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Basel II, ICAAP, Oracle, XO and You

Basel II, ICAAP, Oracle, XO and You. Nigel Webb Director Consultancy (Risk Management & Treasury). Executive Summary. 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

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Basel II, ICAAP, Oracle, XO and You

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  1. Basel II, ICAAP, Oracle,XO and You Nigel Webb Director Consultancy (Risk Management & Treasury) xocl.net

  2. Executive Summary • 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 xocl.net

  3. Basel II • Basel II Accord introduced in June 2004 to improve risk management within banks • Basel II has 3 Pillars • Regulatory Capital Requirements (Credit, Operation & Market Risk) • Economic Capital Requirements - Supervisory Review inc. Internal Capital Adequacy Assessment Process - ICAAP • Market Discipline xocl.net

  4. Basel II (contd.) • 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 xocl.net

  5. Basel II - Pillar 1 • 3 types of risk considered • Limited models available for risk assessment • Regulation requires specific allocation of capital reserves against quantified risk xocl.net

  6. Basel II – Pillar 2 Pillar 2 is intended to identify and allocate capital against all risks not previously considered within Pillar 1 xocl.net

  7. Basel II – Pillar 2 (contd.) • 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 xocl.net

  8. Basel II – Pillar 3 • 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 xocl.net

  9. ICAAP • 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 SREP xocl.net

  10. ICAAP xocl.net

  11. ICAAP Structure • 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 xocl.net

  12. ICAAP Challenges & Solutions • 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 xocl.net

  13. ICAAP Challenges & Solutions • 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 xocl.net

  14. ICAAP Challenges & Solutions • 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 xocl.net

  15. ICAAP Challenges & Solutions • 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 xocl.net

  16. XO and Oracle • 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 xocl.net

  17. A 360° challenge needs a 360° Solution xocl.net

  18. XO 360° Coverage • 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 xocl.net

  19. 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 xocl.net

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