1. Basel II, ICAAP, Oracle, XO and You
Nigel Webb
Director
Consultancy (Risk Management & Treasury)
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2. 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
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3. 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
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4. “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
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5. 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
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6. 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
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7. 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
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8. 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
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9. “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
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10. ICAAP
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11. 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
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12. 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
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13. 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
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14. 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
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15. 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
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16. 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
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17. 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
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18. 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
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19. Contact Details Nigel Webb XO Consultants Ltd 18 Hanover Sq London
W1S 1HX T: F:
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