Basel II a rush job for ANZ

The adaptation of risk management systems and business practices at ANZ to conform to the requirements of the Basel II regime for working out risk weights and thus capital levels was a bit of a rush job, or at least there's a lot more benefit the bank could extract from the whole process, the bank's CEO Mike Smith said yesterday at the half-yearly results briefing.

"When Basel II was introduced, the bank had to introduce it in a hurry and I think what had happened was that the actual compliance with Basel II was the end game and... when people actually then looked at the business they were writing and the balance sheets that they were constructing, they weren't necessarily optimising the efficiency of what Basel II actually created.

"It's going to take some years I think for banks to work that one through."

Being part of a question and answer session at an investor briefing, it's worth bearing in mind that Smith probably didn't mean precisely what he said.

Banks had somewhere between a few months and several years to get set for Basel II, depending on when you care to start counting (and the reasonably final rules were not made available by APRA until just before banks had to report to APRA, but not the market, on a Basel II basis). Banks could argue some APRA rulings were not available until very late in the preparations.

On the other hand, one underlying principle of the APRA's prudential standards on risk and capital, derived from Basel II, is to some extent to reward banks with lower risk weights, lower provision charges and lower capital allocation in return for improved business practice.

That is, the value of the information collected, if properly managed by a bank, could be vast. For example, a true pricing for risk system - which the data collected could easily allow for and which banks despite all their risk pricing at the moment do not really have - could make ANZ's and other banks' capital work a lot more efficiently than now.