Leveraging XBRL for Basel II Daniel D’Amico, IBM Business Consulting Services, UK

Agenda  Basel II background  Basel II is an opportunity  The data management challenge  XBRL and Basel II

A couple of quotes  “Regulators and customers are demanding greater focus on risk management. …This call for transparency will challenge traditional business practices and will require more auditable processes throughout the business” Morgan Stanley analyst (on market timing), FT 11/03  “US regulators expect Basel II will apply to a total of around 20 large US banks. All US banks operating under Basel II will be obliged to use only the most advanced Basel II approaches for assessing banking risks, which means the IRB approaches in the case of credit risk.” Global Risk Regulator 10/03

Basel II Background What is Basel II Accord? Commercial imperative When does it happen? The publication of the Basel II Accord will mark the end of long process that will have effectively re- written the rules of banking. Basel II will affect the conduct of monetary policy and the stability of financial institutions all over the world What is it trying to achieve?  To promote safety and soundness in the financial system  To align regulatory capital requirements more closely with underlying risks  To offer incentives for institutions to pursue more sophisticated & effective risk management  Basel II will significantly impact FS institutions and the change is such that preparation needs to begin now to ensure readiness for a parallel run starting 1 st Jan 2006  Key strategic decisions need to be taken now on the approach to be taken and the benefit that should be achieved over and above compliance QIS 3 Evaluation QIS 3 Consultation phase Preparation New Accord EU directive Parallel run Basel I + II CP 3 New Accord Full force Oct 02 May 03 Nov 03Dec 02July 03Dec 06Jan 06 Integrate into National law

Basel II Opportunities: Improve shareholder value Economic capital savings Improve/maintain credit rating Improve risk management strategy Alignment of Risk & Finance Cost reduction through organizational process improvement Identify potentially dangerous portfolio positions and other risk sources Basel II is an Opportunity – not just a Mandate Data Foundation Pillar 2: Pillar 1: Calculation and Management of:  Credit Risk  Operational Risk  Market Risk  Ensure sound processes  Ensure adequate capital at all times  Ensure motivation improving risk management practices  Quantitative and qualitative disclosure of undertaken risks and risk methodologies Basel II Pillar 3: Minimum Capital requirements Supervisory Review Process Market Discipline Basel II Challenges: Setting up Basel II program Data management Systems management Establishing Risk Framework

Key challenges – Systems & Data Management 10 Common signs of unstable data foundation Data Management is the key challenge in meeting Basel II Source: IBM Institute for Business Value analysis, Banks and Basel II: How Prepared Are They?, October 2002 interviews with 32 Financial institutions worldwide 1.Inability to gather data for new reporting requirements. 2.Difficulty complying with regulatory requirements like Basel II Accord 3.Senior management questions quality, timeliness, reliability of information used to make multi-million dollar decisions 4.Inability to consolidate data from multiple diverse sources 5.Senior Management requests for information require intensive manual effort to respond, and far longer than desired. 6.Difficulty in building a single architecture to address both data consolidation and data aggregation requirements. 7.Multiple databases or spreadsheets storing similar data; no common data “dictionary” across the enterprise 8.No ownership of data 9.There’s no single enterprise view of data 10.Difficulty answering questions about the origins and business processes performed against data

Common definition of LGD, PD, EAD Common customer identifier Cross Modelling Solution A complex International banking group Group Personal FinanceWholesale BankingCorporate Private Banking and Asset Management Credit Cards Discretionary Portfolio Management Fixed Income, Equity and derivatives UK retail North America Asia Pacific SingaporeHong Kong Japan Capital allocation Capital Calculation Risk Strategy External Reporting

Enterprise Data Warehouse Data store IBM’s Basel II Architecture Core Banking Products Credit Collaterals Customer Loss Data Data source Metadata Warehouse Administration Transformation & calculation Basel II Credit Risk Engine Basel II Op. Risk Engine Basel II Market Risk Engine Non-Basel II Risk Engines Extraction, Validation Extraction Data Marts Result Data Result Data Result Data Result Data Disclosure Management Data Reporting Group Regulatory External Audience Internal Audience Rating, PD, LGD, CCF Models

Enterprise Data Warehouse Data store Where does XBRL fit? Core Banking Products Credit Collaterals Customer Loss Data Data source Metadata Warehouse Administration Transformation & calculation Basel II Credit Risk Engine Basel II Op. Risk Engine Basel II Market Risk Engine Non-Basel II Risk Engines Extraction, Validation Extraction Data Marts Result Data Result Data Result Data Result Data Disclosure Management Data Reporting Group Regulatory External Audience Internal Audience Rating, PD, LGD, CCF Models XBRL 1 2 3

XBRL for Basel II analytics Many Analytics requirements Credit Risk Profile Credit Risk Assessment Credit Risk Mitigation Assessment Operational Risk Assessment Portfolio Credit Exposure Security Analysis Liquidity Risk Collections Analysis Involved Party Exposure Location Exposure Non Performing Loan Aggregate data for analytics Multiple Sources Different periods Different rules

XBRL for Basel II reporting Many reporting requirements External Disclosures Regulatory Internal Group Subsidiary Management reporting Integration with other reporting requirements IAS Aggregate data for reporting Multiple Sources Different periods Different rules

Common definition using XBRL Definition of Internal Basel II taxonomies: Define an organizational metadata layer Traceability back to transactions Common repository for changes and updates to requirements Enhance group ability to consolidate data Improve data quality Basel II is an opportunity for banks to force its subsidiaries and business units into following a common understanding of data, driving common standards into the organisation. XBRL can be THE standard

How is XBRL solving some of the data management issues? 1.Inability to gather data for new reporting requirements. 2.Difficulty complying with regulatory requirements like Basel II Accord 3.Senior management questions quality, timeliness, reliability of information used to make multi-million dollar decisions 4.Inability to consolidate data from multiple diverse sources 5.Senior Management requests for information require intensive manual effort to respond, and far longer than desired. 6.Difficulty in building a single architecture to address both data consolidation and data aggregation requirements. 7.Multiple databases or spreadsheets storing similar data; no common data “dictionary” across the enterprise 8.No ownership of data 9.There’s no single enterprise view of data 10.Difficulty answering questions about the origins and business processes performed against data XBRL for Basel II Analytics XBRL for Basel II reporting Common definitions using XBRL

Leveraging XBRL for Basel II Daniel D’Amico, London UK IBM BSC, Financial Services Sector, Risk and Compliance