Presentation on theme: "How comfortable can you afford to be? Kostas Kotsiopoulos"— Presentation transcript:
1 How comfortable can you afford to be? Kostas Kotsiopoulos
2 Agenda Overview Risk Rating Historical Data Iterative Approach Time PeriodINFORMER Solutions
3 OverviewPillar ThreeMarketDisciplinePillar OneMinimum CapitalRequirementsPillar TwoSupervisoryReviewStandardisedApproachOperationalRiskIRBApproachTradingBookSecuritisationFrameworkBasel 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.
4 The three different approaches for Capital Adequacy Standardised ApproachFoundation Internal Ratings Based Approach. Five years data, the exception can be 2 years.Advanced Internal Ratings Based Approach. Five years for PD, seven years for LGD and EAD
5 Implementing BASEL II Solutions Bought in dataBalance sheet analysisSector analysisCredit historyEtc..
6 Risk 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?
7 Some 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?
8 Mitigation is the KeyCan make a significant difference to the capital chargeIs a sensitive way to manage riskMay be:Eligible financial collateralApproved GuaranteesEligible Credit DerivativesNetting
9 Risk Rating Systems: Principle Rating and risk estimation systems provide a meaningful way of ranking and quantifying riskThis provides a controlled way of categorising Obligor and Facility/transactional riskThe approaches must show a clearly defined and consistent approach to risk assessment, which is systemic in its application within a bank
10 Rating SystemsAll of the methods, processes, controls, data collection and IT systems that support the assessment of credit riskThis in turn leads to the assignment of internal risk ratings and the quantification of loss estimatesThis underpins the whole of the BASEL II IRB approaches
11 Risk Rating Credit Scoring Solution Credit Rating Solution Customer and Transaction RatingRisk Pricing ModelDisclosure of the bank’s Information will affect its own rating (PILLAR 3)Operational RiskIncrease Provisions?Increase the Cost of Fund?
12 Regulatory and Economic 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
13 Reasons for the Capital Buffer For the benefit of a bank’s own rating within the marketsThe business mix will require adjustment beyond the capital calculated by the Basel II single factor modelAs a reserve to avoid raising capital in poor market conditionsPrudence to avoid getting close to the regulatory capital minimumThe general point about the single factor model and other market correlations
14 Principle 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”
15 Historical Data Availability of data Data Cleansing Efficient and Representative DataStatistical AnalysisData CleansingConsolidation of dataClassification of dataIs there any requirement for benchmarks?
16 Iterative Approach Simulations Select the appropriate Approach Combination of ApproachIntroduce the Appropriate Method for Internal Rating
17 TimetableBasel II is confirmed and the timelines will not slip, and not only for G10National supervisors steadfast on deadlinesParallel run commencing 2006Final going in position by 2007The absolute minimum expectation is that banks should be able to implement the Standardised Approach by January“Dry run” by mid 2006 latestConsultation with supervisor by end 2005 latestCommence programs for change (2nd Iteration) by mid 2005 latest
18 Applying of the new framework in EE Test and Parallel Run by the end of 2005End 2006 Standardised and IRBFEnd 2007 IRBAThe banks that will choose the IRBA are able to remain at the current framework during 2007.
19 Basel II Accord – Challenges The task of implementing Basel II can be separated into the following challengesComprehending the type and format of data you need for Basel IIConsolidating, Standardising and Translating this data before it is usable for any Risk CalculationsAuditing, Validating and Correcting the End-to-End Credit Risk Management ProcessManaging the evolution of Basel II complianceBIS level – Basel IIINational SupervisorBusiness or product evolution
20 INFORMERExtensive Experience in Banking Projects (Core banking, e-banking, Outsourcing, etc.)Vision of the Company is to offer Integrated Solutions to the Financial SectorBuilding up the Competence of our personnel and partnership with specialised companiesA dedicated team for these projects
22 INFORMER’S SOLUTIONS Consulting Services (Training, Gap Analysis) Data Cleansing, Consolidation and ClassificationInterfaces with specialised solutionsCredit Scoring and Rating Applications complementary to Core Banking Systems (T24, Retail 24)Specialised Solutions like Barracuda of TLCHardware SolutionsSoftware Solutions
23 FAQs – Why start now?Time to define your migration path to compliance and beyondCorrecting data and disparate legacy databases has business wide impact – it needs careful planning and time to testBuy-in to process and procedure change is critical – allow time for change managementSet achievable iterations of improvement – understand and communicate the resultsImpress the regulator with a clear picture of where you are and where you are goingDerive maximum pillar 1 value by focussing on “heat maps” of product and unit mixGain early competitive advantageReduce the risk of a penalty rateRUNNING BEHIND SCHEDULE?
24 Operational 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