In recent times the implementation of Basel II has been looked at, as the most crucial challenge that the Indian banking industry is confronted with. The fact that this challenge has appeared on the banking scene, at a time when the banks are already facing stiff challenges in terms of coping with the paradigm shift in customer profile, customer expectations, increased competition makes it that much more exciting.While the above aspects highlight both the areas of focus and the road map given to the banks for a proper implementation of Basel II, the following can be taken as necessary prerequisites for the banks to ensure a proper implementation.
The third most important prerequisite that a bank needs to implement Basel II, is the required level and adequacy of people who have to implement Basel II. As Basel II transcends across the entire gamut of banking activities as far as Risk Management is concerned, it is necessary to have people who can appreciate this philosophy at every level and also possess the requisite skill set.
To ensure that the risks are estimated, the role of technology is very crucial. Risk estimation depends on the ability to forecast risks, which is a function of the behavioral pattern of variables involved. For example, if credit risk is to be estimated, naturally, the distribution of client/transaction history is to be drawn on the basis of which the future could be forecast irrespective of the models used, be they scoring models, or default probability models. For this, given the number of customers and the volume of transactions that are put through, only technology can help. Similarly, if market risk is to be measured either by deploying duration or through VaR concept, again, the role of technology is something that cannot be undermined. Coming to the mother of all risks, the Operational Risk is definitely a relatively unknown quantity in the current context, but, if banks have to forecast Operational Risk with reasonable accuracy, again, technology will be the savior.
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