SAP Analytical Banking - Basel II
Partho Chakraborty
Solution Architect, SAP India
Mumbai, 13th September 2007
Timeline for Basel II compliance in APA
2006 2007 2008 2009 2010
India (1st Apr 2007)
S. Korea
Singapore (1st Apr 2007)
China
Indonesia
Thailand
Taiwan* Australia
Malaysia* Japan (1st Apr 2007)
Hong Kong
31 Mar
2008
31 Mar
2009
Basel II
Market risk Credit risk Operational risk
Minimum Capital Requirements Supervisory Review Process
Risk interest rate change Responsibility Double check methods against
BII requirements
Market Discipline
Risk segments Capital structure Disclosure Transparency
Stipulating capital charges to motivate banks to improve their risk management and measurement capabilities
Creating a supervision framework to encourage best risk practices and to ‘mop up’ other risks (e.g. strategic, reputational)
Requiring banks to disclose, in detail, capital structure, risk exposures and capital adequacy
Means Pillar I – Minimum Capital Requirements
Pillar II – Supervision
Pillar III – Market Discipline
The 3 pillars of Basel II
Banks are faced with many different regulations
Proposed AS 30, 31 & 32 in Indian
GAAP
SEBI Listing Agreement - Clause 49
Banks Challenges in Meeting Market Requirements
Increasing regulation, management and market requirements…
More transparency and value insight More key performance indicators More sophisticated regulation More disclosure Faster closings
Finance Risk
Internal
External
Several silos for every area Huge reconciliation effort Inconsistent source data and results Huge efforts for new requirements Limited process and quality control Many redundant interfaces
… lead to increasing complexity and cost on IT side
IAS
Basel II
CEBS
Anti Money Laundering
Sarbanes-Oxley
CRD
Integrated, modular and flexible Architecture
Today Future
Several silos for every area Inconsistent source data and
results Huge reconciliation effort
Integrated architecture for multidimensional views and multiple purposes Flexibility for every-changing
requirements
User-friendly reporting layer for disclosure and internal reporting
Granular result data for reporting, auditability, and reconciliation
Historical data for validation of credit risk parameters
Comprehensive RWA calculation for all products, asset classes, and calculation approaches
Basel II: Overview
Preconfigured and flexible Basel II data model
Financial Product Valuation
Results Data Layer
Reporting and Analytics
Source Data Layer
Modelling
PD
LGD
Historical Data
CCF
COREP Disclosure Internal Reporting
Collateral Distribution … RWA Expected
Loss
Basel II: Flexibility
Flexible data modeling: financial product innovation
Flexible calculation process: regulatory and bank-specific business rule definition
Flexible structures of Historical Data: support of bank-specific internal risk models
Flexible Result Data Layer and Reporting on any bank- specific information and ad-hoc reporting
Financial Product Valuation
Results Data Layer
Reporting and Analytics
Source Data Layer
Modelling
PD
LGD
Historical Data
CCF
COREP Disclosure Internal Reporting
Collateral Distribution … RWA Expected
Loss
Basel II: Auditability and Transparency
Additional Services of SAP Basel II Versioning ensures availability of data
and results by system - and business date
Correction server allows to maintain corrections and assess impact
Plausibility checks for data delivery and during the calculation process
Why are these services important? Enhanced information quality Improved transparency of
information and processes Meets audit requirements
Financial Product Valuation
Results Data Layer
Reporting and Analytics
Source Data Layer
Modelling
PD
LGD
Historical Data
CCF
COREP Disclosure Internal Reporting
Collateral Distribution … RWA Expected
Loss
The Market Risk Manager needs access to up-to-date information; from single transactions up to the Group level. He requires a toolkit containing best practice methods from NPV calculations up to statistical models.
Market Risk Management
Value at Risk
Net Present Value
What if Analysis
Backtesting
Key Capabilities for Market Risk Management
Best practice methods for NPV calculation VaR calculation What if Analysis Backtesting
Full transparency
Drill-down to the single cash-flow Audit trail
Open System Inclusion of complementary or proprietary methods Timely integration of new products
Extensive automation of data collection and evaluation processes,
Customer-specific flexibility,
Easy adjustment and enhancement of reports,
Possibility to include future extended data requirements set by regulatory authorities,
Openness for future integration of calculation and simulation models
Collection and Evaluation
Self Assessment
Loss Database
Risk Indicators
OpRisk Models
Reporting
OpRisk Regulatory Capital
Calculation and Simulation
Operational Risk Requirement: Flexible Tool to Support Risk Management Processes
OpRisk is a new topic that is still in discussion
Disclosure & Reporting : Basel II Reports - Overview
Number of reports
15 - counter party risk
4 - equity investment
6 - securitization
2 - commercial real estate
4 - migration matrices
1 - operational risk
- single transaction level
The Capital Accord was analyzed and the disclosure requirements transformed into report specifications
Report Functionality - display options
Excel:
Well known interface
Download of data for further Simulations / Calculations
Ideal for Professional users
Web Reporting
Excel Reporting
Web:
Easy to handle interface, only browser installation required
Ideal for occasional users
External Disclosure – Example Report
Internal Reporting – Drill-Down and Filter
Drill-Down on Risk Grade
Filter on Risk Type
SAP Offers Comprehensive Basel II Solution
SAP System
Non-SAP System
SAP/Non-SAP System
Credit Risk Platform
Output
Management Reporting Disclosure Regulatory Reporting
Management
Limits
Analytical Engines
Exposure Reg Capital Ec Capital Fair Value Default
Probability Loss Given
Default
Correlation Credit Conversion
Business Database
FDB
Historical Database
HDB
Operative Systems
Collateral Management
Customer Information
Loan Loss Provisions Transactions Rating
Applications
Result Database
RDB
SAP Basel II
Main Run Regulato
ry Capit
al Calculation
Risk Paramete
rs
Exposure
at Default
Calculation
Netting
Pre-Processing
Pre-Runs Account Pooling
Determination of free line
Retail pre-processing Determination
of default Risk weight
pre-processing ABS
pre-processing Purchased Rec. pre-processing
SAP Basel II: Best-in-class Functionality
The SAP credit risk calculation is Basel II compliant All asset and collateral classes, all portfolios (sovereign, bank,
corporate, retail, etc.) and all approaches are covered Eligibility checks for all collaterals and guarantees Optimization algorithm for collateral distribution (Simplex
Algorithm) Results of the calculation process are exposure at default, risk
weighted assets, expected losses and regulatory capital
Results Data Layer
Reporting and Analytics
SAP Credit Risk Exposure Engine
(optional)
Source Data Layer
Exposure RWA
3rd-party Risk Engine
(optional)
SAP Source Data and 3rd-party
Engine (optional)
Source Data Layer
Valuation
SAP: Reporting Solution Architecture
COREP Disclosure Internal Reporting
Ready to run Standard Reports (Basel II, COREP) and flexible internal reporting
Granular result data as input for Disclosure, COREP and Internal Reporting
Integration of all required risk figures calculated by SAP and third party Risk engines
SAP Value Proposition for Risk Management / Basel II
Reconciled financial database
Credit risk engine
Flexibility
Disclosure and internal risk reporting
Infrastructure to validate internal models
Stress testing and back testing
Limit management
Regulatory reporting
Pre defined project scope and timing
Reduced capital costs
Improved capital allocation
Improved risk-based pricing
Reduced compliance costs 1
Reduce implementation project by 30 %
2
3
4
5
Value impact
Source: SAP projects, Expert estimation
Key capabilities
SAP Basel II – A Strategic Step
SAP Basel II offers the key modules required by a risk management platform Lower costs for developing and maintaining interfaces Reduced effort for reconciliation Internal and external risk management integrated as
well as internal and external financial accounting
The SAP Basel II building blocks can be leveraged for Credit Portfolio Management Global Exposure and Limit Management Loss Provisions Regulatory Reporting
SAP Basel II Customer Base
rtc.ch IT-Outsourcing & Banking Software
Customers
THANK YOU FOR YOUR ATTENTION !
Partho H. Chakraborty A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore - 560 037, India Tel: +91 80 420 50293, Cell: +91 99863 22504 email: [email protected] [email protected] Skype: parthohc01