Banks invest in Basel II compliance

DUBAI — Leading UAE banks have started investing to create competent internal compliance departments that will supervise and execute the banks' compliance requirements as per the Basel II Capital Accord.

By Babu Das Augustine

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Published: Sun 7 Aug 2005, 10:33 AM

Last updated: Thu 2 Apr 2015, 4:12 PM

According to a recent survey by the Financial Stability Institute and Bank of International Settlements, banking institutions in the Middle East region recognise the importance of Basel II and have started the preparatory work for the implementation of the Accord.

Basel II defines 'compliance risk' as risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its banking activities .

“Traditionally compliance departments in the banks used to be clubbed with the internal audit and service quality supervision functions. Suddenly, compliance has assumed much greater importance as the banks are preparing for the implementation of Basel II,” said a banking consultant working with a leading local bank that is building a full-fledged internal compliance department.

The Basel Committee on Banking Supervision (the Committee) has issued a framework for the compliance function in banks. Banking supervisors must be satisfied that effective compliance policies and procedures are followed and that management takes appropriate corrective action when compliance failures are identified. According to Basel Committee, compliance starts at the top and should be effective from the board of directors and senior management.

During the past one year many local banks have separated their compliance functions from internal audit or operations risk functions. “Some banks may wish to club their compliance function within their operational risk function, as there is a close relationship between compliance risk and certain aspects of operational risk. Others may prefer to have separate compliance and operational risk functions. Though close cooperation between the two functions are possible, ideally each institution should have an independent compliance department,” said a management consultant working with a leading UAE-based bank.

According to the Basel Committee, a bank should hold itself to high standards when carrying on business, and at all times strive to observe the spirit as well as the letter of the law. Failure to consider the impact of its actions on its shareholders, customers, employees and the markets may result in significant adverse publicity and reputational damage, even if no law has been broken.

A recent survey by the Financial Stability Institute shows that by 2009, 90 per cent of the region's banking assets will be covered by Basel II and most banks in the region have started preparatory work for the implementation of Basel II. Only 13 per cent of total banking assets (of locally incorporated banks) will move to Basel II by the end-2006. This figure increases dramatically for the period 2007-09. In 2007-09 period, 89 per cent of banking assets in the Middle East are expected to be covered by Basel ll.

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