SAP Analytical Banking - Basel II

Partho Chakraborty

Solution Architect, SAP India

Mumbai, 13th September 2007

Timeline for Basel II compliance in APA

2006 2007 2008 2009 2010

India (1st Apr 2007)

S. Korea

Singapore (1st Apr 2007)

China

Indonesia

Thailand

Taiwan* Australia

Malaysia* Japan (1st Apr 2007)

Hong Kong

31 Mar

2008

31 Mar

2009

Basel II

Market risk Credit risk Operational risk

Minimum Capital Requirements Supervisory Review Process

Risk interest rate change Responsibility Double check methods against

BII requirements

Market Discipline

Risk segments Capital structure Disclosure Transparency

Stipulating capital charges to motivate banks to improve their risk management and measurement capabilities

Creating a supervision framework to encourage best risk practices and to ‘mop up’ other risks (e.g. strategic, reputational)

Requiring banks to disclose, in detail, capital structure, risk exposures and capital adequacy

Means Pillar I – Minimum Capital Requirements

Pillar II – Supervision

Pillar III – Market Discipline

The 3 pillars of Basel II

Banks are faced with many different regulations

Proposed AS 30, 31 & 32 in Indian

GAAP

SEBI Listing Agreement - Clause 49

Banks Challenges in Meeting Market Requirements

Increasing regulation, management and market requirements…

More transparency and value insight More key performance indicators More sophisticated regulation More disclosure Faster closings

Finance Risk

Internal

External

Several silos for every area Huge reconciliation effort Inconsistent source data and results Huge efforts for new requirements Limited process and quality control Many redundant interfaces

… lead to increasing complexity and cost on IT side

IAS

Basel II

CEBS

Anti Money Laundering

Sarbanes-Oxley

CRD

Integrated, modular and flexible Architecture

Today Future

Several silos for every area Inconsistent source data and

results Huge reconciliation effort

Integrated architecture for multidimensional views and multiple purposes Flexibility for every-changing

requirements

User-friendly reporting layer for disclosure and internal reporting

Granular result data for reporting, auditability, and reconciliation

Historical data for validation of credit risk parameters

Comprehensive RWA calculation for all products, asset classes, and calculation approaches

Basel II: Overview

Preconfigured and flexible Basel II data model

Financial Product Valuation

Results Data Layer

Reporting and Analytics

Source Data Layer

Modelling

PD

LGD

Historical Data

CCF

COREP Disclosure Internal Reporting

Collateral Distribution … RWA Expected

Loss

Basel II: Flexibility

Flexible data modeling: financial product innovation

Flexible calculation process: regulatory and bank-specific business rule definition

Flexible structures of Historical Data: support of bank-specific internal risk models

Flexible Result Data Layer and Reporting on any bank- specific information and ad-hoc reporting

Financial Product Valuation

Results Data Layer

Reporting and Analytics

Source Data Layer

Modelling

PD

LGD

Historical Data

CCF

COREP Disclosure Internal Reporting

Collateral Distribution … RWA Expected

Loss

Basel II: Auditability and Transparency

Additional Services of SAP Basel II Versioning ensures availability of data

and results by system - and business date

Correction server allows to maintain corrections and assess impact

Plausibility checks for data delivery and during the calculation process

Why are these services important? Enhanced information quality Improved transparency of

information and processes Meets audit requirements

Financial Product Valuation

Results Data Layer

Reporting and Analytics

Source Data Layer

Modelling

PD

LGD

Historical Data

CCF

COREP Disclosure Internal Reporting

Collateral Distribution … RWA Expected

Loss

The Market Risk Manager needs access to up-to-date information; from single transactions up to the Group level. He requires a toolkit containing best practice methods from NPV calculations up to statistical models.

Market Risk Management

Value at Risk

Net Present Value

What if Analysis

Backtesting

Key Capabilities for Market Risk Management

Best practice methods for NPV calculation VaR calculation What if Analysis Backtesting

Full transparency

Drill-down to the single cash-flow Audit trail

Open System Inclusion of complementary or proprietary methods Timely integration of new products

Extensive automation of data collection and evaluation processes,

Customer-specific flexibility,

Easy adjustment and enhancement of reports,

Possibility to include future extended data requirements set by regulatory authorities,

Openness for future integration of calculation and simulation models

Collection and Evaluation

Self Assessment

Loss Database

Risk Indicators

OpRisk Models

Reporting

OpRisk Regulatory Capital

Calculation and Simulation

Operational Risk Requirement: Flexible Tool to Support Risk Management Processes

OpRisk is a new topic that is still in discussion

Disclosure & Reporting : Basel II Reports - Overview

Number of reports

15 - counter party risk

4 - equity investment

6 - securitization

2 - commercial real estate

4 - migration matrices

1 - operational risk

- single transaction level

The Capital Accord was analyzed and the disclosure requirements transformed into report specifications

Report Functionality - display options

Excel:

Well known interface

Download of data for further Simulations / Calculations

Ideal for Professional users

Web Reporting

Excel Reporting

Web:

Easy to handle interface, only browser installation required

Ideal for occasional users

External Disclosure – Example Report

Internal Reporting – Drill-Down and Filter

Drill-Down on Risk Grade

Filter on Risk Type

SAP Offers Comprehensive Basel II Solution

SAP System

Non-SAP System

SAP/Non-SAP System

Credit Risk Platform

Output

Management Reporting Disclosure Regulatory Reporting

Management

Limits

Analytical Engines

Exposure Reg Capital Ec Capital Fair Value Default

Probability Loss Given

Default

Correlation Credit Conversion

Business Database

FDB

Historical Database

HDB

Operative Systems

Collateral Management

Customer Information

Loan Loss Provisions Transactions Rating

Applications

Result Database

RDB

SAP Basel II

Main Run Regulato

ry Capit

al Calculation

Risk Paramete

rs

Exposure

at Default

Calculation

Netting

Pre-Processing

Pre-Runs Account Pooling

Determination of free line

Retail pre-processing Determination

of default Risk weight

pre-processing ABS

pre-processing Purchased Rec. pre-processing

SAP Basel II: Best-in-class Functionality

The SAP credit risk calculation is Basel II compliant All asset and collateral classes, all portfolios (sovereign, bank,

corporate, retail, etc.) and all approaches are covered Eligibility checks for all collaterals and guarantees Optimization algorithm for collateral distribution (Simplex

Algorithm) Results of the calculation process are exposure at default, risk

weighted assets, expected losses and regulatory capital

Results Data Layer

Reporting and Analytics

SAP Credit Risk Exposure Engine

(optional)

Source Data Layer

Exposure RWA

3rd-party Risk Engine

(optional)

SAP Source Data and 3rd-party

Engine (optional)

Source Data Layer

Valuation

SAP: Reporting Solution Architecture

COREP Disclosure Internal Reporting

Ready to run Standard Reports (Basel II, COREP) and flexible internal reporting

Granular result data as input for Disclosure, COREP and Internal Reporting

Integration of all required risk figures calculated by SAP and third party Risk engines

SAP Value Proposition for Risk Management / Basel II

Reconciled financial database

Credit risk engine

Flexibility

Disclosure and internal risk reporting

Infrastructure to validate internal models

Stress testing and back testing

Limit management

Regulatory reporting

Pre defined project scope and timing

Reduced capital costs

Improved capital allocation

Improved risk-based pricing

Reduced compliance costs 1

Reduce implementation project by 30 %

2

3

4

5

Value impact

Source: SAP projects, Expert estimation

Key capabilities

SAP Basel II – A Strategic Step

SAP Basel II offers the key modules required by a risk management platform Lower costs for developing and maintaining interfaces Reduced effort for reconciliation Internal and external risk management integrated as

well as internal and external financial accounting

The SAP Basel II building blocks can be leveraged for Credit Portfolio Management Global Exposure and Limit Management Loss Provisions Regulatory Reporting

SAP Basel II Customer Base

rtc.ch IT-Outsourcing & Banking Software

Customers

THANK YOU FOR YOUR ATTENTION !

Partho H. Chakraborty A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore - 560 037, India Tel: +91 80 420 50293, Cell: +91 99863 22504 email: parthohc@airtelmail.in parthohc@rediffmail.com Skype: parthohc01