Survey shows some HK institutions still to adopt revised risk management code despite deadline drawing near Some small Hong Kong banks have not yet begun preparations for implementing new global banking regulations, raising doubts about whether they will meet the January 2007 deadline, according to a survey by accounting firm Ernst & Young. The survey of 245 financial institutions in the Asia-Pacific region last month and in early December involved preparations for the Basel II capital accord, a revised code for risk management. It aims to make banks' assessments of their loans and investments more sensitive to risk while reflecting technological developments in the global marketplace. Each domestic banking regulator can decide how to implement the new rules. In Europe, all banks are required to adopt Basel II while the United States says it will only apply to the 20 largest banks. The Hong Kong Monetary Authority wants all banks to have implemented Basel II by the deadline. The survey, carried out jointly by E&Y and Asia Risk, showed that about 65 per cent of respondents in the region were either at the early stage of implementation or had not yet started the programme. 'Overall, levels of preparedness of banks in Asia are lagging the US and Europe. Although some big banks in the region are up to speed, some small local banks have done very little or have not started doing anything yet,' said Phillip Straley, partner at E&Y financial services risk management practices. He said in Hong Kong, where 18 banks were surveyed, international banks such as HSBC, Standard Chartered Bank and some local lenders had made good progress. However, some small local banks have yet to do anything. He said these banks would have to discuss their implementation of Basel II with the HKMA or they might miss the deadline. 'Smaller banks as a group will continue to lag and will need to understand and manage the consequences. Hopefully, they can achieve better progress by the middle of next year,' he said. A spokesman for the HKMA said the authority had sent a letter to all banks reminding them to begin work on the capital requirements by the end of the year. Mr Straley believed the cost of implementing Basel II would be substantial. Banks need to spend millions of US dollars on the IT system and setting up data collection and information services to comply with the rules. He said it could lead to some small banks opting for mergers or forming alliances. 'Basel II will be one of the major driving forces for banking mergers in the region in the next few years,' he added. In China, the China Banking Regulatory Commission has decided not to force banks to implement Basel II but Mr Straley said mainland banks would be under pressure to adopt the new rules when they sought listings overseas. The survey found that 40 per cent of the respondents considered they would benefit from Basel II as the new rules would help them reduce risks and enhance reputations. Mr Straley said most banks were focusing on the capital requirements in Basel II while paying not enough attention to the rules on supervision and internal controls.