While preparing
for Basel II implementation...
20 października 2004 roku
Maciej Majewski
Partner
Deloitte & Touche Sp. z o.o.
©2003 Firm Name/Legal Entity
What Credit Risk Officer should be aware of?
On 26 June 2004 the Basel Committee, after many consultations and analyses, presented
the final version of the New Capital Accord.
It is aimed at maintaining the current level of the capital (Pillar I) in the system,
with simultaneous consideration of:
1.
The better approach to the evaluation of the credit risk (e.g. use of internal ratingsbased methods);
2.
The operational risk (NCA introduces capital requirements with respect to this risk);
3.
Importance of the control exercised by the regulator (Pillar II) and provision
of
appropriate information on the risk management methods to external recipients
(Pillar III).
The Committee has no formal power with respect to supervisions responsible for setting
up local regulations but most of them (Group of Ten countries, EU countries, etc.) have
already decided to implement Basel II. For implementation in the European Union, this will
require a new Capital Adequacy Directive, CAD3 (starting December 2006), to overwrite
the existing rules and to extend the scope of the new Basel regime to all credit institutions
and investment firms.
Are you aware of a limited time left in order to meet
Basel II implementation requirements?
The timetable for implementing the IRB approaches for credit and operational risk capital
is tight given the amount of work that still needs to be undertaken:
Credit risk
At the end of 2005 Bank will have
to start calculating capital requirement
using IRB approach and current Accord
Use credit scoring (rating)
system for 3 years before
the transition process
Transition1
Data set
with 5 years
of history (PD)
and IRB retail
(PD/LGD/EAD)
2 years of data
required for IRB
before entering
transition period
2004
Operational risk
Earliest
date for
Foundation
IRB
2005
2006
2007
2008
2009
Transition
3 years data required for
Advanced Measurement Approaches
Systems
in place and
operating for
Basic,
Standard
and AMA
approaches
5 years of
data
required
for AMA
2010
Data set with
7 years of
history
(PD,LGD, EAD)
– IRB advanced
non-retail
2011
2012
Key:
1. Transition: During the transition period
the data requirements for the IRB and AMA
approaches will be relaxed. This is
conditional on banks making steady
progress during this period.
PD – Probability of Default
LGD – Loss Given Default
EAD – Exposure at Default
Have you checked your compliance with Basel II
requirements in the area of Credit Risk?
Gap Analysis
Compliance

1.
Does your segmentation and methodologies allow for proper risk
identification?
2.
Does your organizational structure reflect proper Credit Risk
Management functions?
3.
Have you introduced a default definition?
4.
Do you perform PD/LGD/EAD/ estimations?
5.
Are you able to satisfy the supervisor that your credit risk
assessment model / procedure has a good predictive power and
that regulatory capital requirements will not be distorted as a result
of its use?
6.
Do you have detailed review procedures to ensure your systems
and controls are adequate to serve as the basis for the IRB
approach?
7.
Are you also aware that for the duration of non compliance,
supervisors may require to hold additional capital under Pillar 2?
Have you checked your compliance with Basel II
requirements in the area of Operational Risk?
Gap Analysis
Compliance

1.
Have you identified and defined operational risk in your organisation?
2.
Have you developed operational risk management
strategy and set up organizational structure that reflects proper
Operational Risk Management functions?
3.
Does your segmentation allow for proper identification
of operational risk categories and can you map Bank’s business
and gross income to business lines defined by Basel II?
4.
Do you apply adequate risk quantification methods
and management tools?
5.
Do you have in place operational risk measurement system
and capital calculator?
6.
Have you ensured proper operational risk mitigation tool?
7.
Have you implied operational risk limits and thresholds?
Are you able to evidence your compliance
with the minimum standards in the following area?
Segmentati
on by asset
classes
EAD, M
calculation
IT
solutions
supporting
credit
process
Quantificatio
n
techniques:
KRI,
scorecard,
selfassessment
Group
approach/
business
lines
Basic
indicator,
standardised
method,
AMA
Collateral
Management
Haircuts
Independe
nt credit
risk
control unit
Operational
risk
definition,
segmentati
on,
categories
PD
estimations
Capital
calculation
engine
RAROC,
RORAC
Manageme
nt
oversight
of the
rating
process
Default
definition
Minimum
number of
borrower
rating
grades
Operating
procedures
Responsibil
ities of
parties that
rate
borrowers
and
facilities
Internal
rating
system
Do you realize the complexity in closing
of any identified gap?
Does your Independent credit risk control unit
cover the following responsibilities?
• Testing and monitoring of credit assessment models
in order to improve their performance;
therefore, emphasis is to be placed on default cases
which should be examined thoroughly before and
after the event of default (in non-retail customers).
The testing and monitoring will help detect
the models’ weaknesses;
Independent credit
risk
control unit
• Preparation and analysis of summary reports
from the Bank’s rating system which should include
historical default data sorted by rating at the time
of default and one year prior to default, grade
migration analyses and the monitoring of trends
in key rating criteria;
• Implementing procedures which would verify whether
the rating definitions are consistently applied across
departments and geographic areas;
• Reviewing and documenting any changes
to the rating process, including the rationale
for the changes;
• Reviewing/documenting the rating criteria
or individual rating parameters in order to evaluate
whether they remain predictive of risk; and
• Supervising any models used in the rating process.
Are you aware of costs scale and structure related
to Basel II requirements implementation?
A significant portion of outlays is assigned for investments related to credit risk.
Operational risk investments account for only 15%.
Operational risk
15%
Other costs
40%
IT costs
60%
Credit risk
85%
Do you realise what are your benefits
from Basel II implementation?
Shareholder
Value
Your local and
international
regulators
have
appreciation
for
your effort
We can help you!
Services for Banks related
to the Basel II requirements:
• Costs and benefits analysis of implementing
various Basel II approaches.
• Assessment of readiness for implementation
of Pillar I requirements – for all approaches
to credit risk operational risk and market risk.
• Assessment of Pillar II and Pillar III
compliance.
• Assessment of data availability in information
systems for selected approaches to credit,
operational and market risks.
• Development and implementation of strategy
to close gaps in the area of credit, operational
and market risk management.
• Development and implementation of Basel II
solutions: e.g. proper scoring/rating
methodologies, calculation packs for PD, LGD
and EAD, operation risk management tools loss database, KRI (key risk indicators),
process maps, risk maps, self-assessment
processes.
• IT systems for Basel II selection
and implementation support.
Other services for Banks related
to the Basel II:
• Credit risk management organizational
structure design.
• Credit and collection processes reengineering.
• Design of operational risk management
organizational structure, including description
of roles and responsibilities.
• Development of operational risk management
strategy.
• Design and implementation of unexpected
losses (economic capital) and expected losses
calculations covering all risk types, i.e. credit,
operational and market risk.
• Design and implementation
of the strategy/financial planning process based
on RAROC and EVA concepts (including FTP
and ABC methodologies).
• Selection and implementation
of IT infrastructure supporting calculation
and reporting of risk-based profitability.
Deloitte & Touche Sp. z o.o.
Member of
Deloitte Touche Tohmatsu