Oracle’s BASEL II Solution Bucuresti 24 th February 2004 Pal Ribarics Oracle Financial Services Consulting, EU Enlargement Countries Solution Team

Basel - part of a broader initiative to improve shareholder value Enterprise-Wide Reporting via Portal Key Risk and Performance Indicators Corporate Performance Management Minimal for Basel Compliance Profitability RAROC Integrated Risk and Finance Marketing Better Returns Sharing Client & Finance Data Core Finance Statutary and Regulatary Reporting Risk Management integrate risk and finance integrate finance & marketing Apply economic capital and track key indicators

Financial services solution map Financial Applications General Ledger Payables Procurement Expenses Projects Product Systems Deposits Collateral (CRM) loans Information Delivery P O R T A L Statutory Reporting Management Reporting Regulatory Reporting OFSA Basel IIFTP ALM Profitability Data Warehouse Other

data warehouse - OFDM asset classification rating assignment customer id supervisory values Basel II PDLGDEADM risk weighted calculation capital calculation and allocation operational risk calculation archivingaudit trail data management Basel II reporting - Portal internal regulatory disclosure Basel II – architecture OFSA Externally generated credit risk metrics Detailed Individual customer account data Workflow/business process facilitation Market Risk Capital Details Basel II Data Extensions

data warehouse - OFDM asset classification rating assignment customer id supervisory values Basel II PDLGDEADM risk weighted calculation capital calculation and allocation operational risk calculation archivingaudit trail data management Basel II reporting - Portal internal regulatory disclosure Basel II – available today OFSA Externally generated credit risk metrics Detailed Individual customer account data Workflow/business process facilitation Market Risk Capital Details Basel II Data Extensions Non-Oracle Future Partial Available Ongoing

Critical component: Data Model Critical component: Data Model

Accounts Options Accounts Transactions Customers Collaterals

52 entities and 420 attributes OFSA Datamodel – Basel 2 data

Basel II Functionality Basel II Functionality

3 ‘Mutually Reinforcing’ Pillars Scope of Application: Individual, Sub-consolidated & Consolidated Basis Minimum Capital Requirements Minimum Capital Requirements Supervisory Review Process Review Process Market Discipline Calculation of capital requirementsCalculation of capital requirements Credit risk Operational risk Trading book changes (market risk)Trading book changes (market risk) Overview of supervisory reviewOverview of supervisory review Key principles Capital management processesCapital management processes Interest rate risk in the banking bookInterest rate risk in the banking book Disclosure requirements Capital structure Risk exposures Capital adequacy Pillar 1 “Quantitative” Pillar 2 “Qualitative” Pillar 3 “Market Forces” Basel II : Credit, operational, interest rate risks Basel II Risk Calculation Engine Oracle Discoverer Basel II Risk Calculation Engine Oracle Discoverer Oracle Risk Manager

Credit Risk Module 1.Three methods (Standardised Approach, IRB foundation method, IRB advanced method) for the allocation of regulatory capital for credit risk 2.Rank rated customers into arbitrarily chosen number of categories of assets and borrowers 3.Assign to them arbitrarily chosen number of external credit assessments or PDs 4.Conversion of off-balance-sheet items into credit exposure equivalents and the calculation of LGD can be parameterized to handle arbitrary exposure types. 5.Credit risk mitigation : all calculation techniques substitution supervisory haircut own haircut methods to collaterals.

Credit Risk Module

Simulation Module Interpretation and analysis of the results obtained from other modules 1.Analysis of the complete and the partial portfolios (regions, branches, sectors, customer categories, assets Euro etc.), as well as the contribution of those portfolios to the total risk of the Bank. 2.Stress test effect of simulated extreme changes in the principal variables determining the risk on the portfolio. 3.Changing to an other method quantifies the change in capital charge for each of the advanced methods. 4.Backtesting for arbitrarily chosen element of the portfolio to determine the originally estimated and the real loss as well as the cause of difference between them

Risk Adjusted Performance Measurements

Basel II Risk Mgt Structural Risk Trading Risk Credit Risk Operational Risk Interest Rate Liquidity Planning ( BS/P&L) ALM System Equity, FX … Interest Dealing & Trading Systems Internal (Inadequate/Failure) External Processes People Systems Default(PD) Exposure Maturity Collateral Expected Loss Unexpected Loss Vendor or Internal Model Basel II Compliance Risk Adjusted Performance Management (RAPM) Risk Adjusted Performance Management Business Unit Management Capital Management Budgets Revenue Profit Mgt Cost Planning Budget/Forecasts Budgeting & Planning Interest Income Fee & Other Income Cost of FundsFTP.. Operational Cost ABC.. Expected Loss Beyond Compliance