20030325 STARS Basel II Review

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Building a Technology Framework to Meet the Basel
II Requirements Risk Management Workshop COLOMBIA
From Theory to Implementation Cartagena,
Colombia February 16, 2004 Presented by David M.
Rowe, Ph.D.Executive Vice President for Risk
ManagementSunGard Trading and Risk Systems
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Agenda
1. Introduction A Brief History of the Basel
Accord 2. Data Issues and Technology
Challenges 3. Support for Broader Trends in Risk
Management 4. Solution Components to Manage
Credit Risk Under Basel II 5. Importance of
Communication
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Basel Capital Accord Brief History
U.S. Bank Capital Ratios 1935 - 1988
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Basel Capital Accord Brief History
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Basel Capital Accord Brief History
Basel I
1986 Proposed minimum regulatory capital
requirements for banks. 1988 Capital
requirements came into effect with minimum
capital rising to 8 of risk adjusted assets by
the end of 1992.
The capital calculation was intended to
distinguish among assets by risk class, but did
so in only the crudest fashion.
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The Basel I Approach
Overview of risk weights
Claim
Assessment
OECD
Non-OECD
All
Sovereigns
0
100
Comm. Banks
20
100
20
Multi-National Development Banks
50
Secured Residential Mortgages
Corporates
100
OECD
Non-OECD
All
Required data could largely be derived from
financial reporting systems.
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Basel Capital Accord Brief History
Bank Capital Ratios 1935 - 1988
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Basel Capital Accord Brief History
Bank Capital Ratios 1935 - 1998
Late-80s forward
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Basel Capital Accord Brief History
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Basel Capital Accord Brief History
Basel I Market Risk Amendment
April, 1993 Initial prescriptive
proposal. April, 1995 Proposed allowing use of
internal market risk models for calculation of
regulatory capital (subject to supervisory review
and approval.) Jan 1, 1998 - Market risk
amendment took effect with internal VaR models
as a major source of risk estimates.
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Basel Capital Accord Brief History
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Agenda
1. Introduction A Brief History of the Basel
Accord 2. Data Issues and Technology
Challenges 3. Support for Broader Trends in Risk
Management 4. Solution Components to Manage
Credit Risk Under Basel II 5. Importance of
Communication
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Data Fragmentation
System Integration tends to be along internal
regions and products.
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Data Fragmentation
Credit Risk data requirements cut directly across
existing system fragmentation.
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Data Fragmentation
Credit Risk data requirements cut directly across
existing system fragmentation.
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Data Fragmentation
Credit Risk data requirements cut directly across
existing system fragmentation.
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Data Fragmentation
Credit Risk data requirements cut directly across
existing system fragmentation.
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Credit Risk - Standardised Approach
Overview of risk weights
Claim
Assessment
AAA to AA-
A to A-
BBB to BBB-
BB to B-
Below B-
Unrated
Sovereigns
0
20
50
100
150
100
Option 1
Banks
20
50
100
100
150
100
Option 2
20
50
50
100
150
50
Corporates
20
100
50
150
100
AAA to AA-
A to A-
BBB to BB-
Below BB-
Unrated
Required data must come from risk systems.
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Credit Risk - IRB Approach
Regulatory capital EAD x risk weight (f PD,
LGD, M) x 8
This implies an even greater need for data from
risk systems rather than just financial systems.
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The First Challenge Data Integration

• Consolidating exposure across products, regions
  and systems (by obligor or by risk
  characteristics.)
• Maintaining clean and consistent legal entity and
  facilities definition data.
• Integrating collateral, guarantees and other
  credit enhancement data with items 1 and 2.
• Collection and maintenance of external historic
  data (market data, industry defaults, etc.)
• Providing audit trails and reconciliation to
  source systems.
• Archive facilities to refine analysis and
  validate results.
• Proper data security to limit unauthorized
  access.

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The Second Challenge Analytics

• Implementation of multiple sophisticated credit
  ratings models.
• Scoring or Merton-style models for PD.
• Behavioral models for EAD.
• Structural and external conditions models for
  LGD.
• Advanced economic capital allocation framework
  (Pillar II.)

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Credit Exposure Map
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Additional Information and Analytics
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Credit Exposure and Supporting Data
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Typical Existing Data Links
Line Unit 1
Control Unit 1
Line Unit 2
Control Unit 2
Line Unit 3
Control Unit 3
Line Unit 4
Control Unit 4
Line Unit 5
Control Unit 5
Line Unit 6
Line Unit 8
Line Unit 7
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Ideal Data Linkage Configuration
Line Unit 1

• Bridging operating systems network protocols
• Delivery and routing

Control Unit 1
Line Unit 2
Control Unit 2
Line Unit 3
Middleware MQSeries, MINT...
Control Unit 3
Line Unit 4

• Content translation

Control Unit 4
XML Protocols FpML, NTM...
Line Unit 5

• Central repository for portfolio data and
  analytics

Control Unit 5
Line Unit 6
Line Unit 8
Line Unit 7
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Practical Data Linkage Configuration
Line Unit 1

• Bridging operating systems network protocols
• Delivery and routing

Control Unit 1
Line Unit 2
Control Unit 2
Middleware
Line Unit 3
Control Unit 3
Line Unit 4

• Content translation

Control Unit 4
Line Unit 5

• Central repository for portfolio data and
  analytics

Control Unit 5
Line Unit 6
Line Unit 8
Line Unit 7
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Agenda
1. Introduction A Brief History of the Basel
Accord 2. Data Issues and Technology
Challenges 3. Support for Broader Trends in Risk
Management 4. Solution Components to Manage
Credit Risk Under Basel II 5. Importance of
Communication
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Evolution of Credit Risk Management

• A portfolio management overlay.
• Underwriting data feed portfolio management.
• Few data flow the other way.
• Portfolio management is mainly strategic.

• Credit risk management was dominated by careful
  underwriting.
• The watchword tended to be We only make good
  loans.

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Evolution of Credit Risk Management
Today
In 5 to 15 Years
Portfolio Management
Portfolio Management
Credit Underwriting
Credit Underwriting

• A portfolio management overlay.
• Underwriting data feed portfolio management.
• Little data flows the other way.
• Portfolio management is mainly strategic.

• Data flow both ways.

• Portfolio analysis becomes a tactical decision
  support tool.

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Data Map Wholesale Finance
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Support for Tactical Decisions
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Data Map - Trading Credit
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Simulation-Based Trading Credit Exp.
Marginal Credit Loss and Credit Capital Charges
Limit Query
Real-Time Process
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Agenda
1. Introduction A Brief History of the Basel
Accord 2. Data Issues and Technology
Challenges 3. Support for Broader Trends in Risk
Management 4. Solution Components to Manage
Credit Risk Under Basel II 5. Importance of
Communication
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Needed Components for a Basel II Credit Solution

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Basel II Credit Risk Architecture Overview
Tactical Decision Support
B2 Capital Calculator
B2 Data Consolidator
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Buy vs. Build the Software Life Cycle

• Software has a life cycle like all other products

Dangerous Position
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Agenda
1. Introduction A Brief History of the Basel
Accord 2. Data Issues and Technology
Challenges 3. Support for Broader Trends in Risk
Management 4. Solution Components to Manage
Credit Risk Under Basel II 5. Importance of
Communication
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The Third Challenge Communication

• Keeping the credit underwriters on board.
• Providing information support for informed credit
  judgments.
• Make validation constructive not threatening.
• The motto should be

Technology in Support of Sound Judgment