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© 2004 Accenture All Rights Reserved. Accenture, its logo, and Accenture High Performance Delivered are trademarks of Accenture.
Basel II - Implementation
June 2004
2 © 2004 Accenture. All rights reserved
Agenda
Implementation Status
Implementation Approach
Implementation Issues
Implementation Aids
Questions
3 © 2004 Accenture. All rights reserved
Implementation Status
Uncertainty amongst banks• Delay in finalisation of the Accord
• National Regulators slow to interpret National Discretion
• Home v. Host issues still unclear
Investment Commitment• Initial Business Case exists but formal budgetary approval outstanding
• Resources are scarce
• Competing projects e.g. IAS
Solutions• Vendors are still developing offerings and many banks holding back on commitment
• In the last few months increasing banks committing to a solution
4 © 2004 Accenture. All rights reserved
Implementation Status
Our experience* indicates that almost all banks (80%) are aiming to achieve the foundation (35%) or advanced (45%) internal rating-based approach (IRB). Currently they are at different points of the implementation process.
Strategic Direction & Positioning
The vast majority of banks have decided on target level and have conducted high level readiness assessment
The vast majority of banks have decided on target level and have conducted high level readiness assessment
29% banks have moved into this stage, at least for parts of their program 29% banks have moved into this stage, at least for parts of their program
29% banks are currently performing this stage of the work across the group which will result in a precise target solution
29% banks are currently performing this stage of the work across the group which will result in a precise target solution
26% have begun build and test of solutions, with the integrated solution fully designed26% have begun build and test of solutions, with the integrated solution fully designed
(Accenture’s Implem
entation Focus)Bank’s Positioning
Majority of banks
Few banks
Detailed design and solution selection
Design&
Build
Develop LDM, detailed systems mapping and target
solution definition
* Basel II – A survey of complaince issues, research commissioned by Accenture from the Financial Times Research Centre, May 2004
5 © 2004 Accenture. All rights reserved
Agenda
Implementation Status
Implementation Approach
Implementation Issues
Implementation Aids
Questions
6 © 2004 Accenture. All rights reserved
Implementation Approach
Overall Basel II Implementation Roadmap
Data Modelling & Mapping
Phase
Detailed Design and
Solution Selection
Phase
Build and TestPhase
Business Requirements
Phase
• Understand implications for CR WRC and OR capital, reporting, control
• Model capital Requirements and determine the Basel II model to be used
• Document the new requirements to support credit risk
• Identify data synergies across the new requirements
• Develop data model• Review required data for
availability• Review gaps and prioritise• Develop solution to bridge
gaps
1-2 months 3-6 months 3-6 months 12-36 months
Implementation Activity
Timeframe
• Build, test and roll out• Phased by component,
geography or portfolio
• Link data model to the conception design and develop systems and interface change specifications
• Review vendor solutions against the conceptual design for best fit
• Vendor Selection• Determine technical
architecture design
7 © 2004 Accenture. All rights reserved
Implementation Approach
Many business case efforts focus on Strategic Direction, Credit Risk Measurement and Policies/Procedures, but a comprehensive business case must understand and account for each of the required components necessary for success.
Credit Risk Measurement
Strategic Direction
Organization Design
Policies and Procedures
Operational Risk
Systems Integration
Pillar III : Reporting
Pillar II : Economic Capital
Program Management
2
10
3
2
55
10
5
3
10
Basel II Program Components % of Effort DescriptionImpact of Basel II on the individual portfolios in relation to the capital requirement changes and likely market re-actions.
Development of compliant credit risk rating models including PD, LGD and EAD and segmented retail portfolios.
Development of documented compliant policies and procedures for all levels of risk management.
Establishing organizational responsibilities for appropriate independence, review and validation functions.
Integrating changes to existing systems and interfaces and developing new data storage, calculation and reporting functionality.
Establishing an operational risk framework including loss event metrics, causal analysis and capital calculation.
Integrating regulatory risk models with other quantified risk metrics and balance sheet management.
Integrating capital and risk reporting with financial and regulatory reporting.
Management and co-ordination of the program across diverse business lines and geographies.
Note: % represents the estimated man day implementation effort for a typical bank
8 © 2004 Accenture. All rights reserved
Implementation Approach
The journey to become Basel compliant will be long and complex, therefore a phased approach is recommended to ensure manageability
Detailed Design
Detailed analysis
confirming IT platforms etc.
Review Implementa-
tion Plan
Design, build, testDesign, build, test
Build, test, roll out
Phase 1 Phase 2 Phase 3 Phase 4
Implemen-tation
Approach and Plan
Key Checkpoints
MeasurementData Gathering
Analysis Findings
Segmentation / SVOC
SystemsGap Analysis
B2 / CAD 3 Data Model
Explore potential tactical / strategic solutions
High Level Strategic Review
High Level Operating Model and Business
Requirements
Phase 2 Planning and Mobilisation
Business Case
Overall Programme Management
High Level Gap
Analysis and Implementati
on plan
New / Revised Models
Incorporation of IRB into BAU‘Use Test’ValidationPolicies & Procedures
Incorporate Measurement Piece
9 © 2004 Accenture. All rights reserved
Implementation Approach
The data assessment needs to be comprehensive and cover customer, exposure, product, risk rating, risk mitigantand default / arrears data.
In many instances business units will have data consolidated onto central systems or warehouses and these can be the main basis for the data review. However, additional assessments may need to be made.
Central Data Stores / Accounting Systems / Consolidation Systems
Risk Rating and Scoring Systems
Product / Customer /Channel Systems
Risk Mitigant Systems Default ManagementSystems
10 © 2004 Accenture. All rights reserved
Implementation Approach
Our experience also supports the need for a strong Program Office and Governance Structure. The following diagram of a typical Basel II Governance Structure indicates the strong role needed to be taken in managing and directing a Basel II initiative.
Economic Capital
Reporting
Operational Risk
Systems Integration
Credit Risk Measurement
Policies and Procedures
Functional Program
Lead
IT ProgramLead
Group Program Director
Communication & Training
Group Program
Office
ITCo-ordination
Retail
ITCo-ordination
Non-retail
Functional Co-ordination
Retail
Functional Co-ordination
Non-retail
Work PackagesBU
ProjectManager
Steering Committee
BU Project
Manager
BU Project
Manager
ITCo-ordinationOperational
Risk
ITCo-ordination
Finance / Reporting
Functional Co-ordinationOperational
Risk
Functional Co-ordination
Finance / Reporting
Design Authority
OrganizationDesign
Function Project
Manager
Function Project
Manager
Governance, Management, and Co-ordination
Work Package Delivery
Corporate SME /Business
Mortgages Finance GroupCredit
11 © 2004 Accenture. All rights reserved
Implementation Approach
The Objectives of the Data Assessment / Solution Design work that is currently occupying many banks are as follows:
• To create a logical data model reflecting the known requirements of Basel II / CAD 3 and bank specific requirements
• To assess the ability of the current systems and interfaces to provide / derive / calculate the required data elements
• To create a solution design / application architecture outlining the high level end-state solution and identifying changes required to existing systems / interfaces as well as any new systems / interfaces required
• To refine the business case and implementation plans based on a more detailed understanding of the solution and required effort / activities
12 © 2004 Accenture. All rights reserved
Agenda
Implementation Status
Implementation Approach
Implementation Issues
Implementation Aids
Questions
13 © 2004 Accenture. All rights reserved
Typical challenges we see bank’s facing in establishing a compliant operating model, include their IT systems, processes and organisation design
Implementation Issues
Organisation Organisation
Lack of common reference data platformsNumerous credit risk systems with inconsistent data modelsLack of a common methodology for categorisation of bad debts across systems
Aspects of required data not currently capturedNo single view of the Customer for Non Retail Customers
ProcessesProcesses
IT Systems IT Systems
Many processes not in place e.g. validation, rating model maintenanceProcesses linking risk management into financial reporting are not presentCapability required to perform much more complex RWA calculations with increased number of variablesIntegration of Basel II compliant risk reporting with operational processes e.g. credit approval, portfolio limit setting, provisioning, is not in place
Roles and responsibilities not assigned between risk, finance and BUsOwnership for models and algorithms as opposed to periodic data processing unclearReporting and governance giving ownership to the executive not set
14 © 2004 Accenture. All rights reserved
Implementation Issues
Basel II has impacts across the entire operating model of a bank, from front-office activities through to Group reporting
Group finance
Group risk
Capability to record data items
Capability to calculate credit risk ratings
Capability to extract, store and
aggregate data
Capability to undertake
calculations
Capability to consolidate and store data
Capability to undertake reporting
Front-endProduct
processing systems
MIS
Financial Reporting &
GL
BU
DataIntegration& Storage
GroupReporting
Capability to reconcile between finance and
risk data
15 © 2004 Accenture. All rights reserved
Implementation Issues
The Basel II impacts require new functionality in the systems of a bank‘s IT architecture
Captures Basel II relevant information e.g. credit score, application scoreComplete product information for Basel II
Access to business rules and reference data for credit scoring, behavioural scoringCalculate PD, LGD and EAD automatically using complex variables and historic dataRapid integration of data from third parties
Standard extracts to product, customer and risk systemsReal-time access to data
Store historic rating information and exposure data Store borrower rating history inc. audit trail and grade migration over timeFacility for Non-Retail; Exposure level for RetailAccess to business rules and reference data for back-testingAccess to historic Information for Basel II reporting and AnalysisTimely information for reporting and analyticsReconciliation between Finance and Risk data
New data elements Historic information Reconciliation between finance and risk data
BU
front-office
BUback-office(finance)
Group finance
Group risk
Group Reporting
Product Processing
General Ledger
Group consolid-
ation
Risk Rating
ReportingSystems
& s/sheets
Risksystems
Customer data Channel
Data Stores
Data Stores
Integration layer
Integration layer
Initiates request for credit risk rating from channel applicationsCaptures user information at point of customer interactionCredit risk systems enabled at point of customer interaction
Retail customer segmentationNon-retail facility level but groups linked
Flexible reportingNew report formats
Automatic RWA calculations from complex variables
Derivation of new ratings Reconciliation between finance and risk data
Calculation method
New reportingCustomer
Customer data encoded to allow matching and aggregationStore customer exposure data against different criteriaReconciliation between Finance and Risk dataFlexible reporting Robust analytics capability
16 © 2004 Accenture. All rights reserved
Agenda
Implementation Status
Implementation Approach
Implementation Issues
Implementation Aids
Questions
17 © 2004 Accenture. All rights reserved
Implementation Aids
Accenture has developed a set of assets designed to help banks accelerate their Basel II initiatives and overcome the hurdles to Basel II compliance
Basel II Diagnostic Tool
Basel II Operating Model
Basel II Data Model
Basel II Assessment
Basel IIOperating Model
Basel II Data Model
Basel II Process Model
Basel II Process Model
Technical Architecture Template
Basel II Data Assessment Tool
Business Unit Architecture Group Architecture
Informational Architecture
Front End Source Systems Local Storage
Reports
Operational Architecture
Data Feeds Data Feeds
Front End
NAO
A/C Mgmt
A/C Maintenance
Product Processing
Risk Rating
Collateral
Local Reports
Customer System
Central Group Storage
Services (e.g. On-Line Services, Batch, ETL,Metadata)
External Data Internal Data External Data Internal Data
Local Storage
Information Flow
Collections & Recoveries
Guarantees and Cr Derivatives
Services (e.g. On-Line Services, Batch, ETL, Metadata)
Reporting Architecture
Risk DataMart
Finance DataMart
Other Data Mart
Reports
Reports
Reports
Basel II Data Assessment Tool
Technical Architecture
18 © 2004 Accenture. All rights reserved
Implementation Aids
Logical Data Model … which can be tailored for individual banks precise data requirements…
Transaction
Provision
Rating & PD
Customer
Credit Risk Mitigation
Default Business Unit
Reference Datae.g. Currency, Constants etc
Exposure
Rating Grade
Credit Grade
DefaultEvent
Default Legal
Asset class
Exposure Maturity
Office
Legal
Credit Derivative
Guarantee
Collateral
Credit Risk Mitigation
CRM Type
Product/Facility subclass
Business Unit
Score
PortfolioSegment
Provision
Portfolio
FutureMargin Income
Account
Securit ‘nPurch RecEquities
Exposure cash flow
Haircut
Mismatch
RetailBoth
Non-retailGroup
GeneralAgri
PropertyCare SectorInvestmentsProject Fin.
Parent
Scorecard Version
GuarantorCustomer
ConstantsCCFs
Std Haircut
CurrencyCountryIndustry
RelationshipAccount
19 © 2004 Accenture. All rights reserved
Implementation Aids
• Each business unit completes a data assessment template for all relevant systems
• Where a business unit owns a system with transactions for other business units the system-owning business units must complete the data assessment for those data items
• Where business units use different systems to capture data relating to different product groups, all systems must be covered
• Approximately 19 data attributes will need to be collected for each data item, covering source system, data quality, data source and data extraction capability to enable a robust design to be developed
• Several hundred data items are contained within the data assessment templates
Risk Area Name Risk Attribute Name Description of Attribute Is the data present on a
system?What is the name of the system?
Account Account ID Unique Record Identifier for Account Account Account Number Account numberAccount Account Name Name of the AccountAccount Relationship ID Unique Record Identifier for Relationship Account Relationship Name Relationship name
Asset Class Product/Facility ID Transactions are members of the sub class groupAsset Class Asset Class Basel II Asset Class i.e. Corporate, Sovereign, Bank,
Retail or EquityAsset Class Asset Sub Class Basel II Asset Sub Class e.g. Revolving Credit,
Mortgages, Project Finance, Object FinanceAsset Class Asset Class Description Description of the Asset Class
Asset Class Asset Sub Class Description
Description of the Asset Sub Class
Asset Class Product/Facility Description
Further breakdown of the Asset Sub Class e.g. Overdrafts, Credit Cards
Business Unit BU Id Unique Record Identifier for BU Business Unit Business Unit Name e.g. Bristol & West Commercial, B&W residentialBusiness Unit Business Unit Team
Name - LenderBusiness Unit Team Name - Lender
Business Unit Business Unit Address Refers to the BoI Business Unit location/Address e.g. Donegal House, Belfast, Lisburn Road
Collateral Collateral ID Unique Record Identifier for Collateral Collateral Collateral useful life end
dateCapture date to indicate the useful life of collateral - the date to be the shorter of the period to the maturity date
of the collateral or the final date that the risk is contractually covered by collateral (for trading book
only)Collateral Average Time for
Collateral CollectionAverage time taken (in days) for collection of collateral
following default. Captured for product/facility
Collateral Average Cost of Collateral Collection
The average cost of collection of collateral on a per product/facility basis
Collateral Collateral Pool Flag Yes/No flag indicating whether there is pooled collateral (i.e. multiple collateral items) against a particular
exposureCollateral LGD for Allowable Non
Financial Collateral ©Loss Given Default for non financial collateral including
receivables, Real Estate, and other physical collateral
Collateral Collateral Minimum Holding Period
Collateral Minimum Holding Period (no of Business Days) Refers to trading book Minimum holding period for the collateral which will affect Loss Given Default
Collateral Revaluation Frequency Frequency of revaluing collateral (number of days)Collateral Zero Haircut ? Flag indicating if a zero haircut can be applied to the
collateral
Where is the data stored?
Basel II - Data RequirementsBusiness Unit Name:Person Completing Response:Date Response Completed:
The Logical Data Model drives the creation of the Data Assessment templates tailored around the particular portfolios of each Business Unit…
20 © 2004 Accenture. All rights reserved
Implementation Aids
The Technical Architecture allows existing systems capabilities to be mapped onto the required functionalities. We can then review the gaps against the capabilities of Vendors to establish ‘best fit’
Extraction, Conversion,
Mapping, Cleansing, Transfer
Internal Reporting
RegulatoryReporting
StatutoryReporting
Front End Risk Systems Extraction Data Store Functionality Reporting
Stress Testing
Validation
RW
A
Credit S
coring
PD
Risk R
ating
Collateral
Customer Transaction
Data
General Ledger
Journal Adj.s
Consolidation
Consolidation Adj.s
Collections / R
ecoveries
Credit Risk
OperationalRisk
Other Financialmaturityindustrygeographyfair values
AMA capital
modelling
FairValuesMeta Data Management
SVO
C
Extraction, Conversion,
Mapping, Cleansing, Transfer
Internal Reporting
RegulatoryReporting
StatutoryReporting
Front End Risk Systems Extraction Data Store Functionality Reporting
Stress Testing
Validation
RW
A
Credit S
coring
PD
Risk R
ating
Collateral
Customer Transaction
Data
General Ledger
Journal Adj.s
Consolidation
Consolidation Adj.s
Collections / R
ecoveries
Credit Risk
OperationalRisk
Other Financialmaturityindustrygeographyfair values
AMA capital
modelling
FairValuesMeta Data Management
SVO
C
21 © 2004 Accenture. All rights reserved
Implementation Aids
SAS Infrastructure and Basle II Solutions
Extraction, Conversion,
Mapping, Cleansing, Transfer
Internal Reporting
RegulatoryReporting
StatutoryReporting
Front End Risk Systems Extraction Data Store Functionality Reporting
Stress Testing
Validation
RW
A
Credit Scoring
PD R
isk Rating
Collateral
Customer Transaction
Data
Internal
Internal
General Ledger
Journal Adj.s
Consolidation
Consolidation Adj.s
External
EG Experian
Collections / R
ecoveries
Credit Risk
OperationalRisk
Other Financialmaturityindustrygeographyfair values
AMA capital
modelling
FairValuesMeta Data Management
SVO
C
Internal
SAS CreditScoring + Source Systems
SAS ETL
SAS Data Quality
- SAS DW
SAS Credit Risk
SAS Op. Risk
SAS Data Model
SAS Warehouse Admin
SAS Risk Engine SAS RiskDashboard
SAS Portal
SAS EnterpriseGuide
Extraction, Conversion,
Mapping, Cleansing, Transfer
Internal Reporting
RegulatoryReporting
StatutoryReporting
Front End Risk Systems Extraction Data Store Functionality Reporting
Stress Testing
Validation
RW
A
Credit Scoring
PD R
isk Rating
Collateral
Customer Transaction
Data
Internal
Internal
General Ledger
Journal Adj.s
Consolidation
Consolidation Adj.s
External
EG Experian
Collections / R
ecoveries
Credit Risk
OperationalRisk
Other Financialmaturityindustrygeographyfair values
AMA capital
modelling
FairValuesMeta Data Management
SVO
C
Internal
SAS CreditScoring + Source Systems
SAS ETL
SAS Data Quality
- SAS DW
SAS Credit Risk
SAS Op. Risk
SAS Data Model
SAS Warehouse Admin
SAS Risk Engine SAS RiskDashboard
SAS Portal
SAS EnterpriseGuide
22 © 2004 Accenture. All rights reserved
Implementation Aids
The Basel II Accelerator, coupled with our implementation methodology, provides our clients with tangible benefits
Proven solution and assetsThe Basel II accelerator as well as our implementation methodology have been utilised at many of the leading banks around the world
Compressed implementation timeframeWe have developed and utilised a comprehensive, end-to-end Basel II solution ranging from programme planning and set up to IT Architecture design and ultimate implementationWe have a team of professionals in place with Basel II expertise and systems development implementation experienceWe can provide knowledge and learnings from previous and on going client engagements to design and implement a more effective Basel II programme
Cost savingsWe are committed to leveraging existing IT architecture for Basel II compliance, thereby avoiding unnecessary system purchases and reducing costsWe have working relationships with many of the key vendors offering Basel II related solutions and can provide recommendations regarding the best fit for your needs Our assets and methodology are designed to limit the disruption caused by Basel II to the organisation and help attain Basel II compliance in the most cost effective manor