Basel II and Credit Risk
Basel II and Credit Risk
Basel II and Credit Risk
Overview Topics
1. Introduction to Basel II
Basel II - Background
First Basel guidelines - 1988 Amended for Market Risk 1996
Need for holistic Business Risk Mgmt. especially for internationally active banks Need for better risk cushion, disclosure and monitoring mechanism
Basel II - Overview
Guidelines added for Market and Operational Risk Option of using Internal Risk Assessment Standardization of supervisory and disclosure norms
Pillar 1
Capital Charge
Market Risk (VAR, Stress) Credit Risk (Std, IRB ) Operational Risk (Std, IRB )
Pillar 2
Supervisory Process
(Integrated fully audited process from Data Collection to reporting)
Risk Monitoring/Rprtg.
Regulatory (std, IRB) Or internal model
(1) Basel II accord is to be at this level on a consolidated basis, i.e. up to holding company level (2), (3), (4): Basel II accord is also applied to all internationally active banks on a stand-alone basis
Reported data
Disclosure
Management data
Analysis
Group level
Centralised approach
Operational Risk Market Risk Calculated
data
Data Store
Collateral system
Payment data
Credit rating
Valuation data
Loss data
Source data
Credit Risk
Default Risk / Counterparty Risk Portfolio Risk Intrinsic Risk Concentration Risk
Market Risk
Interest Rate Risk Capital market Risk Liquidity Risk Exchange Rate Risk Commodity Risk
Operational Risk
Internal /External Fraud Employ. Practices & safety Clients, Prod & Biz Practices Physical damage to Assets Business disruption & Systems Failure Execution, Delivery & Process Management
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The risk of loss arising from default by a creditor or counterparty The risk of losses in trading positions when prices move adversely Foreign Exchange and Commodities open positions The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events
Market Risk
Operational Risk
Total Capital
Overview Topics
1. Introduction to Basel II
Terminology
PD, LGD, EAD RWA, K, EL CCF, Security
Data Requirements
Customer Information, Rating / Scores, Categories Products, Risk Weights, Categories, A/Cs, Securitization Exposure / Facility & their Categories, Exposure Rating Default, Overdue Amounts, Settlement Adjustments Collateral, Guaranties, Haircuts, Maturities Reference Basel parameters, Currency / Rates, Org Str.
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Basel I Approach Simple Approach Estimation of risk variables (PD, LGD, EAD)
Standardised
Internal ratings-based Foundation Level Advanced level Internal estimates Determined by supervisor
Comprehensive Approach
RW determined through ratings
Determined by supervisor
Determined by supervisor
Determined by supervisor
No limitation
Haircuts
Determined by supervisor
Determined by supervisor
Determined by supervisor
Internally determined
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IRB Approach
Exposure categorization (Retail /Wholesale) Segmentation of Exposures (for Retail) Calculation / Recalc of Basic Risk Parameters, Adjustments
(PD, LGD, EAD), both Historical and Estimated
Post-Securitization Adjustments
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Data Gathering
Pre Processing
Distributed Processing
Data Transmission
Logical Architecture
Central Components
Reporting Analysis Results Repository Calculation Engine Risk Data Repository Consolidation Scripts Staging Area
Distributed Components
Data Sources
Extract Scripts
Staging Area
FTP / Media
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Data Gathering
Pre Processing
Logical Architecture
Unit level Components
Data Sources
Extract Scripts
Staging Area
ECTL Jobs
Calculation Engine
Results Repository
Reports, Analysis
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Overview Topics
1. Introduction to Basel II
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Credit Risk
Probability of Default Model for Corporate loans Credit Appraisal & Monitoring Model Process Model for Basel II Standardized Approach IRB Framework for Retail Business Lines Data Model Solution Template
Phase 1
ASSESS AND PLAN
Operations Risk
Operational Risk Framework
Methodology
ORGANIZATION
Phase 2
SOLUTION CONFIGURATION
Phase 3
Phase 4
Corporate Governance/ Risk Management Basel II Implementation Approach Basel II implementation Master Plan Use Test and Approval Basel II Roll-Out Plan Monitor and Control Credit Risk Operational Risk Impact Analysis
PROCESSES
Gap Analysis
METHODS
DATA
SYSTEMS
Q U E S T I O N S A N S W E R S