Basel can be chilly in winter, and like its namesake the Basel II regulations are currently sending a shiver through financial institutions around the world. An Accenture Ltd. survey of large U.S. banks released in July found that dozens are spending significant sums to comply with Basel II, but most of the respondents said they also fear that the strict Basel II conditions will only slightly or not at all improve the capital positions of banks.

In a nutshell, Basel II requires financial institutions, including around 20 of the largest US banks, to put together new systems of governance and control to address three types of risk: operational risk (failure of internal systems and processes), credit risk (setting out the minimum capital a bank needs) and market risk (e.g. exchange rate fluctuations). As with other regulatory requirements, Basel II is not an optional extra, it is a requirement which institutions need to address, in this case by the end of 2007, and it will not come cheap.

From a technology point of view, there are several products on the market which claim to solve Basel 2 worries, but this is simply not the case. Marketing departments have been working overtime in the last few years to repackage existing products as “compliance solutions”, but the simple fact remains that meeting legislative requirements demands a broader outlook - no one solution can be a panacea. The data needed to comply with Basel II resides in a variety of operational systems, so understanding and processing this data to please the regulators requires a significant integration effort.

Crucially, companies must “show their workings”. Unfortunately for the more unscrupulous accounting departments in the financial world, it’s not simply enough to say that everything is OK. Basel II represents a tightening up of reporting accountability, and a key element to the regulations is that companies must explain how they arrived at their figures and conclusions.

A major complication for many will be the need to not only drag data out of disparate systems, but also still make sense of it over time and throughout change. M&A, corporate restructuring and changes in classification are a fact of daily life for most large organisations, and financial houses are no different. For example, suppose you want to assess the outstanding positions on trading at a certain day four years ago. If the counter-party with which you were you were dealing was once classified one way, but in the trading system is now classified another way, how well will your systems cope with this? Add to this the fact that one of your trading partners was acquired two years ago and is now part of a bigger company that you also dealt with. How easy will it be to unravel the transactions of the original company from its now parent company?

Prior to leading Kalido's spin off from Shell in June 2003, Andy was CEO of Kalido Ltd in January 2001. In previous roles at Shell, Andy led a 290-person global consultancy practice of Shell Services International, and was Technology Planning Manager of Shell UK Oil. Prior to Shell, Andy worked in a number of senior technology positions within Exxon.

A 20-year veteran of data warehousing and integration projects, Andy is a regular speaker at international conferences such as ETRE, Tornado Insider, Red Herring, Gartner and Enterprise Outlook. See his award winning blog www.andyonenterprisesoftware.com for his insights on the industry.

Andy has a BSc (Hons) Mathematics degree from Nottingham University.