The Basel culture takes root in Korea
Kookmin Bank is Korea's first to comply with the Basel II Accord – and is already feeling the benefits
With a customer base that includes approximately half of South Korea's adult population, Kookmin Bank (KB) has a dominant position in the country's banking sector, the third largest in Asia. Created from a merger between the Kookmin Bank and the H&CB Bank in 2001, KB achieved annual revenues of KRW 20.88 trillion in 2004 (US$20.78 billion) and a turnaround of its net income to KRW 555.3 billion (US$553 million). Moreover, in 2005 it nearly quadrupled its net profit in the first half from a year earlier to KRW 890 billion (US$860.7 million).
The company has improved its financial performance by enhancing its operational effectiveness in the face of intense competition from domestic and international rivals, and is now poised for renewed asset expansion as the Korean economy picks up again. In particular, Kookmin has improved its credit risk management and bolstered internal control systems and procedures. To expand its customer base, Kookmin is concentrating on high value customers through cross-selling based on integrated customer relationship management. In retail banking it is seeking to build up relationships with existing customers rather than acquiring new ones, while in the corporate banking sector the bank has actively secured large corporate customers with high credit ratings. Two interlinked strategies have been critical to Kookmin's pursuit of these goals. One is to diversify its revenue sources, and the second, to improve its risk management.
It is an achievement for which KB feels rightly proud. "Basel II compliance will have to be achieved by 2007 in Korea. The FSS is giving requirements and objectives to all Korean banks to establish a Basel II framework and system. We feel we are well ahead of schedule and establishing a true Basel II culture at KB," says Donald H. MacKenzie, Chief Risk Officer and Senior VP of Kookmin Bank.
KB's risk team has 85 employees. "Basel II has a high priority so we have a large dedicated team and full backing from senior management. The FSS is very pleased that KB is leading the way for compliance efforts in Korea," says MacKenzie.
Huge data volumes
Data volume was a key reason for choosing SAS, according to Lee. "KB needed a platform that was capable of handling the ever-expanding data. The advantage of SAS is that everything can be done within a single platform, which speeds up the process and makes it easier to manage. Data integration, metadata management, user authority management and credit risk management reporting are all integrated within the SAS®9 architecture."
The Basel Accord is applied differently in each country according to the decisions and the supplementary requirements of the supervisory agency (in this case Korea's FSS). On top of this, each individual bank has its own peculiarities such as its data structure and its internal reporting requirements. "SAS is powerful and can be implemented quickly, yet it is also uniquely flexible. That is a big advantage," says Lee.
A team effort
KB is now confident that Pillar II will be easily achieved on the basis of the work already done, but operational risk compliance will require further concentrated effort.
Saving regulatory capital
Moreover Basel II compliance means more independence of action for the bank, not less. By earning the right to use its own internal models to manage risk, KB is improving its capital allocation by saving on regulatory capital, say Lee and MacKenzie. A review by the FSS in 2006 will give KB an objective external assessment of the bottom-line impact of the project. Meanwhile, risk management is also giving KB a better knowledge of its customer portfolio, which it can now manage more proactively and more profitably.
Establishing a risk culture at a company as large as KB is a major challenge and MacKenzie is looking forward to constant infrastructure improvements through 2006 before final completion of the project. Meanwhile, "Satisfaction with SAS is 100 percent," concludes MacKenzie. "With the Basel II implementation we have enforced greater discipline across the company. We can measure a lot more, with a lot more accuracy, and we can now manage with greater effectiveness."
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Integrate credit risk management procedures and comply with the Basel II Accord
SAS Credit Risk Management
Kudos for being first Korean bank to comply with Basel II; savings of regulatory capital; secure basis for business expansion
“ With the Basel II implementation we have enforced greater discipline across the company. We can measure a lot more, with a lot more accuracy, and we can now manage with greater effectiveness. Satisfaction with SAS is 100 percent. ”
Donald H. MacKenzie
Chief Risk Officer, Kookmin Bank