1. TheArtof the Possible
Basel II
Oracle
XO
xocl.net
Basel II, ICAAP, Oracle,
XO and You
Nigel Webb
Director
Consultancy (Risk Management & Treasury)
2. TheArtof the Possible
• Basel II and ICAAP place onerous demands on Risk
Management within a Bank
• It is anticipated that these controls will reach further
into the Financial Services Industry
• A mixture of Strategy, Business Processes and
Technology are required to address the needs
• XO offers a 360° approach centred on an integrated
Oracle eBusiness platform specifically targeted at
Basel II and ICAAP
Executive Summary
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3. TheArtof the Possible
• Basel II Accord introduced in June 2004 to improve
risk management within banks
• Basel II has 3 Pillars
1. Regulatory Capital Requirements (Credit, Operation &
Market Risk)
2. Economic Capital Requirements - Supervisory Review inc.
Internal Capital Adequacy Assessment Process - ICAAP
3. Market Discipline
Basel II
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4. TheArtof the Possible
• Pillar 1 has well established risk
models and is strictly regulated
• Pillar 2 is entrusted to the Bank’s
Board for responsibility of
implementing an ICAAP that is
“Appropriate to its Risk Profile and
Business Plan”
• Pillar 3 includes Disclosure
Requirements or Reporting
Basel II (contd.)
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Pillar 1
Credit Risk
Operational Risk
Market Risk
Pillar 2
Supervisory Review
“Other Risk”
Pillar 3
Market Discipline
“Disclosures &
Reporting”
5. TheArtof the Possible
• 3 types of risk considered
• Limited models available
for risk assessment
• Regulation requires
specific allocation of
capital reserves against
quantified risk
Basel II - Pillar 1
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Credit
• Standardised
• Foundation IRB
• Advanced IRB
Operational
• Standardised
• BIA
• AMA
Market
• VAR
6. TheArtof the Possible
Pillar 2 is intended to identify and allocate capital against
all risks not previously considered within Pillar 1
Basel II – Pillar 2
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Risk
Liquidity
Insurance
Concentration
Residual
Securitisation
Business
Interest Rate
Pension
Obligation
Other
7. TheArtof the Possible
• It is the responsibility of the Board of Directors and Senior
Management to define appropriate risk measurement
• ICAAP is the bank’s internal assessment of capital that it
considers adequate to cover all material risks
• Pillar 2 analysis has a degree of flexibility and complexity that is
an order of magnitude of Pillar 1
• Processes and technology must be:
– Robust
– Demonstrably Appropriate
– Transparent
Basel II – Pillar 2 (contd.)
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8. TheArtof the Possible
• Pillar 3 greatly increases the disclosures that the bank must
make. This is designed to allow the market to have a better
picture of the overall risk position of the bank and to allow the
counterparties of the bank to price and deal appropriately
• FSA Supervisory Review Evaluation Process (SREP) is
encompassed in Pillar 3
Basel II – Pillar 3
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9. TheArtof the Possible
• Although ICAAP is not synonymous with
Basel II, it is a significant part of it
• Because of the nature of the higher
complexity of analysis, ICAAP is usually
associated with Pillar 2, but does also
cover Pillar 1
• The guiding principles of ICAAP are:
– Principle of Proportionality
– Forward Looking
– Ongoing exercise
– Evolving-nature
• ICAAP is not a static, one-off, exercise, but
a dynamic process that must be
maintained appropriate to the risk
ICAAP
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Pillar 1
Credit Risk
Operational Risk
Market Risk
Pillar 2
Supervisory Review
“Other Risk”
Pillar 3
Market Discipline
“Disclosures &
Reporting”
ICAAP
SREP
11. TheArtof the Possible
• Executive Summary
• Background
• Summary of Current and Projected Financial and Capital
Positions
• Capital Adequacy
• Key Sensitivities and Future Scenarios
• Aggregation and Diversification
• Challenge & Adoption of the ICAAP
• Use of the ICAAP within the Firm
ICAAP Structure
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12. TheArtof the Possible
• Risk Identification
– It is the bank’s responsibility to identify all material risks that it faces
– Bank should put in place an automated process at a pre-determined
frequency to identify risk
– Technical solutions are available to capture, process and present
analysis to senior management to monitor risk on an on-going basis
• Materiality Assessment of Risks
– Probability categorisation (e.g. Immaterial, Low, Medium, High, Very
High) is a challenging task
– Technical solutions are available to evaluate risk materiality using
multiple and complex criteria
ICAAP Challenges & Solutions
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13. TheArtof the Possible
• Risk Quantification
– The quantification of risk is more challenging that the materiality
– Common, but inefficient, process is to retain an unquantified “cushion”
– Many complex and varied models available to determine risk
– There is no “one size fits all”
– Again, technology can be a great assistance, but must be
complemented by effective strategy and business processes
• Reporting & Monitoring Process
– Workflow and reporting technologies based on industry standards (e.g.
BPEL) can be employed to great effect if source systems are integrated
ICAAP Challenges & Solutions
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14. TheArtof the Possible
• Reconciliation of ICAAP and Pillar 1
– Requirement to compute economic capital and reconcile against
regulatory capital requirements
– Often a diversity in evaluation processes that must be identified and
the differences attributed appropriately
• Stress Testing
– Requirement to develop a framework to assess risk for extreme, but
plausible, scenarios
– Vendor solutions allow banks to define, execute and report complex
scenarios
ICAAP Challenges & Solutions
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15. TheArtof the Possible
• Summary
– ICAAP requirements require an holistic approach to a complex problem
– A contiguous source of information is critical as a basis for analysis. This
may start from multiple sources:
• Fund Management
• Transactional
• Core accounting platform
– All reporting must be traceable (drill down) to source
– Business strategy and processes must be in concert with the technology
ICAAP Challenges & Solutions
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16. TheArtof the Possible
• 360° Approach
– Oracle eBusiness offers an excellent product suite specifically designed for Basel II
and ICAAP that includes
• Oracle Reveleus ICAAP Analytics
• Oracle Reveleus ICAAP Assessments
• Oracle Reveleus Market Risk
• Oracle Reveleus Economic Capital Advanced
• Oracle Reveleus Operational Risk Economic Capital
• Oracle Reveleus Asset Liability Management
• Oracle Reveleus Enterprise Risk Infrastructure
– Business Processes must reflect Strategy and meet both business and compliance
needs
– Implementation, Adoption & Evolution require effective Change Management
XO and Oracle
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17. TheArtof the Possible
A 360° challenge needs a
360° Solution
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•Oracle eBusiness
Financials Suite
•Custom Apps
•Feeder System
Integration
•Basel II Pillar 3
•Internal MIS/BI
•Risk Strategy
•Risk Identification
•Business Processes
•Basel II Pillar 1
•ICAAP / Pillar 2
•Internal Audit
•External Audit
Compliance Processes
Technology
Disclosure
& Reporting
18. TheArtof the Possible
• Consultancy
– Experienced Risk Managers that provide Basel II and ICAAP Review/Evaluation
– Risk Strategy definition
– Business Process Reengineers to (re)define Basel II & ICAAP business processes
• Technology
– XO have a long and enviable track record in implementing integrated solutions
based on an Oracle eBusiness core
• Change Management
– Project, Programme and Managers are the core of our business
– Our training programmes are designed to be end-to-end incorporating
technology & processes
XO 360° Coverage
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19. TheArtof the Possible
Contact Details
Nigel Webb
XO Consultants Ltd
18 Hanover Sq
London
W1S 1HX
T: 0870 766 9001
F: 0870 766 9002
nigel.webb@xocl.net
www.xocl.net
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