Data management issues are creating unique and unexpected challenges for Canadian banks, as financial institutions alike focus on meeting the requirements of the Basel II accord created to promote greater consistency in the way banks and regulators approach risk management.

Survey results published today by Ernst & Young LLP indicate that financial services institutions worldwide are taking Basel II seriously as bankers believe compliance will bring several important benefits, including more dynamic portfolio management, greater use of hedging and derivatives and an increased use of risk-based pricing.

In Canada, among the major banks, the age and complexity of older, so- called “legacy” banking systems – combined with the information demands resulting from the sophistication of more recent risk analysis and reporting tools – has resulted in Canadian institutions taking longer to execute Basel II than originally anticipated, according to Paul Battista, a partner who leads E&Y’s financial services advisory practice in Toronto.

“The difficulty of extracting and cleansing inaccurate or inconsistent data from a myriad of source systems is a key reason why most of the Big 5 banks in Canada have incurred Basel II implementation costs well in excess of the global average of $70 million.” said Battista.

Looking beyond the immediate implementation challenges, the major Canadian banks are beginning to turn their attention to how the technology, risk and process changes driven by Basel II can benefit their organizations. “The investments required to support the accord’s implementation were non-negotiable as they were demanded by the Canadian banking regulator OSFI,” said Battista. “But with the bulk of these significant investments made, there is increasing focus on how to find ways of strategically using the new risk data and reporting to improve the business.”

According to the survey, processes and systems will significantly change along with the way risks are managed, signifying a new era and dynamic approaches in the global financial services marketplace. “Basel II is recognized as more than a regulatory requirement. Our findings indicate that senior bankers are beginning to appreciate the long-term impact Basel II will have on their own organizations and banking as a whole,” said Patricia Jackson, partner at Ernst & Young UK and a former member of the Basel Committee.

The online survey was conducted for Ernst & Young by the Economist Intelligence Unit. The survey polled 307 executives at large banks around the world. Over 40% of respondents were located in Europe, 25% in North America and 24% in the Asia-Pacific region.