Malaysian institutions must look towards gaining competitive advantage through implementing an effective economic capital management programme, said John Lee, the financial services and strategic management director of KPMG Business Advisory Sdn Bhd.
“As the country emerges from the economic crisis recently towards a period of renewed optimism and growth, local institutions are likely to face levels of competition particularly with the impending 2007 World Trade Organisation (WTO) dateline for the liberalisation of the domestic financial industry,” Lee said at the media briefing of KPMG Basel II Survey 2003 here Wednesday.
Under the Basel II Capital Accord initiative, economic capital management is no longer a business imperative, but also a compliance obligation.
KPMG has come up with a White Paper Basel II – A Clear Look Managing Economic Capital to inform financial institutions about the importance of financial institutions to integrate economic capital planning into overall risk management.
The paper provides an explanation of economic capital – what it is, why the increased focus, and a clear distinction between economic and regulatory capital.
It also addresses the issues and challenges faced when linking risks to capital.
John said the importance of economic capital management in Malaysia was evidenced by the performance of Malaysian banks when measured on a risk-adjusted basis.
According to the survey, he said the Risk-Adjusted Return on Capital (RAROC) of the country's 10 anchor banks and two Islamic banks, based on their respective financial year-ending in the period from June 30, 2003 showed that -4.79 percent has the lowest RAROC, 13.46 percent (mean RAROC) while 36.70 percent has the highest RAROC.
Further analysis of the results revealed that the two banks's RAROC were below the risk-free rate. This means the returns that these banks generate from their assets are insufficient to compensate for their risk exposures.
He said economic capital management therefore was playing an increasingly central role in the evolution of the financial industry in particular, these external and internal drivers would have a major impact on competitive advantage.
KPMG in Malaysia is a member firm of the KPMG International, a global network of professional services firms whose aim is to turn the understanding of information, industries and business trends into value.
With nearly 100,000 people worldwide, KPMG member firms provide audit and risk advisory, tax and financial advisory services from more than 750 cities in 150 countries.
