Leveraging XBRL for Basel II

1
Leveraging XBRL for Basel II

• Daniel DAmico, IBM Business Consulting Services,
  UK

2
Agenda

• Basel II background
• Basel II is an opportunity
• The data management challenge
• XBRL and Basel II

3
A couple of quotes

• Regulators and customers are demanding greater
  focus on risk management. This call for
  transparency will challenge traditional business
  practices and will require more auditable
  processes throughout the business Morgan Stanley
  analyst (on market timing), FT 11/03
• US regulators expect Basel II will apply to a
  total of around 20 large US banks. All US banks
  operating under Basel II will be obliged to use
  only the most advanced Basel II approaches for
  assessing banking risks, which means the IRB
  approaches in the case of credit risk. Global
  Risk Regulator 10/03

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Basel II Background
What is Basel II Accord?
The publication of the Basel II Accord will mark
the end of long process that will have
effectively re-written the rules of banking.
Basel II will affect the conduct of monetary
policy and the stability of financial
institutions all over the world
What is it trying to achieve?

• To promote safety and soundness in the financial
  system
• To align regulatory capital requirements more
  closely with underlying risks
• To offer incentives for institutions to pursue
  more sophisticated effective risk management

When does it happen?
Commercial imperative

• Basel II will significantly impact FS
  institutions and the change is such that
  preparation needs to begin now to ensure
  readiness for a parallel run starting 1st Jan
  2006
• Key strategic decisions need to be taken now on
  the approach to be taken and the benefit that
  should be achieved over and above compliance

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Basel II is an Opportunity not just a Mandate

• Basel II Opportunities
• Improve shareholder value
• Economic capital savings
• Improve/maintain credit rating
• Improve risk management strategy
• Alignment of Risk Finance
• Cost reduction through organizational process
  improvement
• Identify potentially dangerous portfolio
  positions and other risk sources

Basel II
Pillar 1
Pillar 2
Pillar 3

• Minimum Capital requirements

• Supervisory Review Process

Market Discipline

• Calculation and
• Management of
• Credit Risk
• Operational Risk
• Market Risk

• Ensure sound processes
• Ensure adequate capital at all times
• Ensure motivation improving risk management
  practices

• Quantitative
• and qualitative
• disclosure of
• undertaken risks
• and risk
• methodologies

• Basel II Challenges
• Setting up Basel II program
• Data management
• Systems management
• Establishing Risk Framework

Data Foundation
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Key challenges Systems Data Management
10 Common signs of unstable data foundation
Data Management is the key challenge in meeting
Basel II

1. Inability to gather data for new reporting
   requirements.
2. Difficulty complying with regulatory requirements
   like Basel II Accord
3. Senior management questions quality, timeliness,
   reliability of information used to make
   multi-million dollar decisions
4. Inability to consolidate data from multiple
   diverse sources
5. Senior Management requests for information
   require intensive manual effort to respond, and
   far longer than desired.
6. Difficulty in building a single architecture to
   address both data consolidation and data
   aggregation requirements.
7. Multiple databases or spreadsheets storing
   similar data no common data dictionary across
   the enterprise
8. No ownership of data
9. Theres no single enterprise view of data
10. Difficulty answering questions about the origins
    and business processes performed against data

Source IBM Institute for Business Value
analysis, Banks and Basel II How Prepared Are
They?, October 2002 interviews with 32 Financial
institutions worldwide
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A complex International banking group
Group
Personal Finance
Wholesale Banking
Corporate
Private Banking and Asset Management
Credit Cards
Asia Pacific
Discretionary Portfolio Management
Fixed Income, Equity and derivatives
UK retail
North America
Japan
Singapore
Hong Kong
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IBMs Basel II Architecture
External Audience
Loss Data
Result Data
Disclosure
Customer
Result Data
Regulatory
Collaterals
Result Data
Group
Credit
Result Data
Management Data
Core Banking Products
Rating, PD, LGD, CCF Models
Internal Audience
Data Marts
Reporting
Data source
Metadata
Warehouse Administration
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Where does XBRL fit?
1
XBRL
2
XBRL
External Audience
Loss Data
Result Data
Disclosure
Customer
Result Data
Regulatory
Collaterals
Result Data
Group
Credit
Result Data
Management Data
Core Banking Products
Rating, PD, LGD, CCF Models
Internal Audience
Data Marts
Reporting
Data source
Metadata
XBRL
3
Warehouse Administration
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XBRL for Basel II analytics

• Many Analytics requirements
• Credit Risk Profile
• Credit Risk Assessment
• Credit Risk Mitigation Assessment
• Operational Risk Assessment
• Portfolio Credit Exposure
• Security Analysis
• Liquidity Risk
• Collections Analysis
• Involved Party Exposure
• Location Exposure
• Non Performing Loan

• Aggregate data for analytics
• Multiple Sources
• Different periods
• Different rules

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XBRL for Basel II reporting

• Many reporting requirements
• External
• Disclosures
• Regulatory
• Internal
• Group
• Subsidiary
• Management reporting
• Integration with other reporting requirements
• IAS

• Aggregate data for reporting
• Multiple Sources
• Different periods
• Different rules

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Common definition using XBRL

• Definition of Internal Basel II taxonomies
• Define an organizational metadata layer
• Traceability back to transactions
• Common repository for changes and updates to
  requirements
• Enhance group ability to consolidate data
• Improve data quality

Basel II is an opportunity for banks to force its
subsidiaries and business units into following a
common understanding of data, driving common
standards into the organisation . XBRL can be
THE standard
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How is XBRL solving some of the data management
issues?

1. Inability to gather data for new reporting
   requirements.
2. Difficulty complying with regulatory requirements
   like Basel II Accord
3. Senior management questions quality, timeliness,
   reliability of information used to make
   multi-million dollar decisions
4. Inability to consolidate data from multiple
   diverse sources
5. Senior Management requests for information
   require intensive manual effort to respond, and
   far longer than desired.
6. Difficulty in building a single architecture to
   address both data consolidation and data
   aggregation requirements.
7. Multiple databases or spreadsheets storing
   similar data no common data dictionary across
   the enterprise
8. No ownership of data
9. Theres no single enterprise view of data
10. Difficulty answering questions about the origins
    and business processes performed against data

XBRL for Basel II Analytics
XBRL for Basel II reporting
Common definitions using XBRL
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Leveraging XBRL for Basel II

• Daniel DAmico, London UK
• IBM BSC, Financial Services Sector,
• Risk and Compliance
• Daniel.Damico_at_uk.ibm.com