Basel II, ICAAP, Oracle, XO and You Nigel Webb Director Consultancy (Risk Management & Treasury) xocl.net

Executive Summary 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 xocl.net

Basel II Basel II Accord introduced in June 2004 to improve risk management within banks Basel II has 3 Pillars Regulatory Capital Requirements (Credit, Operation & Market Risk) Economic Capital Requirements - Supervisory Review inc. Internal Capital Adequacy Assessment Process - ICAAP Market Discipline xocl.net

“Disclosures & Reporting” Basel II (contd.) Pillar 1 Credit Risk Operational Risk Market Risk Pillar 2 Supervisory Review “Other Risk” Pillar 3 Market Discipline “Disclosures & Reporting” 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 xocl.net

Basel II - Pillar 1 3 types of risk considered Limited models available for risk assessment Regulation requires specific allocation of capital reserves against quantified risk Credit Standardised Foundation IRB Advanced IRB Operational BIA AMA Market VAR xocl.net

Basel II – Pillar 2 Pillar 2 is intended to identify and allocate capital against all risks not previously considered within Pillar 1 Risk Liquidity Insurance Concentration Residual Securitisation Business Interest Rate Pension Obligation Other xocl.net

Basel II – Pillar 2 (contd.) 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 xocl.net

Basel II – Pillar 3 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 xocl.net

“Disclosures & Reporting” ICAAP Pillar 1 Credit Risk Operational Risk Market Risk Pillar 2 Supervisory Review “Other Risk” Pillar 3 Market Discipline “Disclosures & Reporting” 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 SREP xocl.net

ICAAP xocl.net

ICAAP Structure 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 xocl.net

ICAAP Challenges & Solutions 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 xocl.net

ICAAP Challenges & Solutions 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 xocl.net

ICAAP Challenges & Solutions 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 xocl.net

ICAAP Challenges & Solutions 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 xocl.net

XO and Oracle 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 xocl.net

A 360° challenge needs a 360° Solution Compliance Basel II Pillar 1 ICAAP / Pillar 2 Internal Audit External Audit Processes Risk Strategy Risk Identification Business Processes Technology Oracle eBusiness Financials Suite Custom Apps Feeder System Integration Disclosure & Reporting Basel II Pillar 3 Internal MIS/BI xocl.net

XO 360° Coverage Consultancy Technology Change Management 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 xocl.net

Contact Details Nigel Webb XO Consultants Ltd 18 Hanover Sq London W1S 1HX T: 0870 766 9001 F: 0870 766 9002 nigel.webb@xocl.net www.xocl.net xocl.net