With the publication of the Basel II framework, The Banker asks Vijay Sharma, head of i-flex consulting, what banks should now be doing to prepare for the framework becoming statute.
After more than five years of painstaking effort to define a structure that improves the safety of the world’s banking system, the new Basel capital adequacy framework has finally been published. Despite concerns, it undoubtedly provides an excellent paradigm for risk management. With the ongoing debate, the Basel II initiative has gained significant momentum. The guiding principles of the framework are now clearly established: to match the capital that banks must hold more closely to the risks that they take. Q Regulators will transpose the framework into law within their regions and mandate what approach banks are required to comply with. Should banks continue to wait while regulators decide on the specific approach and details relating to computations? A The objective of better matching capital requirements to the risk taken certainly makes sense for all banks. What is important, though, is that the capital requirement should relate not only to the amount of risk the bank undertakes, but also to how well the risk is managed. Designing and implementing a framework to manage risks effectively need not wait for definition of country-specific guidelines. Best practices in this area are required to be implemented on an ongoing basis. Q Where do we start? A Basel II is not just another technology project. It is better viewed as a transformation process that spans across the organisation, having an impact on systems, data, processes, methods and the structure as a whole. Because of the nature and extent of change that Basel implies, a common strategy and centralised co-ordination become imperative. The most obvious place to start is to examine the availability, adequacy and quality of data, across application platforms, with respect to the reporting and analysis needs of credit and market risk. This is not a simple task, by any measure, because data typically resides in silos and in a form that is not easy to consolidate. Q What about operational risk? A Operational risk was left out of the 1988 Basel Accord and since then, two factors have contributed significantly towards increased scrutiny in this area. One is the exponential growth in the use of technology and the other is the increase in inter-linkages between financial market participants across the globe. However, operational risk management still remains at a nascent stage and the definition of data models should also be an initial focus area. A data warehouse that stores credit, market and operational risk measures, and that provides standardised and flexible data extraction, integration and transformation mechanisms, will provide a solid foundation for implementing an integrated enterprise-wide risk management solution. But there is much more to the Basel II programme, and establishing a data infrastructure and providing data management capabilities only make a sound beginning. Q How does a bank plan this significant transformation process? A An in-depth analysis is required to assess a bank’s preparedness against the Basel II framework. Based on the outcome of the study, banks would do well to prepare a detailed roadmap. Banks should also consider defining the overall architecture (including data, system and process architecture) for risk management. Implementing a Basel II compliance initiative is an extremely challenging task and will extend over years. While Basel II provides a basis for establishing immediate objectives, the larger goal for banks should be to achieve maturity in risk measurement and, ultimately, embed risk management into every activity of the bank. Fortunately, many banks already have ongoing projects that can be extended to include risk management. For instance, many banks have already been working on their information management architecture and establishing a business intelligence infrastructure by extracting data from databases across applications and geographies. Banks are also executing process improvement initiatives to integrate legacy platforms, and testing internal controls as part of other compliance initiatives driven by requirements such as the Sarbanes-Oxley Act. For such banks, the Basel II technology-related initiative could well be viewed as an extension of ongoing initiatives. For others, the time to start work on Basel II initiatives is now. A whole new world is waiting to be born.
