Banks that manage risk effectively will benefit from reduced capital costs. They can pass on part of this benefit to the product and relationship levels. Some banks have long embraced advanced calculation approaches for economic capital and understand how to leverage Basel II for business gain. Looking at representative banks, in general, Tier 1 capital ratios are above the minimum acceptable level of 6%. These cushions in capital ratios are evolving to reflect the business realities and risk management competence at each bank. As Basel II adoption picks up, banks will introduce more sophisticated risk management systems that are available from technology vendors. TowerGroup estimates that third-party solutions represent 60% of spending in risk management technologies and will be almost $13bn globally for 2006.
Guillermo Kopp is vice-president of financial services strategies and IT investments at TowerGroup.
