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Implementation of Basel II Trends and Experience
from the West European Banking Sector
Dr. Robert Wagner – BearingPoint
XVth International Banking CongressSaint-Petersburg, June 8th 2006
© 2006 BearingPoint – Page 2
About $3.4bn net revenuein 2004
Over 2,100 clients (750 of the Fortune 2000)
Regular engagements at 98% our Top-100-clients
National and international framework contracts with key clients
90% of our clients confirm their satisfaction in working with us
Clients & Business
BearingPoint, Inc. is a listed company (NYSE: BE) with global headquarters in McLean, Virginia
Founded in 2002 after the acquisition of 17 former KPMG Consulting and Andersen practices
Today over 17.000 employees with an average of 12 years experience in 155 offices in 40 countries
Over 50 alliance partners
BearingPoint Global
BearingPoint provides management & technology consulting services globally as well as in Russia
Management and Technology
Consultants
100+ professionals – approximately a half of them are certified consultants
90% of consultants have experience in project implementation in Russia and around the Globe (at least 2 finished projects)
BearingPoint Russia
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© 2006 BearingPoint – Page 3
Our FS Risk Management Group has vast experience in implementing Basel II
Risk Management Core Team (Basel II / Risk IT)
230 experts worldwide 130 experts in Europe
Risk management experts
Credit Risk Operational Risk Market Risk Regulatory Reporting Business Process Design
Risk IT experts .
Data Warehouse EAI, SOA Standard components IT Security Programme Delivery
We started work on Basel II in 2000 with leading German banks We assisted many local, regional and international banks with
their Basel II program We worked on Basel II engagements across EMEA,
the US and ASPAC We own a portfolio of assets and tools that we use in our
assignments, including our Basel II Solution Abacus/DaVinci
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© 2006 BearingPoint – Page 4
In the evolution of risk decision-making, the future is integrated and forward-looking
Focus on Revenue and Cost Management
1990s
Mark tomarketMark tomarket
Activity-basedcosting
Activity-basedcosting
Transferpricing
Transferpricing
Future
Shareholder ValueIntegrated Risk & Profitability
Shareholder ValueIntegrated Risk & Profitability
Fully integratedprofitability andrisk information
Forward-looking(not just static)
management tools
2000s
Value atRisk
Value atRisk
Risk-adjustedperformance
Risk-adjustedperformance
PortfolioManagement
PortfolioManagement
Focus on Risk Control
(historical focus)
Ris
k M
gm
t. E
volu
tion
Ris
k M
gm
t. E
volu
tion
Basel II
© 2006 BearingPoint – Page 5
Basel II
Objectives
Basel II strives the convergence of external and internal Risk-Management measures
Basel II develops a framework to further strengthen the soundness and stability of the international banking system while maintaining sufficient consistency on capital adequacy requirements to create a level playing field for internationally active banks.
Provide international consistency
Promote Risk adjusted pricing
Incentivize an improved internal risk management
Converge external and internal risk management
Define risk adequate capital requirements
Base
l II O
bje
ctiv
es
Base
l II O
bje
ctiv
es
© 2006 BearingPoint – Page 6
The choosen approach determines the data requirements and implementation effort
Rating
CollateralDefault
Definition& detection
DataHistorization
ExpectedLoss
Parametercalculation &estimation
Recoveries
Processes
Basel II Approach
EAD(Exposure at Default)
PD(Probability of Default)
LGD(Loss Given Default)
StandardizedApproach
StandardizedApproach
IRB FoundationApproach
IRB FoundationApproach
IRB AdvancedApproach
IRB AdvancedApproach
StandardRisk Weight
StandardRisk Weight
StandardLGD
StandardLGD
Credit LimitCredit Limit EAD based on internal estimation
EAD based on internal estimation
PD based on Internal RatingsPD based on Internal Ratings
LGD based on internal estimation
LGD based on internal estimation
Capital RequirementsImplementation Effort
higher lower
The Expected Loss is based on three components: EL = PD x LGD x EAD
Three approaches differ in the decision which risk parameters can be determined internally
Internal estimation of risk parameters is therefore the key issue of Basel II
lower higher
Base
l II A
ppro
ach
Base
l II A
ppro
ach
Basel IITopics
© 2006 BearingPoint – Page 7
Acquire risk from competition on too cheap risk margin
Lose solvent clients to competition because of too high price
Risk adjusted pricing will be key to survive in a competitive market
AAA AA
1 2 3 4 5 6 7 8 9
0.01 0.05 0.1 0.5 1.2 7.5 10 26 40.5EL Margin %
A BBB BB B CCC CC C
0.780.04 8 21
21 3 4
Portfolio-StructureChange
Portfolio-StructureChange
Rating Class
EL Margin %
Rating Class
Ban
k A
Ban
k B
S&
P
Pro
fitab
ility
Pro
fitab
ility
Ris
k A
dju
sted
Pri
cin
gR
isk
Ad
just
ed
Pri
cin
g
© 2006 BearingPoint – Page 8
Implementing Basel II affects risk management as well as processes, data and technology
Policies/Procedures and
Controls
Organization And People
Business Processes
Capital Calculation & Adequacy
Credit Process Risk Management
Market Disclosure
Technology Technology
DataArchitecture & Management
DataArchitecture & Management
Credit Mgt Processes Collecting
and Using Risk Data
Portfolio Risk & Financial
Reporting & Mgt
Model Development & Validation
Availability Of Required Data
Data Quality
Data History
Data Architecture
Data Warehousing
Business Process
& Organization
Business Process
& Organization
Functional Requirements
Application Architecture
Applications and Tools
Pillar 1
&2
Pillar 2
Pillar 2
Pillar 2
Pillar 1
Pillar 3
Business Rules & Calculations
Models & Methodologies
Models & Methodologies
Operational Risk Models
Portfolio Risk Models
PD & LGD Rating Models
Capital Allocation Models
Base
l II Im
pact
sB
ase
l II Im
pact
s
© 2006 BearingPoint – Page 9
Estimation and use of internal parameters require extensive historical data
Required time series for risk parameters in the advanced approach for implementation by 2007:
Required time series for estimation
Minimum additional time to retrieve useful data for calculating parameter figure
Transition period of 3 years
Rating (3 years)
BCS: LGD (5 years)
BCS: Banks, Corporates, Sovereigns
BCS: EAD (5 years)
For later introduction of IRB approach the data collection should start as early as possible
Developing the data retrograde is difficult and costly
98 99 00 01 02 03 04 05 06 07 08 0997
BCS: PD (5 years)
Retail: (5 years) PD, LGD, EL, EAD/CCF
Data
His
tory
Data
His
tory
© 2006 BearingPoint – Page 10
A common data platform supports the conver-gence of risk management, finance and ALM
Load-Management (Staging- und ETL-Layer)Load-Management (Staging- und ETL-Layer)
Hedge Accounting
Hedge Accounting
Fair ValueFair Value
RWA Calculation
RWA Calculation
Regulatory Reporting
Regulatory Reporting
RAROC, Pricing
RAROC, Pricing
Limit-/Risk-ManagementLimit-/Risk-
Management MISMISProfitability ManagementProfitability
ManagementStatutoryReportingStatutoryReporting
„FINANCIAL DATABASE“(Operational Data Store, Relational DB-Model, Info-Cubes, Data-Marts)
„FINANCIAL DATABASE“(Operational Data Store, Relational DB-Model, Info-Cubes, Data-Marts)
Risk Mitigation
Risk Mitigation
IFRSIFRSBasel IIBasel II ALMALM
AccountingSystems
AccountingSystems
RatingSystemsRating
SystemsTradingSystemsTradingSystems
Credit Loss Database
Credit Loss Database
Limit Management
Limit Management
MasterData
MasterData
Account/Portfolio
Management
Account/Portfolio
Management
CollateralManagement
CollateralManagement
Ris
k &
Fin
an
ceR
isk
& F
inan
ce
© 2006 BearingPoint – Page 11
Data quality, integrity and availability often is the most complex issue in Basel II projects
Data quality: High Data Quality is required for accurate parameter estimations; higher accuracy of estimations results in lower requirements on equity capital;
Data availability: Retrograde data collection is expensive and often almost impossible in sufficient quality and quantity;
Complexity: Basel II Projects require a high degree of internal communication and coordination as they have an effect on different divisions of a bank: Controlling, Sales, Workout departments, Risk management/Controlling, Legal, IT
Time Pressure: Regulatorsgive a clear time limitfor implementation
Know-how: Often theneeded skills are notavailable in sufficientquality and quantity
Imp
lem
en
tati
on
Iss
ues
Imp
lem
en
tati
on
Iss
ues
© 2006 BearingPoint – Page 12
German QIS4 results show the positive impact of Basel II on capital requirements of local banks
* Different results for international operating banks Source: Deutsche Bundesbank, June 2005
Germ
an
Experi
en
ceG
erm
an
Experi
en
ce
Chosen Basel II Approach(88 local operating banks*)
Standardised approach
Foundation IRB approach
Advanced IRB approach
Number of Banks 28 56 4
Change in Capital Requirement -7,5 % -6,4 % -27,5 %
Capital drivers
Corporates o – o
Banks o + o
SME - Corporates o – –
SME - Retail – – –
Other Retail – – – – – –
Mortgage loans – – – – – –
Operational risk ++ ++ ++
Least capital requirements with advanced IRB approach
Relatively low capital requirements under Basel II for retail portfolio (significant part of over-all business for local operating banks)
Higher requirements for operational risk for all approaches
-- more than 3% degrease - between 1% and 3% degreaseo no change+ between 1% and 3% increase ++ more than 3% increase
© 2006 BearingPoint – Page 13
Key Success Factors in Basel II implementation projects
Less
ons
Learn
ed
Less
ons
Learn
ed
1. Agree on the right strategy regarding the different approaches and asset classes
2. Involve all affected departments at an early stage
3. Ensure that all business units (regional subsidiaries, branches, etc.) are able to support the chosen Basel II approach
4. Enforce IT & business departments to work together seamlessly
5. Create a flexible and expandable data architecture
6. Start with historical data collection as soon as possible
7. Consider regulatory, risk management, ALM and accounting aspects as interconnected
8. Choose an experienced partner …
... like BearingPoint... like BearingPoint
© 2006 BearingPoint – Page 14
Thank you for your attention!
© Copyright BearingPoint GmbH, Frankfurt/Main, 2006Alle Rechte vorbehalten. Der Inhalt dieses Dokuments unterliegt dem Urheberrecht. Veränderungen, Kürzungen, Erweiterungen und Ergänzungen bedürfen der vorherigen schriftlichen Einwilligung durch BearingPoint GmbH, Frankfurt/Main. Jede Vervielfältigung ist nur zum persönlichen Gebrauch gestattet und nur unter der Bedingung, dass dieser Urheberrechtsvermerk beim Vervielfältigen auf dem Dokument selbst erhalten bleibt. Jede Veröffentlichung oder jede Übersetzung bedarf der vorherigen schriftlichen Einwilligung
durch BearingPoint GmbH, Frankfurt/Main. Gewerbliche Nutzung oder Nutzung zu Schulungs-zwecken durch Dritte bedarf ebenfalls der vorherigen schriftlichen Einwilligung durch BearingPoint GmbH, Frankfurt/Main.
Dr. Robert WagnerManaging Director
Olof-Palme-Straße 3160439 Frankfurt/MainGermanywww.bearingpoint.com
Tel.: +49.69.13022.1331Fax: +49.69.13022.1471
Mobile: [email protected]
Thomas StuemerGeneral Director
Tel.: +7.495.937.4466Fax: +7.495.937.4467
Mobile: [email protected]
Bolshaya Ordynka 40119017 MoscowRussiawww.bearingpoint.com
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