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The Art of the Possible Basel II Oracle XO xocl.net Basel II, ICAAP, Oracle, XO and You Nigel Webb Director Consultancy (Risk Management & Treasury)

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Presentation on theme: "The Art of the Possible Basel II Oracle XO xocl.net Basel II, ICAAP, Oracle, XO and You Nigel Webb Director Consultancy (Risk Management & Treasury)"— Presentation transcript:

1 The Art of the Possible Basel II Oracle XO xocl.net Basel II, ICAAP, Oracle, XO and You Nigel Webb Director Consultancy (Risk Management & Treasury)

2 The Art of the Possible Basel II and ICAAP place onerous demands on Risk Management within a Bank It is anticipated that these controls will reach further into the Financial Services Industry A mixture of Strategy, Business Processes and Technology are required to address the needs XO offers a 360° approach centred on an integrated Oracle eBusiness platform specifically targeted at Basel II and ICAAP Executive Summary 2 xocl.net

3 The Art of the Possible Basel II Accord introduced in June 2004 to improve risk management within banks Basel II has 3 Pillars 1.Regulatory Capital Requirements (Credit, Operation & Market Risk) 2.Economic Capital Requirements - Supervisory Review inc. Internal Capital Adequacy Assessment Process - ICAAP 3.Market Discipline Basel II 3 xocl.net

4 The Art of the Possible Pillar 1 has well established risk models and is strictly regulated Pillar 2 is entrusted to the Bank’s Board for responsibility of implementing an ICAAP that is “ Appropriate to its Risk Profile and Business Plan” Pillar 3 includes Disclosure Requirements or Reporting Basel II (contd.) 4 xocl.net Pillar 1 Credit Risk Operational Risk Market Risk Pillar 2 Supervisory Review “Other Risk” Pillar 3 Market Discipline “Disclosures & Reporting”

5 The Art of the Possible 3 types of risk considered Limited models available for risk assessment Regulation requires specific allocation of capital reserves against quantified risk Basel II - Pillar 1 5 xocl.net Credit Standardised Foundation IRB Advanced IRB Operational Standardised BIA AMA Market VAR

6 The Art of the Possible Pillar 2 is intended to identify and allocate capital against all risks not previously considered within Pillar 1 Basel II – Pillar 2 6 xocl.net Risk Liquidity Insurance ConcentrationResidual Securitisation BusinessInterest Rate Pension Obligation Other

7 The Art of the Possible It is the responsibility of the Board of Directors and Senior Management to define appropriate risk measurement ICAAP is the bank’s internal assessment of capital that it considers adequate to cover all material risks Pillar 2 analysis has a degree of flexibility and complexity that is an order of magnitude of Pillar 1 Processes and technology must be: – Robust – Demonstrably Appropriate – Transparent Basel II – Pillar 2 (contd.) 7 xocl.net

8 The Art of the Possible Pillar 3 greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately FSA Supervisory Review Evaluation Process (SREP) is encompassed in Pillar 3 Basel II – Pillar 3 8 xocl.net

9 The Art of the Possible Although ICAAP is not synonymous with Basel II, it is a significant part of it Because of the nature of the higher complexity of analysis, ICAAP is usually associated with Pillar 2, but does also cover Pillar 1 The guiding principles of ICAAP are: – Principle of Proportionality – Forward Looking – Ongoing exercise – Evolving-nature ICAAP is not a static, one-off, exercise, but a dynamic process that must be maintained appropriate to the risk ICAAP 9 xocl.net Pillar 1 Credit Risk Operational Risk Market Risk Pillar 2 Supervisory Review “Other Risk” Pillar 3 Market Discipline “Disclosures & Reporting” ICAAP SREP

10 The Art of the Possible xocl.net 10 ICAAP

11 The Art of the Possible Executive Summary Background Summary of Current and Projected Financial and Capital Positions Capital Adequacy Key Sensitivities and Future Scenarios Aggregation and Diversification Challenge & Adoption of the ICAAP Use of the ICAAP within the Firm ICAAP Structure 11 xocl.net

12 The Art of the Possible Risk Identification – It is the bank’s responsibility to identify all material risks that it faces – Bank should put in place an automated process at a pre-determined frequency to identify risk – Technical solutions are available to capture, process and present analysis to senior management to monitor risk on an on-going basis Materiality Assessment of Risks – Probability categorisation (e.g. Immaterial, Low, Medium, High, Very High) is a challenging task – Technical solutions are available to evaluate risk materiality using multiple and complex criteria ICAAP Challenges & Solutions 12 xocl.net

13 The Art of the Possible Risk Quantification – The quantification of risk is more challenging that the materiality – Common, but inefficient, process is to retain an unquantified “cushion” – Many complex and varied models available to determine risk – There is no “one size fits all” – Again, technology can be a great assistance, but must be complemented by effective strategy and business processes Reporting & Monitoring Process – Workflow and reporting technologies based on industry standards (e.g. BPEL) can be employed to great effect if source systems are integrated ICAAP Challenges & Solutions 13 xocl.net

14 The Art of the Possible Reconciliation of ICAAP and Pillar 1 – Requirement to compute economic capital and reconcile against regulatory capital requirements – Often a diversity in evaluation processes that must be identified and the differences attributed appropriately Stress Testing – Requirement to develop a framework to assess risk for extreme, but plausible, scenarios – Vendor solutions allow banks to define, execute and report complex scenarios ICAAP Challenges & Solutions 14 xocl.net

15 The Art of the Possible Summary – ICAAP requirements require an holistic approach to a complex problem – A contiguous source of information is critical as a basis for analysis. This may start from multiple sources: Fund Management Transactional Core accounting platform – All reporting must be traceable (drill down) to source – Business strategy and processes must be in concert with the technology ICAAP Challenges & Solutions 15 xocl.net

16 The Art of the Possible 360° Approach – Oracle eBusiness offers an excellent product suite specifically designed for Basel II and ICAAP that includes Oracle Reveleus ICAAP Analytics Oracle Reveleus ICAAP Assessments Oracle Reveleus Market Risk Oracle Reveleus Economic Capital Advanced Oracle Reveleus Operational Risk Economic Capital Oracle Reveleus Asset Liability Management Oracle Reveleus Enterprise Risk Infrastructure – Business Processes must reflect Strategy and meet both business and compliance needs – Implementation, Adoption & Evolution require effective Change Management XO and Oracle 16 xocl.net

17 The Art of the Possible A 360° challenge needs a 360° Solution 17 xocl.net Oracle eBusiness Financials Suite Custom Apps Feeder System Integration Basel II Pillar 3 Internal MIS/BI Risk Strategy Risk Identification Business Processes Basel II Pillar 1 ICAAP / Pillar 2 Internal Audit External Audit ComplianceProcesses Technology Disclosure & Reporting

18 The Art of the Possible Consultancy – Experienced Risk Managers that provide Basel II and ICAAP Review/Evaluation – Risk Strategy definition – Business Process Reengineers to (re)define Basel II & ICAAP business processes Technology – XO have a long and enviable track record in implementing integrated solutions based on an Oracle eBusiness core Change Management – Project, Programme and Managers are the core of our business – Our training programmes are designed to be end-to-end incorporating technology & processes XO 360° Coverage 18 xocl.net

19 The Art of the Possible Contact Details Nigel Webb XO Consultants Ltd 18 Hanover Sq London W1S 1HX T: F: xocl.net


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