the art of the possible basel ii oracle xo xocl.net basel ii, icaap, oracle, xo and you nigel webb...

The Art of the Possible

Basel II

Oracle

XO

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Basel II, ICAAP, Oracle,XO and You

Nigel WebbDirectorConsultancy (Risk Management & Treasury)


• 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

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• Basel II Accord introduced in June 2004 to improve risk management within banks

• Basel II has 3 Pillars1. 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

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• 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.)

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Pillar 1Credit Risk

Operational RiskMarket Risk

Pillar 2Supervisory

Review“Other Risk”

Pillar 3Market Discipline

“Disclosures & Reporting”


• 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

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Credit• Standardised• Foundation IRB• Advanced IRB

Operational• Standardised• BIA• AMA

Market • VAR


Pillar 2 is intended to identify and allocate capital against all risks not previously considered within Pillar 1

Basel II – Pillar 2

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Risk

Liquidity

Insurance

Concentration

ResidualSecuritisati

onBusinessInterest RatePension Obligation

Other


• 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.)

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• 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

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• 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

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Pillar 1Credit Risk

Operational RiskMarket Risk

Pillar 2Supervisory

Review“Other Risk”

Pillar 3Market Discipline

“Disclosures & Reporting”

ICAAP

SREP


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ICAAP


• 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

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• 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

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• 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


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• 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


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• 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


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• 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

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A 360° challenge needs a 360° Solution

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• Basel II Pillar 1• ICAAP / Pillar 2• Internal Audit• External Audit

• Risk Strategy• Risk Identification• Business

Processes

•Oracle eBusiness Financials Suite

•Custom Apps•Feeder System Integration

• Basel II Pillar 3• Internal MIS/BI

Compliance Processes

Technology

Disclosure &

Reporting


• 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

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Contact Details

Nigel WebbXO Consultants Ltd18 Hanover SqLondonW1S 1HX

T: 0870 766 9001F: 0870 766 9002

[email protected]

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mailto:[email protected]

http://www.xocl.net/

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