Basel II Implementation Challenges for a Global Bank Mumbai, March 13 Andy Charlton Group Head, Basel Implementation

2 2 Standard Chartered ’ s Basel Challenge  56 countries… scale and complexity varies widely  FSA lead regulator… but all are important  Different and evolving ‘Basel’ regulations… and timetables  Internal consistency and standards  Basel is a priority… but other strategic imperatives Standardised Foundation - IRB Advanced - IRB Standardised Advanced - IRB Basic Indicator Approach Standardised Advanced Measurement Approaches Standardised Foundation - IRB Advanced - IRB Standardised Retail - IRB Internal Models (CAD II) Basic Indicator Approach The Standardised Approach Advanced Measurement Approaches Standardised Credit Risk Wholesale Credit Risk ConsumerMarket RiskOperational Risk SCB approaches

3 3 Key learnings  Be clear about objectives  Adopt an enterprise-wide approach  Know where you stand  Focus on data… and information  Models: the devil is in the detail  Pillar 2 will be critical  Education and communication are key enablers  Home-host disparities increase complexity

4 4 Be clear about objectives  Why are we doing this? –compliance –better risk management –capital efficiency –increased profitability –investor community perception –competitive advantage  Focus on outcomes... manage the inputs The world’s best international bank Leading the way in Asia, Africa and the Middle East

5 5 Adopt an enterprise-wide approach  Successful Basel II implementation requires engagement across the bank  Basel II is not a Risk project… or a Finance project… or a Compliance project… or an IT project or…  Support engagement through inclusive governance structures  Top management engagement is essential  In-country engagement is vital  Implementation is a programme of continuous improvement  Adapt and adopt in BAU as much as possible Group Project Steering Committee PSC Outcome based workstreams Country PSC Country coordinators  Governance  Compliance  Audit  Risk  Finance  Businesses

6 6 Know where you stand  Self assessment must be done in detail… with rigour  Ensure robust process to address initial non-compliance  Ensure audit trails and transparency  Basel regulations emphasise the importance of consistent policies and procedures Self Assessment

7 7 Focus on data and information  Basel II requires data to be managed in a more robust manner  Governance, infrastructure, assurance all require attention  No shortcuts to robust data for models  Focus on reporting… early but retain flexibility  Reliable information in critical to Use Use of information is likely to be key to generating lasting business benefits WB Data Warehouse Calculation & Reporting tool

8 8 Models – the devil is in the detail  IRB modelling expectations very prescriptive  Robust data is essential base  Good governance and evidence is critical  Senior management challenge is vital  Appropriate MI reinforces Use  Education is a major challenge  Models inform judgement. They are not a panacea Meet minimum standards but establish a process of continuous improvement

9 9 Pillar 2 is critical  Pillar 2 and supervisory review determine capital requirements  It’s not all credit, market and operational risk  ICAAP should enhance existing capital management processes  Home/host challenges will add to complexity  Pillar 2 requirements still lacking definition Capital Supply Internal Drivers  Risk Profile & Business Objectives Capital RaisingBalance Sheet Management Capital Management  Capital Ratio Targets  Individual Capital Guidance (FSA)  Capital Management Policy and Objectives  Capital Deployment (Subsidiary & Country) External Drivers  Investor Community  Regulators Capital Requirements Capital Demand Pillar 2

10 Education and Communication are key enablers  Complexity means excellent communication and engagement are essential  Regulations seek to embed cultural change  Fear of technical complexity to overcome  Education required to establish compliance  … But education to support Use is a better challenge Education supports Use and delivers objectives

11 Home/host disparities increase complexity  Differing regulations… differing timelines  Global coverage vs local coverage  Multiple reporting requirements  Multiple applications... multiple ICAAPs  Inefficiency... resource contention... additional cost All regulators are important. Manage accordingly!

12 Conclusion  Establish desired outcomes and focus on them  Take enterprise-wide approach  Understand complexity and resource appropriately  Recognise that Basel II is a long term commitment to continuous improvement Local banks and international banks face similar challenges but scale and multi-geography adds complexity