Banking on a better future
Ron Dembo is the founding chairman of Algorithmics Incorporated, a risk assessment system provider based in Canada. Dembo shared his views with Błażej Karwowski on the future of Polish banks, risk management and implementation of the new international banking standards known as Basel II.
What structural changes await Polish financial institutions?
Poland's entry to the EU requires Polish banks to comply with EU directives. They [the EU authorities] are being pretty stringent as to what banks need to have in place in terms of infrastructure. So this is a country in which the banking system is undergoing a tremendous change-a change for people and technology.
What should be the priorities for Polish banks?
Let's take a look at risk in a bank. Enterprise risk is a section that looks at all bank operations. That is a relatively new function. So if you had come to a Polish bank pre-EU, before acquisitions from foreign banks, you would have found that this function didn't exist. In fact even in Western European banks it has probably only been in existence for 10-12 years.
The second thing is that the original regulations, [called] Basel I, were all about market risk. Market risk is a small part of banks. So you could have a small team sitting in a corner doing market risk calculations and that was enough. In this new regulation, Basel II, and other compliance regulations they force the bank to actually use the risk system as part of their daily business. Which means all of a sudden it becomes integral to how the bank functions.
Will credit risk management help banks operate more safely?
You can improve protection against fraud [in credits] but you'll never eliminate it. What you can improve is the transparency. In many banks the entire evolution of the products they produce themselves is very difficult to trace. So it's hard to know if the numbers are correct. Banks should create transparency and consistency. So if you have proper risk management in credit it becomes much more difficult to be a victim of fraud. Everything is much more visible.
How much would Polish banks have to spend on introducing Basel II standards?
My guess is that large or medium-sized banks would have to spend probably about zł.50 million to complete Basel II. It could be much more than that but it doesn't necessarily have to be that much. For example, you cannot compare how much the top five Canadian banks get [based only on how much they spent on their systems].
Is the risk management issue also a development issue?
It is an opportunity. The best banks we deal with don't think of risk management just for costs. A bank is really a risk machine. It buys risk and it sells risk and is left with risk in between. That's kind of what banks are about.
Where do you think Polish banks will be in comparison to Western partners and competitors 5 to 10 years from now?
You won't recognize the banks in 5 to 10 years. The joining of the Union and regulations of Basel will completely change those banks. What will change is the level of people, the level of mathematical sophistication and the ability to generate new products. The volume of products in 5 to 10 years will be enormously different from what it is today. For a Polish citizen the range of products he can buy is very minimal compared to a French citizen. But local banks can look over the border and see what is going to happen. If you look in Germany you can picture what will happen here, of course on a different scale. So in some sense it is easier for banks here because they will know what they're going to look like. So they can do it cheaper, quicker and better. What is happening in some of the banks is what we call leap-frogging: they are skipping an entire generation of systems. I think you won't recognize banks in five years.
What structural changes await Polish financial institutions?
Poland's entry to the EU requires Polish banks to comply with EU directives. They [the EU authorities] are being pretty stringent as to what banks need to have in place in terms of infrastructure. So this is a country in which the banking system is undergoing a tremendous change-a change for people and technology.
What should be the priorities for Polish banks?
Let's take a look at risk in a bank. Enterprise risk is a section that looks at all bank operations. That is a relatively new function. So if you had come to a Polish bank pre-EU, before acquisitions from foreign banks, you would have found that this function didn't exist. In fact even in Western European banks it has probably only been in existence for 10-12 years.
The second thing is that the original regulations, [called] Basel I, were all about market risk. Market risk is a small part of banks. So you could have a small team sitting in a corner doing market risk calculations and that was enough. In this new regulation, Basel II, and other compliance regulations they force the bank to actually use the risk system as part of their daily business. Which means all of a sudden it becomes integral to how the bank functions.
Will credit risk management help banks operate more safely?
You can improve protection against fraud [in credits] but you'll never eliminate it. What you can improve is the transparency. In many banks the entire evolution of the products they produce themselves is very difficult to trace. So it's hard to know if the numbers are correct. Banks should create transparency and consistency. So if you have proper risk management in credit it becomes much more difficult to be a victim of fraud. Everything is much more visible.
How much would Polish banks have to spend on introducing Basel II standards?
My guess is that large or medium-sized banks would have to spend probably about zł.50 million to complete Basel II. It could be much more than that but it doesn't necessarily have to be that much. For example, you cannot compare how much the top five Canadian banks get [based only on how much they spent on their systems].
Is the risk management issue also a development issue?
It is an opportunity. The best banks we deal with don't think of risk management just for costs. A bank is really a risk machine. It buys risk and it sells risk and is left with risk in between. That's kind of what banks are about.
Where do you think Polish banks will be in comparison to Western partners and competitors 5 to 10 years from now?
You won't recognize the banks in 5 to 10 years. The joining of the Union and regulations of Basel will completely change those banks. What will change is the level of people, the level of mathematical sophistication and the ability to generate new products. The volume of products in 5 to 10 years will be enormously different from what it is today. For a Polish citizen the range of products he can buy is very minimal compared to a French citizen. But local banks can look over the border and see what is going to happen. If you look in Germany you can picture what will happen here, of course on a different scale. So in some sense it is easier for banks here because they will know what they're going to look like. So they can do it cheaper, quicker and better. What is happening in some of the banks is what we call leap-frogging: they are skipping an entire generation of systems. I think you won't recognize banks in five years.
