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KPMG says Basel II implementation still important, but risk management priorities need to be re-assessed in light of sub-prime crisis

Hong Kong, 29 July 2008

While Basel II is widely accepted as providing a sound blueprint to guide institutions in developing their risk management, and consequently many Asia Pacific financial institutions are engaged on major Basel II implementation projects, the recent sub-prime crisis has raised some concerns about its efficacy and whether other risk management areas, for example in the area of liquidity, should now be given priority over Basel II implementation, says a new KPMG report.

Entitled "Risk management priorities for Asia Pacific financial institutions: Basel II and beyond", the report examines the various factors, Basel II included, which are driving institutions to enhance their risk management and suggests how institutions might go about assessing their needs and then effectively planning and prioritizing their development process.

"The sub-prime crisis has to some extent shifted the focus of attention of financial institutions and regulators away from Basel II and towards strengthening some areas of risk management, such as liquidity risk and liquidity stress testing, which are not fully addressed by Basel II" said Simon Topping, Principal, Financial Risk Management, KPMG China. "However, both the Financial Stability Forum and the Basel Committee have reaffirmed the importance of timely implementation of Basel II in their responses to the sub-prime crisis."

Given the Basel II and sub-prime imperatives, however, says the report, there is a danger that institutions may lose sight of a third and important factor that should be driving their risk management initiatives, namely their business needs. The most successful institutions will be those that get their risk management priorities right and align them closely with their business needs, while also meeting regulatory requirements, the report notes.

It is equally important for institutions to put in place a robust risk management framework, especially when implementing the more advanced approaches under Basel II, such as the use of models. As such, the most successful institutions will be those that successfully integrate advanced risk management techniques into their systems and controls, the report says.

The report also highlights that financial institutions in some Asia Pacific jurisdictions face the problem of a relatively rigid and less developed local regulatory environment. Moreover, skills shortages and data limitations also impose challenges for institutions to adopt the more advanced approaches under Basel II.

In Hong Kong, all locally-incorporated institutions, notes the report, migrated to Basel II on 1 January 2007. While most institutions have adopted the standardized approach or a simplified approach known as the basic approach for credit risk, four institutions have so far been approved to use the more sophisticated internal ratings based (IRB) approach, while others are understood to be on the way to developing an IRB capability with a view to obtaining regulatory approval in the next few years.

In China, the report notes, the China Banking Regulatory Commission is strongly advocating the adoption of Basel II by the major institutions, and has issued a number of detailed consultation papers on various aspects of Basel II. Institutions are now engaged in the challenging process of implementation.

"Assimilating into their operations the greater use of models will be a great challenge for the banks in China", said Mr Topping, "but in many ways the biggest challenge in China will be the necessary change to the credit culture and the organizational culture more generally".

Click this link to access the full report: http://www.kpmg.com.hk/redirect.asp?id=8926

About KPMG

KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 145 countries and have more than 123,000 professionals working in member firms around the world.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. KPMG International provides no client services.

About KPMG China

KPMG China has 12 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Shenzhen, Hong Kong and Macau, with more than 7,000 professionals.

In 1992, KPMG became the first international accounting firm to be granted a joint venture licence in China, and our Hong Kong SAR operations have been established for over 60 years since 1945. This early commitment to the China market, together with our unwavering focus on quality, has been the foundation for accumulated industry experience , and is reflected in our appointment by some of the China's most prestigious companies.

As China businesses join the global economy and international companies seek to enter the China market, KPMG's blend of international experience and local knowledge makes us well-positioned to serve our clients in this increasingly complex, but exciting market.

Our single management structure for all our China offices allows efficient and rapid allocation of experienced professionals wherever the client is located in China. The flexibility of this single structure allows us to effectively serve companies across China - and we have many projects where professionals from different offices work together on an work engagement under the supervision of a single nominated client partner, who has operational control of all resources.

Our business in China has established industry groups, enabling targeted, industry-specific experience and solutions to be delivered where needed. For our clients, this focus on industry and country specific knowledge means we can deliver exceptional people with an intimate knowledge of your specific business issues, as well as an overriding commitment to strive for the highest quality services.

For media enquiries, please contact:

Pearl Fan
Senior Manager, Markets Services
KPMG China
Tel: +852 2826 7111
e-Mail: pearl.fan@kpmg.com.hk

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