Basel II Impact on banking processes ISACA Roundtable 2 November 2009 Ronald Holsbeeke RA RE CIA CISA

2 November 2009ISACA RT Basel II2 The Basel Capital Accord (1988) Agreement between G10 banking supervisors on regulatory capital requirements for credit risk Regulatory Capital ≥ 8% ∑ RWC

2 November 2009ISACA RT Basel II3 A Good Start But... NOT RISK SENSITIVE Just 4 Asset Classes! Focus only on Credit Risk! Few Risk Mitigators! Regulatory Capital ≠ Economic Capital!

2 November 2009ISACA RT Basel II4 Basel II: The Revised Framework (2004) Standardised Approach Advanced Measurements Approach Basic Indicator Approach Internal Models Approach Foundation Internal Rating Based Approach Credit RiskMarket RiskOperational Risk Advanced Internal Ratings Based Approach Standardised Approach Standardised Approach

2 November 2009ISACA RT Basel II5 Credit Risk Approach under Basel II Standardised Approach Standardised Approach Foundation IRB Approach Advanced IRB Approach Advanced IRB Approach Credit Risk Complexity Capital charge

2 November 2009ISACA RT Basel II6 IRB: The Expected Loss Calculation Expected Loss Exposure at Default (EAD) Loss given default (LGD) Probability of Default (PD) = x Rating Customer Segment LimitUtilisation Collateral Value Collateral Type What is the probability that a counterparty will default within 1 year? What will be our exposure at this point in time? How much of this are we likely to lose? Counterparty Specific Transaction Specific Workout Costs Product x

2 November 2009ISACA RT Basel II7 | Prospects Process & emPowerment Pricing (P r ofit) Publicity Policy rePorting Portfolio management Use of ratings for potential credit customer acceptance purposes Use of the ratings in delegation, process differentiation and risk management Use of Ratings for pricing, specific product offerings and profitability assessments Straightforward communication to the customer Use of ratings in defining credit and business policy and growth strategy Credit and business books and (semi) annual report, reporting on economic and regulatory capital General and aggregate provisions, syndication, securitisation, credit derivatives,... M I C R O M A C R O USE of Basel: 7 P Approach

2 November 2009ISACA RT Basel II8 Basel II Process flow

2 November 2009ISACA RT Basel II9 Basel II: More Than One Pillar!

2 November 2009ISACA RT Basel II10 Pillar 2: Internal Capital Adequacy Assessment Process (ICAAP) Pillar II ICAAP  Economic Capital More risk types: - interest rate - liquidity) Concentration risk/ country risk Diversification  Enterprise Stress Testing  Capital Allocation  Integrated Risk Reporting  ‘Sound risk management’

2 November 2009ISACA RT Basel II11 Pillar 2: Supervisory Review Process Pillar II SREP Principles  Bank’s Own Assessment of Capital Adequacy  Supervisory Review of Own Assessment  Additional Capital Requirements  Supervisory Pro-activity

2 November 2009ISACA RT Basel II12 Pillar 3: Transparency Increases Market Discipline! Target group: o investors, stakeholders Content: o summary of pillar 1 calculations o description of the risk policies and approaches applied

2 November 2009ISACA RT Basel II13 Basel II impact on clients  More information required  Information should be up to date -> XBRL/SBR  Objective: more risk based relationship management (incl. pricing)