Basel II - Implementation June 2004 - sasCommunity© 2004 Accenture All Rights Reserved. Accenture,...

© 2004 Accenture All Rights Reserved. Accenture, its logo, and Accenture High Performance Delivered are trademarks of Accenture.

Basel II - Implementation

June 2004

2 © 2004 Accenture. All rights reserved

Agenda

Implementation Status

Implementation Approach

Implementation Issues

Implementation Aids

Questions



Uncertainty amongst banks• Delay in finalisation of the Accord

• National Regulators slow to interpret National Discretion

• Home v. Host issues still unclear

Investment Commitment• Initial Business Case exists but formal budgetary approval outstanding

• Resources are scarce

• Competing projects e.g. IAS

Solutions• Vendors are still developing offerings and many banks holding back on commitment

• In the last few months increasing banks committing to a solution



Our experience* indicates that almost all banks (80%) are aiming to achieve the foundation (35%) or advanced (45%) internal rating-based approach (IRB). Currently they are at different points of the implementation process.

Strategic Direction & Positioning

The vast majority of banks have decided on target level and have conducted high level readiness assessment

The vast majority of banks have decided on target level and have conducted high level readiness assessment

29% banks have moved into this stage, at least for parts of their program 29% banks have moved into this stage, at least for parts of their program

29% banks are currently performing this stage of the work across the group which will result in a precise target solution

29% banks are currently performing this stage of the work across the group which will result in a precise target solution

26% have begun build and test of solutions, with the integrated solution fully designed26% have begun build and test of solutions, with the integrated solution fully designed

(Accenture’s Implem

entation Focus)Bank’s Positioning

Majority of banks

Few banks

Detailed design and solution selection

Design&

Build

Develop LDM, detailed systems mapping and target

solution definition

* Basel II – A survey of complaince issues, research commissioned by Accenture from the Financial Times Research Centre, May 2004


Agenda




Implementation Aids

Questions



Overall Basel II Implementation Roadmap

Data Modelling & Mapping

Phase

Detailed Design and

Solution Selection

Phase

Build and TestPhase

Business Requirements

Phase

• Understand implications for CR WRC and OR capital, reporting, control

• Model capital Requirements and determine the Basel II model to be used

• Document the new requirements to support credit risk

• Identify data synergies across the new requirements

• Develop data model• Review required data for

availability• Review gaps and prioritise• Develop solution to bridge

gaps

1-2 months 3-6 months 3-6 months 12-36 months

Implementation Activity

Timeframe

• Build, test and roll out• Phased by component,

geography or portfolio

• Link data model to the conception design and develop systems and interface change specifications

• Review vendor solutions against the conceptual design for best fit

• Vendor Selection• Determine technical

architecture design



Many business case efforts focus on Strategic Direction, Credit Risk Measurement and Policies/Procedures, but a comprehensive business case must understand and account for each of the required components necessary for success.

Credit Risk Measurement

Strategic Direction

Organization Design

Policies and Procedures

Operational Risk

Systems Integration

Pillar III : Reporting

Pillar II : Economic Capital

Program Management

2

10

3

2

55

10

5

3

10

Basel II Program Components % of Effort DescriptionImpact of Basel II on the individual portfolios in relation to the capital requirement changes and likely market re-actions.

Development of compliant credit risk rating models including PD, LGD and EAD and segmented retail portfolios.

Development of documented compliant policies and procedures for all levels of risk management.

Establishing organizational responsibilities for appropriate independence, review and validation functions.

Integrating changes to existing systems and interfaces and developing new data storage, calculation and reporting functionality.

Establishing an operational risk framework including loss event metrics, causal analysis and capital calculation.

Integrating regulatory risk models with other quantified risk metrics and balance sheet management.

Integrating capital and risk reporting with financial and regulatory reporting.

Management and co-ordination of the program across diverse business lines and geographies.

Note: % represents the estimated man day implementation effort for a typical bank



The journey to become Basel compliant will be long and complex, therefore a phased approach is recommended to ensure manageability

Detailed Design

Detailed analysis

confirming IT platforms etc.

Review Implementa-

tion Plan

Design, build, testDesign, build, test

Build, test, roll out

Phase 1 Phase 2 Phase 3 Phase 4

Implemen-tation

Approach and Plan

Key Checkpoints

MeasurementData Gathering

Analysis Findings

Segmentation / SVOC

SystemsGap Analysis

B2 / CAD 3 Data Model

Explore potential tactical / strategic solutions

High Level Strategic Review

High Level Operating Model and Business

Requirements

Phase 2 Planning and Mobilisation

Business Case

Overall Programme Management

High Level Gap

Analysis and Implementati

on plan

New / Revised Models

Incorporation of IRB into BAU‘Use Test’ValidationPolicies & Procedures

Incorporate Measurement Piece



The data assessment needs to be comprehensive and cover customer, exposure, product, risk rating, risk mitigantand default / arrears data.

In many instances business units will have data consolidated onto central systems or warehouses and these can be the main basis for the data review. However, additional assessments may need to be made.

Central Data Stores / Accounting Systems / Consolidation Systems

Risk Rating and Scoring Systems

Product / Customer /Channel Systems

Risk Mitigant Systems Default ManagementSystems



Our experience also supports the need for a strong Program Office and Governance Structure. The following diagram of a typical Basel II Governance Structure indicates the strong role needed to be taken in managing and directing a Basel II initiative.

Economic Capital

Reporting

Operational Risk

Systems Integration

Credit Risk Measurement

Policies and Procedures

Functional Program

Lead

IT ProgramLead

Group Program Director

Communication & Training

Group Program

Office

ITCo-ordination

Retail

ITCo-ordination

Non-retail

Functional Co-ordination

Retail


Non-retail

Work PackagesBU

ProjectManager

Steering Committee

BU Project

Manager

BU Project

Manager

ITCo-ordinationOperational

Risk

ITCo-ordination

Finance / Reporting

Functional Co-ordinationOperational

Risk


Finance / Reporting

Design Authority

OrganizationDesign

Function Project

Manager

Function Project

Manager

Governance, Management, and Co-ordination

Work Package Delivery

Corporate SME /Business

Mortgages Finance GroupCredit



The Objectives of the Data Assessment / Solution Design work that is currently occupying many banks are as follows:

• To create a logical data model reflecting the known requirements of Basel II / CAD 3 and bank specific requirements

• To assess the ability of the current systems and interfaces to provide / derive / calculate the required data elements

• To create a solution design / application architecture outlining the high level end-state solution and identifying changes required to existing systems / interfaces as well as any new systems / interfaces required

• To refine the business case and implementation plans based on a more detailed understanding of the solution and required effort / activities


Agenda




Implementation Aids

Questions


Typical challenges we see bank’s facing in establishing a compliant operating model, include their IT systems, processes and organisation design


Organisation Organisation

Lack of common reference data platformsNumerous credit risk systems with inconsistent data modelsLack of a common methodology for categorisation of bad debts across systems

Aspects of required data not currently capturedNo single view of the Customer for Non Retail Customers

ProcessesProcesses

IT Systems IT Systems

Many processes not in place e.g. validation, rating model maintenanceProcesses linking risk management into financial reporting are not presentCapability required to perform much more complex RWA calculations with increased number of variablesIntegration of Basel II compliant risk reporting with operational processes e.g. credit approval, portfolio limit setting, provisioning, is not in place

Roles and responsibilities not assigned between risk, finance and BUsOwnership for models and algorithms as opposed to periodic data processing unclearReporting and governance giving ownership to the executive not set



Basel II has impacts across the entire operating model of a bank, from front-office activities through to Group reporting

Group finance

Group risk

Capability to record data items

Capability to calculate credit risk ratings

Capability to extract, store and

aggregate data

Capability to undertake

calculations

Capability to consolidate and store data

Capability to undertake reporting

Front-endProduct

processing systems

MIS

Financial Reporting &

GL

BU

DataIntegration& Storage

GroupReporting

Capability to reconcile between finance and

risk data



The Basel II impacts require new functionality in the systems of a bank‘s IT architecture

Captures Basel II relevant information e.g. credit score, application scoreComplete product information for Basel II

Access to business rules and reference data for credit scoring, behavioural scoringCalculate PD, LGD and EAD automatically using complex variables and historic dataRapid integration of data from third parties

Standard extracts to product, customer and risk systemsReal-time access to data

Store historic rating information and exposure data Store borrower rating history inc. audit trail and grade migration over timeFacility for Non-Retail; Exposure level for RetailAccess to business rules and reference data for back-testingAccess to historic Information for Basel II reporting and AnalysisTimely information for reporting and analyticsReconciliation between Finance and Risk data

New data elements Historic information Reconciliation between finance and risk data

BU

front-office

BUback-office(finance)

Group finance

Group risk

Group Reporting

Product Processing

General Ledger

Group consolid-

ation

Risk Rating

ReportingSystems

& s/sheets

Risksystems

Customer data Channel

Data Stores

Data Stores

Integration layer

Integration layer

Initiates request for credit risk rating from channel applicationsCaptures user information at point of customer interactionCredit risk systems enabled at point of customer interaction

Retail customer segmentationNon-retail facility level but groups linked

Flexible reportingNew report formats

Automatic RWA calculations from complex variables

Derivation of new ratings Reconciliation between finance and risk data

Calculation method

New reportingCustomer

Customer data encoded to allow matching and aggregationStore customer exposure data against different criteriaReconciliation between Finance and Risk dataFlexible reporting Robust analytics capability


Agenda




Implementation Aids

Questions


Implementation Aids

Accenture has developed a set of assets designed to help banks accelerate their Basel II initiatives and overcome the hurdles to Basel II compliance

Basel II Diagnostic Tool

Basel II Operating Model

Basel II Data Model

Basel II Assessment

Basel IIOperating Model

Basel II Data Model

Basel II Process Model

Basel II Process Model

Technical Architecture Template

Basel II Data Assessment Tool

Business Unit Architecture Group Architecture

Informational Architecture

Front End Source Systems Local Storage

Reports

Operational Architecture

Data Feeds Data Feeds

Front End

NAO

A/C Mgmt

A/C Maintenance

Product Processing

Risk Rating

Collateral

Local Reports

Customer System

Central Group Storage

Services (e.g. On-Line Services, Batch, ETL,Metadata)

External Data Internal Data External Data Internal Data

Local Storage

Information Flow

Collections & Recoveries

Guarantees and Cr Derivatives

Services (e.g. On-Line Services, Batch, ETL, Metadata)

Reporting Architecture

Risk DataMart

Finance DataMart

Other Data Mart

Reports

Reports

Reports

Basel II Data Assessment Tool

Technical Architecture


Implementation Aids

Logical Data Model … which can be tailored for individual banks precise data requirements…

Transaction

Provision

Rating & PD

Customer

Credit Risk Mitigation

Default Business Unit

Reference Datae.g. Currency, Constants etc

Exposure

Rating Grade

Credit Grade

DefaultEvent

Default Legal

Asset class

Exposure Maturity

Office

Legal

Credit Derivative

Guarantee

Collateral

Credit Risk Mitigation

CRM Type

Product/Facility subclass

Business Unit

Score

PortfolioSegment

Provision

Portfolio

FutureMargin Income

Account

Securit ‘nPurch RecEquities

Exposure cash flow

Haircut

Mismatch

RetailBoth

Non-retailGroup

GeneralAgri

PropertyCare SectorInvestmentsProject Fin.

Parent

Scorecard Version

GuarantorCustomer

ConstantsCCFs

Std Haircut

CurrencyCountryIndustry

RelationshipAccount


Implementation Aids

• Each business unit completes a data assessment template for all relevant systems

• Where a business unit owns a system with transactions for other business units the system-owning business units must complete the data assessment for those data items

• Where business units use different systems to capture data relating to different product groups, all systems must be covered

• Approximately 19 data attributes will need to be collected for each data item, covering source system, data quality, data source and data extraction capability to enable a robust design to be developed

• Several hundred data items are contained within the data assessment templates

Risk Area Name Risk Attribute Name Description of Attribute Is the data present on a

system?What is the name of the system?

Account Account ID Unique Record Identifier for Account Account Account Number Account numberAccount Account Name Name of the AccountAccount Relationship ID Unique Record Identifier for Relationship Account Relationship Name Relationship name

Asset Class Product/Facility ID Transactions are members of the sub class groupAsset Class Asset Class Basel II Asset Class i.e. Corporate, Sovereign, Bank,

Retail or EquityAsset Class Asset Sub Class Basel II Asset Sub Class e.g. Revolving Credit,

Mortgages, Project Finance, Object FinanceAsset Class Asset Class Description Description of the Asset Class

Asset Class Asset Sub Class Description

Description of the Asset Sub Class

Asset Class Product/Facility Description

Further breakdown of the Asset Sub Class e.g. Overdrafts, Credit Cards

Business Unit BU Id Unique Record Identifier for BU Business Unit Business Unit Name e.g. Bristol & West Commercial, B&W residentialBusiness Unit Business Unit Team

Name - LenderBusiness Unit Team Name - Lender

Business Unit Business Unit Address Refers to the BoI Business Unit location/Address e.g. Donegal House, Belfast, Lisburn Road

Collateral Collateral ID Unique Record Identifier for Collateral Collateral Collateral useful life end

dateCapture date to indicate the useful life of collateral - the date to be the shorter of the period to the maturity date

of the collateral or the final date that the risk is contractually covered by collateral (for trading book

only)Collateral Average Time for

Collateral CollectionAverage time taken (in days) for collection of collateral

following default. Captured for product/facility

Collateral Average Cost of Collateral Collection

The average cost of collection of collateral on a per product/facility basis

Collateral Collateral Pool Flag Yes/No flag indicating whether there is pooled collateral (i.e. multiple collateral items) against a particular

exposureCollateral LGD for Allowable Non

Financial Collateral ©Loss Given Default for non financial collateral including

receivables, Real Estate, and other physical collateral

Collateral Collateral Minimum Holding Period

Collateral Minimum Holding Period (no of Business Days) Refers to trading book Minimum holding period for the collateral which will affect Loss Given Default

Collateral Revaluation Frequency Frequency of revaluing collateral (number of days)Collateral Zero Haircut ? Flag indicating if a zero haircut can be applied to the

collateral

Where is the data stored?

Basel II - Data RequirementsBusiness Unit Name:Person Completing Response:Date Response Completed:

The Logical Data Model drives the creation of the Data Assessment templates tailored around the particular portfolios of each Business Unit…


Implementation Aids

The Technical Architecture allows existing systems capabilities to be mapped onto the required functionalities. We can then review the gaps against the capabilities of Vendors to establish ‘best fit’

Extraction, Conversion,

Mapping, Cleansing, Transfer

Internal Reporting

RegulatoryReporting

StatutoryReporting

Front End Risk Systems Extraction Data Store Functionality Reporting

Stress Testing

Validation

RW

A

Credit S

coring

PD

Risk R

ating

Collateral

Customer Transaction

Data

General Ledger

Journal Adj.s

Consolidation

Consolidation Adj.s

Collections / R

ecoveries

Credit Risk

OperationalRisk

Other Financialmaturityindustrygeographyfair values

AMA capital

modelling

FairValuesMeta Data Management

SVO

C



Internal Reporting

RegulatoryReporting

StatutoryReporting


Stress Testing

Validation

RW

A

Credit S

coring

PD

Risk R

ating

Collateral


Data

General Ledger

Journal Adj.s

Consolidation

Consolidation Adj.s

Collections / R

ecoveries

Credit Risk

OperationalRisk


AMA capital

modelling


SVO

C


Implementation Aids

SAS Infrastructure and Basle II Solutions



Internal Reporting

RegulatoryReporting

StatutoryReporting


Stress Testing

Validation

RW

A

Credit Scoring

PD R

isk Rating

Collateral


Data

Internal

Internal

General Ledger

Journal Adj.s

Consolidation

Consolidation Adj.s

External

EG Experian

Collections / R

ecoveries

Credit Risk

OperationalRisk


AMA capital

modelling


SVO

C

Internal

SAS CreditScoring + Source Systems

SAS ETL

SAS Data Quality

- SAS DW

SAS Credit Risk

SAS Op. Risk

SAS Data Model

SAS Warehouse Admin

SAS Risk Engine SAS RiskDashboard

SAS Portal

SAS EnterpriseGuide



Internal Reporting

RegulatoryReporting

StatutoryReporting


Stress Testing

Validation

RW

A

Credit Scoring

PD R

isk Rating

Collateral


Data

Internal

Internal

General Ledger

Journal Adj.s

Consolidation

Consolidation Adj.s

External

EG Experian

Collections / R

ecoveries

Credit Risk

OperationalRisk


AMA capital

modelling


SVO

C

Internal

SAS CreditScoring + Source Systems

SAS ETL

SAS Data Quality

- SAS DW

SAS Credit Risk

SAS Op. Risk

SAS Data Model

SAS Warehouse Admin

SAS Risk Engine SAS RiskDashboard

SAS Portal

SAS EnterpriseGuide


Implementation Aids

The Basel II Accelerator, coupled with our implementation methodology, provides our clients with tangible benefits

Proven solution and assetsThe Basel II accelerator as well as our implementation methodology have been utilised at many of the leading banks around the world

Compressed implementation timeframeWe have developed and utilised a comprehensive, end-to-end Basel II solution ranging from programme planning and set up to IT Architecture design and ultimate implementationWe have a team of professionals in place with Basel II expertise and systems development implementation experienceWe can provide knowledge and learnings from previous and on going client engagements to design and implement a more effective Basel II programme

Cost savingsWe are committed to leveraging existing IT architecture for Basel II compliance, thereby avoiding unnecessary system purchases and reducing costsWe have working relationships with many of the key vendors offering Basel II related solutions and can provide recommendations regarding the best fit for your needs Our assets and methodology are designed to limit the disruption caused by Basel II to the organisation and help attain Basel II compliance in the most cost effective manor


Agenda




Implementation Aids

Questions

Basel II - Implementation June 2004 - sasCommunity© 2004 Accenture All Rights Reserved. Accenture,...

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