context
The transformation that the global economy and financial markets have undergone over the last decade has provided a strong incentive for banks to actively manage their capital base. Globalisation and international consolidation have changed the overall corporate landscape dramatically. Shareholder demands have been growing in an environment of aggressive competition. Financial markets have become much more volatile. Volumes in derivatives markets have grown exponentially. Some observers see the increased level of debt in the international economy as a threat to the stability of the financial system. All these changes, together with the recognition by international regulators that the gap between regulatory and economic capital has widened as a result of banks using increasingly sophisticated internal measures of economic capital, have led to the design of a New Capital Accord. The Committee expects that the New Accord will enhance the safety and soundness of the financial system in the banking business by
- aligning regulatory capital requirement to the underlying risks,
- encouraging better risk management and
- enhanced market discipline.
The business of banking is about finding the right balance between risk and return; capital is a cushion necessary against losses. As an expert in financial risk management practices and data warehousing, Keyrus provides value-added solutions that enable our clients to better manage their capital and to strengthen their competitive advantage in a volatile business environment.
key considerations
The Basel II regulation distinguishes between three approaches to credit risk, being the Standardized, the Foundation IRB and the Advanced IRB approach. The objective of Basel II is to align capital with risk; by focusing on value, financial organizations will be able to better capitalize on the link between regulatory compliance and competitive advantage, driving organizations to preferably adopt advanced approaches. Such approaches however require strong capabilities in various domains, such as:
- data management: the more advanced models are used, the more data are needed. This requires solid performance management foundations to be used, capitalizing on the existing data warehouse and other Enterprise Information Management systems in use, including those less structured systems in use in the business departments only. Availability of historical data is a key requirement.
- risk models: advanced models are specific to each organization and encapsulate their own execution of risk management. A consistent approach to risk management will drive excellence in the risk management processes and support organizations to demonstrate their compliance. With a profound knowledge of the regulation and a true expertise in Basel II projects, Keyrus supports its customers in building the foundations required to leverage their advanced risks models.
- documentation: given the regulatory framework, documentation is essential in the implementation of compliant solutions. Not only the documentation proves the usage of a state-of-the-art administration, but also covers the knowledge of the organization, proving to the regulator the adequacy and compliance of the implementation.
Keyrus and Basel II
Successful implementation of advanced Basel II approaches, where compliance and competitive advantage are converging, requires a strong business case articulation. Keyrus supports its financial customers from the initial preparation steps, and combines business understanding and data management capabilities, offering our customers true value-adding integrated services in the Basel II regulatory context.
