Basel II Compliance & Credit Risk

- Functional and Solution Overview

Overview Topics
1. Introduction to Basel II

2. Credit Risk Management Overview

- Approaches, Processing steps - Architecture, bBIDS support

3.TCS Basel II Offerings

4. TCS Risk Management Assets

Basel II - Background
First Basel guidelines - 1988 Amended for Market Risk 1996

Destabilizing events in International Financial Markets

Collapse of East Asian economies Barings Bank, Sumitomo Capital, Enron, Mannesmann

Need for holistic Business Risk Mgmt. especially for internationally active banks Need for better risk cushion, disclosure and monitoring mechanism

Basel II - Overview
Guidelines added for Market and Operational Risk Option of using Internal Risk Assessment Standardization of supervisory and disclosure norms
Pillar 1
Capital Charge
Market Risk (VAR, Stress) Credit Risk (Std, IRB ) Operational Risk (Std, IRB )

Pillar 2
Supervisory Process
(Integrated fully audited process from Data Collection to reporting)

Pillar 3 Market Discipline & Disclosure

-Qualitative & Quantitative Disclosure

Risk Monitoring/Rprtg.
Regulatory (std, IRB) Or internal model

Regulatory Rules & Reporting Enterprise Data Management

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Basel II Scope of Application

(1) Basel II accord is to be at this level on a consolidated basis, i.e. up to holding company level (2), (3), (4): Basel II accord is also applied to all internationally active banks on a stand-alone basis

Basel II - Architecture Approach

Centralised vs. de-centralised approach Defining Basel II systems & data architecture design
Key issue - the degree of centralised or de-centralised approach A high level of consistency and integration will be needed for both
Reporting Applications Market data Operational Data Store (ODS) Basel II Risk Calculators
Credit Risk

Reported data
Disclosure
Management data

Analysis

Group level

Basel II Data Mart

Centralised approach
Operational Risk Market Risk Calculated

data
Data Store

Operational Data Store (ODS) Extraction

Data Sources

Extraction, Conversion, Mapping, Cleansing, Transfer

Transformed data: PD, LGD, EAD, EI, PE, LGE

Decentralised approach Business unit level

Collateral system

Payment data

Credit rating

Valuation data

Loss data

Source data

Type of Risks in BFS

Business Risks

Credit Risk
Default Risk / Counterparty Risk Portfolio Risk Intrinsic Risk Concentration Risk

Market Risk
Interest Rate Risk Capital market Risk Liquidity Risk Exchange Rate Risk Commodity Risk

Operational Risk
Internal /External Fraud Employ. Practices & safety Clients, Prod & Biz Practices Physical damage to Assets Business disruption & Systems Failure Execution, Delivery & Process Management
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Basel II - Regulatory Capital

Total capital
Credit risk + Market risk + Operational risk
Credit Risk

= Banks capital ratio (minimum 8%)

The risk of loss arising from default by a creditor or counterparty The risk of losses in trading positions when prices move adversely Foreign Exchange and Commodities open positions The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

Market Risk

Operational Risk

Total Capital

Eligible capital = Tier 1 + Tier 2+ Tire III

Tier 1: Shareholders equity + disclosed reserves/ retained earnings Tier 2: Supplementary capital (e.g. undisclosed reserves, provisions) Tier 3: Short Term Sub-ordinate Debt (Only for Market Risk)

Overview Topics
1. Introduction to Basel II

2. Credit Risk Management Overview

- Approaches, Processing steps - Architecture, bBIDS support

3.TCS Basel II Offerings

4. TCS Risk Management Assets

Credit Risk Management

Approaches
Standardized Internal Rating Based Foundation Advanced

Terminology
PD, LGD, EAD RWA, K, EL CCF, Security

Data Requirements
Customer Information, Rating / Scores, Categories Products, Risk Weights, Categories, A/Cs, Securitization Exposure / Facility & their Categories, Exposure Rating Default, Overdue Amounts, Settlement Adjustments Collateral, Guaranties, Haircuts, Maturities Reference Basel parameters, Currency / Rates, Org Str.

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CRM Comparison of Approaches

Basel I Approach Simple Approach Estimation of risk variables (PD, LGD, EAD)

Standardised

Internal ratings-based Foundation Level Advanced level Internal estimates Determined by supervisor

Comprehensive Approach
RW determined through ratings

RW prescribed for Asset Classes

Collateral, guarantees, credit derivatives, netting

Determined by supervisor

Determined by supervisor

Determined by supervisor

No limitation

Haircuts

Determined by supervisor

Determined by supervisor

Determined by supervisor

Internally determined

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CRM Basel II Processing Steps

Standardized Approach
Obligor Categorization Exposure categorization (Retail /Wholesale, Asset Classification) Exposure Computation (includes CCF application for NFB prod) Security Recognition and Application of Adjustments RWA & Regulatory Capital Calculation

IRB Approach
Exposure categorization (Retail /Wholesale) Segmentation of Exposures (for Retail) Calculation / Recalc of Basic Risk Parameters, Adjustments
(PD, LGD, EAD), both Historical and Estimated

Calculation of Advanced Risk Parameters

(EL, K, RWA, RC)

Post-Securitization Adjustments

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CRM Logical Centralized Solution for HO

High-level Process Flow
Central Processing
Reporting & Analysis Regulatory Capital Calculation Data Consolidation

Data Gathering

Pre Processing

Distributed Processing

Verification & Approval (Optional)

Data Transmission

Logical Architecture
Central Components
Reporting Analysis Results Repository Calculation Engine Risk Data Repository Consolidation Scripts Staging Area

Distributed Components

Data Sources

Extract Scripts

Staging Area

ECTL Jobs Risk Data Repository

FTP / Media

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CRM Logical Host (Unit level) Solution

High-level Process Flow
Unit level Reporting

Data Gathering

Pre Processing

Verification & Approval (Optional)

Regulatory Capital Calculation

Reporting & Analysis

Logical Architecture
Unit level Components

Data Sources

Extract Scripts

Staging Area

ECTL Jobs

Risk Data Repository

Calculation Engine

Results Repository

Reports, Analysis

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Overview Topics
1. Introduction to Basel II

2. Risk Management Overview

- Approaches, Processing steps - Architecture, bBIDS support

3.TCS Basel II Offerings

4. TCS Risk Management Assets

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TCS Basel II Offerings

End-to-end Risk Management Solution Implementation Implementation & Support
System Integration Solution Configuration Integration Testing IPR Support Stress & Back Testing Maintenance

Basel II Readiness Blueprint

Solution Strategy & Planning Solution Requirements Anal Data Management Strategy Data Preparation Consulting Package evaluation Implementation Plan

Basel II Readiness Blueprint

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TCS Risk Management Assets

Market Risk/ALM
ALM /Market Risk Framework

Credit Risk
Probability of Default Model for Corporate loans Credit Appraisal & Monitoring Model Process Model for Basel II Standardized Approach IRB Framework for Retail Business Lines Data Model Solution Template
Phase 1
ASSESS AND PLAN

Operations Risk
Operational Risk Framework

Methodology
ORGANIZATION

Phase 2
SOLUTION CONFIGURATION

USE TEST AND APPROVAL

Phase 3

MONITOR AND CONTROL

Phase 4

Corporate Governance/ Risk Management Basel II Implementation Approach Basel II implementation Master Plan Use Test and Approval Basel II Roll-Out Plan Monitor and Control Credit Risk Operational Risk Impact Analysis

PROCESSES

Gap Analysis

METHODS

Market and Other Risks

Capital Planning Disclosure Supervisory Review Process

DATA

SYSTEMS

BASEL II PROJECT MANAGEMENT

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Q U E S T I O N S A N S W E R S