On the road to Basel II For TBA

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On the Road to Basel II Turkish Bankers Association Istanbul, Turkey – Dec 07, 2004 H.S.Rajashekhar Principal Consultant i-flex consulting hs.rajshekhar@iflexsolutions.com www.iflexsolutions.com

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Implementing Basel II – A bird’s eye-view Presentation Outline Internal Rating – An innovative project Who we are and what we do

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Implementing Basel II – A bird’s eye-view Presentation Outline Internal Rating – An innovative project Who we are and what we do

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i-flex solutions Providing end-to-end solutions to BFSI vertical…

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i-flex customer base – 450+ and growing Select Customers…

i-flex Offerings for Basel II implementation: 

i-flex Offerings for Basel II implementation Tools Technology Solutions Components Self Assessment Toolkit Reveleus – Basel II Framework (data mgmt, computations, reporting) iCRS - Internal Rating System System Integration – Extend existing infrastructure Data Warehousing – Establish data management and analysis infrastructure Consulting Gap Analysis (Process, Data, Systems) Data Requirement & Management Policy, Processes & Controls Risk Analytics and Model Validation Program Management

Basel II - Consulting Services – Key offerings: 

Basel II - Consulting Services – Key offerings Readiness assessment and implementation roadmaps Training Programs and Workshops Risk Management - Design of Policies, Processes, Systems Solution architecture, vendor selection and enterprise wide systems integration Development and implementation of Internal Rating Systems Implementation of quantitative methodologies for PD and other parameters Designing and deploying Operational Risk framework and processes Key Risk Indicator identification, capture and predictive modeling of operational risk Risk and Control Self Assessment design and implementation Building of tools and templates to capture loss data Operational risk capital using LDA Basel II Program Management

Basel II Readiness - Self Assessment Tool-kit: 

Basel II Readiness - Self Assessment Tool-kit Facilitates quick but comprehensive self-evaluation of Basel II readiness Simple to self-administer; user-friendly guided process Brings focus on areas of gaps leading to focused granular analysis Areas covered include – policies, processes, systems, data and implementation planning Can be used to trace the readiness as Basel II implementation progresses

iCRS - Internal Rating System: 

iCRS - Internal Rating System Promotes consistency and transparency in the rating process Functional, flexible, easy-to use Use of obligor and facility related data to generate “agency like” rating Use of balanced “best practice approach” of combining model output and judgmental opinion Takes into account sector-specific factors to ensure consistency Facilitates implementation of multiple rating models Provides complete audit trail for rating decisions Facilitates data historization for Pillar 2 supervisory review and back-testing of rating models

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Comprehensive solution for data management, computations and reporting Comprehensive Basel II Data Model Combination of pre-built data structures, computational engines and delivery templates Modular solution structure driven by business requirements Facilitates banks to get a jump-start Supports the “buy and build” approach

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Implementing Basel II – A bird’s eye-view Presentation Outline Internal Rating – An innovative project Who we are and what we do

Basel II – Encompasses enterprise risk: 

Basel II – Encompasses enterprise risk Minimum Capital Requirement = 8% of Risk-weighted Exposures Market Risk No Change Major Changes New element added Risk of losses in on and off balance sheet positions arising from movements in market prices Credit Risk Potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms Operational Risk Risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or external events

Basel II – Moving away from “one-size-fits-all”Menu of approaches…simple to complex…: 

Basel II – Moving away from “one-size-fits-all” Menu of approaches…simple to complex… PILLAR 1 Minimum Capital Requirements PILLAR 2 Supervisory Review PILLAR 3 Market Discipline Risk Weights Definition of Capital Credit Risk Operational Risk Market Risk Standardized Approach Internal Ratings Based Approach Asset Securitization Basic Indicator Approach Standardized Approach Advanced Measurement Approach Foundation Approach Advanced Approach Standardized Approach Internal Ratings Based Approach Alternate Standardized Approach Balance the flexibility and freedom given to banks

Basel II – the three pillarsMutually reinforcing…: 

Basel II – the three pillars Mutually reinforcing… Supervisory Review Market Discipline Providing a flexible, risk-sensitive capital management framework Minimum Capital Requirements Basel II Three Pillars

Implementing the three pillars: 

Implementing the three pillars Supervisory Review Market Discipline Providing a flexible, risk-sensitive capital management framework Minimum Capital Requirements Basel II Three Pillars Data – Internal and External Computations, Models, Testing Transparency Auditability Reporting Implementation Choices Internal Use Test

i-flex approach to Basel II TransformationA Journey of Seven Steps…: 

i-flex approach to Basel II Transformation A Journey of Seven Steps…

A Look at the End-State: 

A Look at the End-State

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Implementing Basel II – A bird’s eye-view Presentation Outline Internal Rating – An innovative project Who we are and what we do

The Organization and the Project: 

The Organization and the Project Technology services company owned by the Association of Banks in Germany The Project… Conceptualize, design and develop a web based solution to support the Basel II Internal Rating requirements of 45 medium and small sized banks in Germany

Key Functionality Requirements…: 

Key Functionality Requirements…

The Technical Challenges: 

The Technical Challenges High configurability customisability Robustness and high scalability High availability Design for data historization Flexible rating process workflow design Platform independence

Project Management Challenges…: 

Project Management Challenges… Changing and evolving functional requirements Complex non-functional requirements Very aggressive timeline and very short development lifecycle

The Solution: Methodology…: 

The Solution: Methodology…

The Solution: Functional Architecture…: 

Rating System Front End External Interfaces SMS (Authentication and Authorization) Data Historization Maker- Checker EOD Processes Customer Info Customer Rating Rule Engine Rating rules Reports Internationalization Static Data Maint. SMS Admin Rating Expiry Escalation Anonymization INTERNET The Solution: Functional Architecture…

The Solution: Technical Architecture…: 

The Solution: Technical Architecture…

And Finally….The Unique Benefits…: 

And Finally….The Unique Benefits… IRB solution for the small and medium sized banks delivered as an ASP Shared costs Common infrastructure but highly customized rating services to different banks Value added services/research using pool data “First-in-the-market” competitive advantage Solution designed to grow and expand Portability of the solution to suit any single bank’s specific and exclusive use

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Q & A Thank you