How comfortable can How comfortable can you afford to be?you afford to be?

Kostas KotsiopoulosKostas Kotsiopoulos

AgendaAgenda

OverviewRisk RatingHistorical DataIterative ApproachTime PeriodINFORMER Solutions

OverviewOverview

Pillar OneMinimum Capital Requirements

Pillar TwoSupervisory

Review

StandardisedApproach

IRBApproach

SecuritisationFramework

TradingBook

OperationalRisk

Pillar ThreeMarket

Discipline

Basel II introduce a unique opportunity for banks to evolve their risk methodologies, strategies and technology in order to control and manage credit, market and operational risk in an integrated

way.

The three different approaches The three different approaches for Capital Adequacyfor Capital Adequacy

1. Standardised Approach 2. Foundation Internal Ratings Based

Approach. Five years data, the exception can be 2 years.

3. Advanced Internal Ratings Based Approach. Five years for PD, seven years for LGD and EAD

ImplementingImplementing BASEL II BASEL II SolutionsSolutions

Bought in dataBalance sheet analysisSector analysisCredit historyEtc..

Risk ComponentsRisk Components

Probability of Default (PD)Loss Given Default (LGD)Exposure at Default (EAD)Based upon the Internal RatingsHow many models are required?Different sectors, different geographies?

Some IssuesSome Issues

Where to source the exposure data?Where to source the mitigant data?Is there common Counterparty

identification?Is there a common way of identifying

internal organisation structures?Can the mitigant data be joined to the

exposure data?Do we have netting arrangements in place?

Mitigation is the KeyMitigation is the Key

Can make a significant difference to the capital charge

Is a sensitive way to manage riskMay be:

– Eligible financial collateral– Approved Guarantees– Eligible Credit Derivatives– Netting

Risk Rating Systems: Risk Rating Systems: PrinciplePrinciple

Rating and risk estimation systems provide a meaningful way of ranking and quantifying risk

This provides a controlled way of categorising Obligor and Facility/transactional risk

The approaches must show a clearly defined and consistent approach to risk assessment, which is systemic in its application within a bank

Rating SystemsRating Systems

All of the methods, processes, controls, data collection and IT systems that support the assessment of credit risk

This in turn leads to the assignment of internal risk ratings and the quantification of loss estimates

This underpins the whole of the BASEL II IRB approaches

Risk RatingRisk Rating Credit Scoring Solution Credit Rating Solution Customer and Transaction Rating Risk Pricing Model Disclosure of the bank’s Information

will affect its own rating (PILLAR 3) Operational Risk Increase Provisions? Increase the Cost of Fund?

Regulatory and Regulatory and Economic CapitalEconomic Capital

• The Pillar 2 wording from The Basel II Accord, makes it very clear that Banks should maintain a buffer over and above the minimum capital requirement

Reasons for the Capital Reasons for the Capital BufferBuffer

For the benefit of a bank’s own rating within the markets

The business mix will require adjustment beyond the capital calculated by the Basel II single factor model

As a reserve to avoid raising capital in poor market conditions

Prudence to avoid getting close to the regulatory capital minimum

The general point about the single factor model and other market correlations

Principle 2Principle 2• “Supervisors should review and

evaluate banks’ internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process”

Historical DataHistorical Data

Availability of data– Efficient and Representative Data– Statistical Analysis

Data Cleansing Consolidation of data Classification of data Is there any requirement for

benchmarks?

Iterative ApproachIterative Approach

Simulations Select the appropriate Approach Combination of Approach Introduce the Appropriate Method

for Internal Rating

TimetableTimetable

Basel II is confirmed and the timelines will not slip, and not only for G10

National supervisors steadfast on deadlines Parallel run commencing 2006 Final going in position by 2007

The absolute minimum expectation is that banks should be able to implement the Standardised Approach by January 1 2007

“Dry run” by mid 2006 latest Consultation with supervisor by end 2005 latest Commence programs for change (2nd Iteration) by mid

2005 latest

Applying of the new framework in EE

End 2005 End 2006 End 2007 End 2008 Standardised/ IRBF

Parallel Run 95% 90% 80%

IRBA Parallel Run ---- 90% 80%

Test and Parallel Run by the end of 2005

End 2006 Standardised and IRBF

End 2007 IRBA

The banks that will choose the IRBA are able to remain at the current framework during 2007.

Basel II Accord – Basel II Accord – ChallengesChallenges

The task of implementing Basel II can be separated into the following challenges

Comprehending the type and format of data you need for Basel II

Consolidating, Standardising and Translating this data before it is usable for any Risk Calculations

Auditing, Validating and Correcting the End-to-End Credit Risk Management Process

Managing the evolution of Basel II compliance BIS level – Basel III National Supervisor Business or product evolution

INFORMERINFORMER

Extensive Experience in Banking Projects (Core banking, e-banking, Outsourcing, etc.)

Vision of the Company is to offer Integrated Solutions to the Financial Sector

Building up the Competence of our personnel and partnership with specialised companies

A dedicated team for these projects

INFORMER’S INFORMER’S SOLUTIONSSOLUTIONS

Consulting Services (Training, Gap Analysis) Data Cleansing, Consolidation and

Classification Interfaces with specialised solutions Credit Scoring and Rating Applications

complementary to Core Banking Systems (T24, Retail 24)

Specialised Solutions like Barracuda of TLC Hardware Solutions Software Solutions

FAQs – Why start now?FAQs – Why start now?Time to define your migration path to compliance and beyond

Correcting data and disparate legacy databases has business wide impact – it needs careful planning and time to test

Buy-in to process and procedure change is critical – allow time for change management

Set achievable iterations of improvement – understand and communicate the results

Impress the regulator with a clear picture of where you are and where you are going

Derive maximum pillar 1 value by focussing on “heat maps” of product and unit mix

Gain early competitive advantage Reduce the risk of a penalty rate

RUNNING BEHIND SCHEDULE?

Operational RiskOperational Risk

"Defining and quantifying operational risk metrics that are tailored to individual lines of businesses will be a major challenge. Firms need to create the proper incentives so that management and other stakeholders not only develop the correct initial approach, but also ensure it incorporates the concept of continuous process improvement,“

Source: CELENT

THANK YOU FOR YOUR THANK YOU FOR YOUR ATTENTIONATTENTION