Today’s Bobsguide carries an interesting piece from Sungard on pillar 2 implementation progress[*]. This piece, though, carries the results of a survey by Sungard on pillar 2 readiness – and it accords with my own experience on this.

The SunGard survey, conducted during the third quarter of 2006, polled 61 banks from Europe, the Middle East, Africa, the Americas, the Asia-Pacific region including Japan to gauge their Pillar II aims and progress, especially with regard to the risk-and-capital systems that lie at the heart of Pillar II compliance.
The results reveal that 60% of participating banks have not yet selected the tools they will need to meet Pillar II requirements, likely because Pillar II is open to the detailed interpretation of local regulators around the world. Nearly 80% of banks say their Pillar II projects are still being defined, in the early planning stages, or underway. Only 16% of respondents claim their project is partially complete, and a mere 5% – all from Europe – have finished and fully integrated their Pillar II systems.
The survey results indicate that the key risks for which banks intend to allocate capital are led by business risk (51%) or the risk to revenues from competition. Market risk in the banking book (48%), and liquidity risk (41%), were close behind. Reputation and legal risk also showed strongly (30%), despite the difficulty of quantifying these risks.
Most participating banks plan to integrate their internal capital adequacy assessment processes into their business by using these new risk measurement numbers for capital planning (85%), business planning and forecasting (79%), risk mitigation (69%), and governance and control (61%). Nearly 60% also aim to apply the numbers to both pricing and performance measurement.

The only really strange thing here was the number of banks that are allocating capital to liquidity risk. I suspect this is at the insistance of the regulators (or through some lack of understanding by the person completing the survey), as holding more capital is not an appropriate response to liquidity risk – holding more liquidity (or ensuring access to liquidity) is. Holding more capital in reserve will actually worsen liquidity.

Other points to note are:

  • Only 5% of the banks – and all of them in Europe – have said they have their pillar 2 project complete. This is hardly surprising, as so few regulators have said what they are doing with pillar 2. It does emphasise the importance of the regulators getting their own house in order, though. Perhaps the FSI could get out there and do something.
  • Only 60% plan to use pillar 2 measures in pricing and performance measurement. This is a disappointing result as I believe the other 40% should also be using it – for a risk model to have validity, it must actually be used.
  • I will be interested to see more of the legal and reputational models over time. These, as the piece notes, are difficult to quantify.

*Quick warning on Bob’s Guide – it normally carries pieces without question and many of the articles carried are little more than advertisements. That said, it is a useful read, and one I at least scan every time

it comes out.