Basel II Compliance & Credit Risk
- Functional and Solution Overview
Overview Topics
1. Introduction to Basel II
2. Credit Risk Management Overview
- Approaches, Processing steps - Architecture, bBIDS support
3.TCS Basel II Offerings
4. TCS Risk Management Assets
Basel II - Background
First Basel guidelines - 1988 Amended for Market Risk 1996
Destabilizing events in International Financial Markets
Collapse of East Asian economies Barings Bank, Sumitomo Capital, Enron, Mannesmann
Need for holistic Business Risk Mgmt. especially for internationally active banks Need for better risk cushion, disclosure and monitoring mechanism
Basel II - Overview
Guidelines added for Market and Operational Risk Option of using Internal Risk Assessment Standardization of supervisory and disclosure norms
Pillar 1
Capital Charge
Market Risk (VAR, Stress) Credit Risk (Std, IRB ) Operational Risk (Std, IRB )
Pillar 2
Supervisory Process
(Integrated fully audited process from Data Collection to reporting)
Pillar 3 Market Discipline & Disclosure
-Qualitative & Quantitative Disclosure
Risk Monitoring/Rprtg.
Regulatory (std, IRB) Or internal model
Regulatory Rules & Reporting Enterprise Data Management
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Basel II Scope of Application
(1) Basel II accord is to be at this level on a consolidated basis, i.e. up to holding company level (2), (3), (4): Basel II accord is also applied to all internationally active banks on a stand-alone basis
Basel II - Architecture Approach
Centralised vs. de-centralised approach Defining Basel II systems & data architecture design
Key issue - the degree of centralised or de-centralised approach A high level of consistency and integration will be needed for both
Reporting Applications Market data Operational Data Store (ODS) Basel II Risk Calculators
Credit Risk
Reported data
Disclosure
Management data
Analysis
Group level
Basel II Data Mart
Centralised approach
Operational Risk Market Risk Calculated
data
Data Store
Operational Data Store (ODS) Extraction
Data Sources
Extraction, Conversion, Mapping, Cleansing, Transfer
Transformed data: PD, LGD, EAD, EI, PE, LGE
Decentralised approach Business unit level
Collateral system
Payment data
Credit rating
Valuation data
Loss data
Source data
Type of Risks in BFS
Business Risks
Credit Risk
Default Risk / Counterparty Risk Portfolio Risk Intrinsic Risk Concentration Risk
Market Risk
Interest Rate Risk Capital market Risk Liquidity Risk Exchange Rate Risk Commodity Risk
Operational Risk
Internal /External Fraud Employ. Practices & safety Clients, Prod & Biz Practices Physical damage to Assets Business disruption & Systems Failure Execution, Delivery & Process Management
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Basel II - Regulatory Capital
Total capital
Credit risk + Market risk + Operational risk
Credit Risk
= Banks capital ratio (minimum 8%)
The risk of loss arising from default by a creditor or counterparty The risk of losses in trading positions when prices move adversely Foreign Exchange and Commodities open positions The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events
Market Risk
Operational Risk
Total Capital
Eligible capital = Tier 1 + Tier 2+ Tire III
Tier 1: Shareholders equity + disclosed reserves/ retained earnings Tier 2: Supplementary capital (e.g. undisclosed reserves, provisions) Tier 3: Short Term Sub-ordinate Debt (Only for Market Risk)
Overview Topics
1. Introduction to Basel II
2. Credit Risk Management Overview
- Approaches, Processing steps - Architecture, bBIDS support
3.TCS Basel II Offerings
4. TCS Risk Management Assets
Credit Risk Management
Approaches
Standardized Internal Rating Based Foundation Advanced
Terminology
PD, LGD, EAD RWA, K, EL CCF, Security
Data Requirements
Customer Information, Rating / Scores, Categories Products, Risk Weights, Categories, A/Cs, Securitization Exposure / Facility & their Categories, Exposure Rating Default, Overdue Amounts, Settlement Adjustments Collateral, Guaranties, Haircuts, Maturities Reference Basel parameters, Currency / Rates, Org Str.
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CRM Comparison of Approaches
Basel I Approach Simple Approach Estimation of risk variables (PD, LGD, EAD)
Standardised
Internal ratings-based Foundation Level Advanced level Internal estimates Determined by supervisor
Comprehensive Approach
RW determined through ratings
RW prescribed for Asset Classes
Collateral, guarantees, credit derivatives, netting
Determined by supervisor
Determined by supervisor
Determined by supervisor
No limitation
Haircuts
Determined by supervisor
Determined by supervisor
Determined by supervisor
Internally determined
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CRM Basel II Processing Steps
Standardized Approach
Obligor Categorization Exposure categorization (Retail /Wholesale, Asset Classification) Exposure Computation (includes CCF application for NFB prod) Security Recognition and Application of Adjustments RWA & Regulatory Capital Calculation
IRB Approach
Exposure categorization (Retail /Wholesale) Segmentation of Exposures (for Retail) Calculation / Recalc of Basic Risk Parameters, Adjustments
(PD, LGD, EAD), both Historical and Estimated
Calculation of Advanced Risk Parameters
(EL, K, RWA, RC)
Post-Securitization Adjustments
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CRM Logical Centralized Solution for HO
High-level Process Flow
Central Processing
Reporting & Analysis Regulatory Capital Calculation Data Consolidation
Data Gathering
Pre Processing
Distributed Processing
Verification & Approval (Optional)
Data Transmission
Logical Architecture
Central Components
Reporting Analysis Results Repository Calculation Engine Risk Data Repository Consolidation Scripts Staging Area
Distributed Components
Data Sources
Extract Scripts
Staging Area
ECTL Jobs Risk Data Repository
FTP / Media
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CRM Logical Host (Unit level) Solution
High-level Process Flow
Unit level Reporting
Data Gathering
Pre Processing
Verification & Approval (Optional)
Regulatory Capital Calculation
Reporting & Analysis
Logical Architecture
Unit level Components
Data Sources
Extract Scripts
Staging Area
ECTL Jobs
Risk Data Repository
Calculation Engine
Results Repository
Reports, Analysis
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Overview Topics
1. Introduction to Basel II
2. Risk Management Overview
- Approaches, Processing steps - Architecture, bBIDS support
3.TCS Basel II Offerings
4. TCS Risk Management Assets
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TCS Basel II Offerings
End-to-end Risk Management Solution Implementation Implementation & Support
System Integration Solution Configuration Integration Testing IPR Support Stress & Back Testing Maintenance
Basel II Readiness Blueprint
Solution Strategy & Planning Solution Requirements Anal Data Management Strategy Data Preparation Consulting Package evaluation Implementation Plan
Basel II Readiness Blueprint
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TCS Risk Management Assets
Market Risk/ALM
ALM /Market Risk Framework
Credit Risk
Probability of Default Model for Corporate loans Credit Appraisal & Monitoring Model Process Model for Basel II Standardized Approach IRB Framework for Retail Business Lines Data Model Solution Template
Phase 1
ASSESS AND PLAN
Operations Risk
Operational Risk Framework
Methodology
ORGANIZATION
Phase 2
SOLUTION CONFIGURATION
USE TEST AND APPROVAL
Phase 3
MONITOR AND CONTROL
Phase 4
Corporate Governance/ Risk Management Basel II Implementation Approach Basel II implementation Master Plan Use Test and Approval Basel II Roll-Out Plan Monitor and Control Credit Risk Operational Risk Impact Analysis
PROCESSES
Gap Analysis
METHODS
Market and Other Risks
Capital Planning Disclosure Supervisory Review Process
DATA
SYSTEMS
BASEL II PROJECT MANAGEMENT
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Q U E S T I O N S A N S W E R S
