| Summary: | The overall objective of this study was to determine the effect of Basel ll on the South African banking system through possible changes in the way in which a bank conducts its business. This purpose arose from the publication of the new Basel ll Framework on 26 June 2004, which has been adopted for implementation by the South African Reserve Bank. South Africa has set January 1, 2008 as the implementation date for Basel ll. The South African banks have mainly been focussing their efforts on becoming Basel ll compliant. Business line management and marketers have up until now not paid much attention to the likely impact of Basel ll on their markets and product offerings. A literature study was undertaken which included a review of the Basel ll Framework, impact studies and a review of the relevant literature on the topic. The Framework was analysed in order to determine the major impact themes. Once these impact themes were identified, the literature on those areas of impact was researched. The analysis of the Basel ll Framework identified three important themes that will have a significant impact on banks. There will firstly be an impact on market segments and product offerings. Secondly, there will be an internal impact on the banks in the form of increased costs, decision-making and capital management. The final theme identified was the global impact on the banks, especially regarding procyclicality and mergers and acquisitions. vii The research indicates that there will be both winners and losers. Banks that have large retail and mortgage exposures will benefit the most from Basel ll, whereas banks that have large exposures to sovereigns, banks and specialised lending portfolios will be negatively impacted. A capital charge for operational risk will mean that some areas such as corporate finance and asset management will be allocated capital, which was not the case under Basel l. Studies indicate that this new operational risk capital requirement more than outweighs any reduction in credit risk capital requirements. Customers that have high credit ratings are more likely to benefit from lower credit spreads. Similarly customers that have poor credit ratings can expect an increase in their pricing due to the higher capital requirements for these customers, unless they can provide a bank with ancillary revenues. Competition in the retail and mortgage markets will intensify due to the favourable capital requirements for these portfolios. The large South African banks will become takeover targets because of their large exposures to these markets. Basel ll will have a major impact on the way in which banks will do business in the future and as a result banks should view the implementation of the Framework as an opportunity to gain strategic advantages rather than just a compliance obligation. === Prof. A. Boessenkool
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