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Leveraging XBRL for Basel II. Daniel D’Amico, IBM Business Consulting Services, UK. Agenda. Basel II background Basel II is an opportunity The data management challenge XBRL and Basel II. A couple of quotes.

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Leveraging xbrl for basel ii l.jpg

Leveraging XBRL for Basel II

Daniel D’Amico, IBM Business Consulting Services, UK


Agenda l.jpg
Agenda

  • Basel II background

  • Basel II is an opportunity

  • The data management challenge

  • XBRL and Basel II


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A couple of quotes

  • “Regulators and customers are demanding greater focus on risk management. …This call for transparency will challenge traditional business practices and will require more auditable processes throughout the business” Morgan Stanley analyst (on market timing), FT 11/03

  • “US regulators expect Basel II will apply to a total of around 20 large US banks. All US banks operating under Basel II will be obliged to use only the most advanced Basel II approaches for assessing banking risks, which means the IRB approaches in the case of credit risk.” Global Risk Regulator 10/03


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NewAccord

Full force

CP 3

Parallel runBasel I + II

Integrate into

National law

EU directive

PreparationNew Accord

Consultationphase

EvaluationQIS 3

QIS 3

Oct 02

Dec 02

July 03

Nov 03

Jan 06

Dec 06

May 03

Basel II Background

What is

Basel II Accord?

The publication of the Basel II Accord will mark the end of long process that will have effectively re-written the rules of banking. Basel II will affect the conduct of monetary policy and the stability of financial institutions all over the world

What is it

trying to achieve?

  • To promote safety and soundness in the financial system

  • To align regulatory capital requirements more closely with underlying risks

  • To offer incentives for institutions to pursue more sophisticated & effective risk management

When does it happen?

Commercial imperative

  • Basel II will significantly impact FS institutions and the change is such that preparation needs to begin now to ensure readiness for a parallel run starting 1st Jan 2006

  • Key strategic decisions need to be taken now on the approach to be taken and the benefit that should be achieved over and above compliance


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Basel II is an Opportunity – not just a Mandate

Basel II Opportunities:

  • Improve shareholder value

  • Economic capital savings

  • Improve/maintain credit rating

  • Improve risk management strategy

  • Alignment of Risk & Finance

  • Cost reduction through organizational process improvement

  • Identify potentially dangerous portfolio positions and other risk sources

Basel II

Pillar 1:

Pillar 2:

Pillar 3:

  • Minimum Capital requirements

  • Supervisory Review Process

Market Discipline

Calculation and

Management of:

  • Credit Risk

  • Operational Risk

  • Market Risk

  • Ensure sound processes

  • Ensure adequate capital at all times

  • Ensure motivation improving risk management practices

  • Quantitative

    and qualitative

    disclosure of

    undertaken risks

    and risk

    methodologies

Basel II Challenges:

  • Setting up Basel II program

  • Data management

  • Systems management

  • Establishing Risk Framework

Data Foundation


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Key challenges – Systems & Data Management

10 Common signs of unstable data foundation

Data Management is the key challenge in meeting Basel II

  • Inability to gather data for new reporting requirements.

  • Difficulty complying with regulatory requirements like Basel II Accord

  • Senior management questions quality, timeliness, reliability of information used to make multi-million dollar decisions

  • Inability to consolidate data from multiple diverse sources

  • Senior Management requests for information require intensive manual effort to respond, and far longer than desired.

  • Difficulty in building a single architecture to address both data consolidation and data aggregation requirements.

  • Multiple databases or spreadsheets storing similar data; no common data “dictionary” across the enterprise

  • No ownership of data

  • There’s no single enterprise view of data

  • Difficulty answering questions about the origins and business processes performed against data

Source: IBM Institute for Business Value analysis, Banks and Basel II: How Prepared Are They?, October 2002

interviews with 32 Financial institutions worldwide


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Cross Modelling Solution

Common definition of LGD, PD, EAD

Common customer identifier

A complex International banking group

Group

Private Banking and Asset Management

Wholesale Banking

Corporate

Personal Finance

Credit Cards

Asia Pacific

Discretionary Portfolio Management

Fixed Income, Equity and derivatives

UK retail

North America

Japan

Singapore

Hong Kong


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Basel II Credit

Risk Engine

Data Warehouse

Basel II Market

Risk Engine

Extraction,

Validation

Basel II Op.

Risk Engine

Non-Basel II

Risk Engines

Transformation

Enterprise

Extraction

Data store

& calculation

IBM’s Basel II Architecture

External Audience

Loss Data

Result

Data

Disclosure

Customer

Result

Data

Regulatory

Collaterals

Result

Data

Group

Credit

Result

Data

Management Data

Core Banking

Products

Rating, PD, LGD,

CCF Models

Internal Audience

Data Marts

Reporting

Data source

Metadata

Warehouse Administration


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Basel II Credit

Risk Engine

Data Warehouse

Basel II Market

Risk Engine

Extraction,

Validation

Basel II Op.

Risk Engine

Non-Basel II

Risk Engines

Transformation

Enterprise

Extraction

Data store

& calculation

Where does XBRL fit?

1

XBRL

2

XBRL

External Audience

Loss Data

Result

Data

Disclosure

Customer

Result

Data

Regulatory

Collaterals

Result

Data

Group

Credit

Result

Data

Management Data

Core Banking

Products

Rating, PD, LGD,

CCF Models

Internal Audience

Data Marts

Reporting

Data source

Metadata

XBRL

3

Warehouse Administration


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XBRL for Basel II analytics

  • Many Analytics requirements

  • Credit Risk Profile

  • Credit Risk Assessment

  • Credit Risk Mitigation Assessment

  • Operational Risk Assessment

  • Portfolio Credit Exposure

  • Security Analysis

  • Liquidity Risk

  • Collections Analysis

  • Involved Party Exposure

  • Location Exposure

  • Non Performing Loan

  • Aggregate data for analytics

    • Multiple Sources

    • Different periods

    • Different rules


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XBRL for Basel II reporting

  • Many reporting requirements

  • External

    • Disclosures

    • Regulatory

  • Internal

    • Group

    • Subsidiary

    • Management reporting

  • Integration with other reporting requirements

    • IAS

  • Aggregate data for reporting

    • Multiple Sources

    • Different periods

    • Different rules


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Common definition using XBRL

  • Definition of Internal Basel II taxonomies:

  • Define an organizational metadata layer

  • Traceability back to transactions

  • Common repository for changes and updates to requirements

  • Enhance group ability to consolidate data

  • Improve data quality

Basel II is an opportunity for banks to force its subsidiaries and business units into following a common understanding of data, driving common standards into the organisation . XBRL can be THE standard


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How is XBRL solving some of the data management issues?

  • Inability to gather data for new reporting requirements.

  • Difficulty complying with regulatory requirements like Basel II Accord

  • Senior management questions quality, timeliness, reliability of information used to make multi-million dollar decisions

  • Inability to consolidate data from multiple diverse sources

  • Senior Management requests for information require intensive manual effort to respond, and far longer than desired.

  • Difficulty in building a single architecture to address both data consolidation and data aggregation requirements.

  • Multiple databases or spreadsheets storing similar data; no common data “dictionary” across the enterprise

  • No ownership of data

  • There’s no single enterprise view of data

  • Difficulty answering questions about the origins and business processes performed against data

XBRL for Basel II Analytics

XBRL for Basel II reporting

Common definitions using XBRL


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Leveraging XBRL for Basel II

Daniel D’Amico, London UK

IBM BSC, Financial Services Sector,

Risk and Compliance

[email protected]


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