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Client Requirement
One of the most difficult aspects of implementing an international agreement is the need to accommodate different cultures, varying structural models, and the complexities of public policy and existing regulation. Banks’ senior management will determine corporate strategy, as well as the country in which to base a particular type of business, based in part on how Basel II is ultimately interpreted by various countries' legislatures and regulators. Basel II is the latest directive of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the different types of financial and operational risks. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. The Basel-II Accord aims at the following :

• Ensure that capital allocation is more risk sensitive.
• Separate operational risk from credit & market risk, and quantify them.
• Align economic and regulatory capital more closely to reduce the scope for regulatory Arbitrage.

The bank is a global leader in securities servicing for issuers, investors and financial intermediaries, playing an integral role in the infrastructure of capital markets. The bank is identified by the Federal Reserve as one of the 10 largest and most complex U.S. banks. The Client needed to meet the requirements of the Basel II Capital Accord, scheduled to go into effect by January 1, 2007 and decided to leverage its existing risk management platform for gathering and managing credit risk data. It needed a systems integrator with strong Basel II domain knowledge and technical knowhow of financial enterprise application and data warehousing skills, as well as practical Basel II and finance knowledge. In addition to these skills, Z&A also provided program management leadership to coordinate the work streams of the Basel II program. We were selected to conduct an assessment, implement the credit risk data warehouse and assist in the management of the Basel II program.

Solution Implemented
Z&A helped the bank establish a project governance structure, obtained executive-level support and created a Basel II project office. This structure helped the bank drive toward successful implementation of the credit risk data warehouse, and also met its other Basel II requirements. Z&A used a six-stage implementation “work breakdown structure” for the implementation phase of the project to identify risk areas within the credit risk data warehouse, gain user acceptance and obtain user feedback. Due to the complexity of the implementation, we divided the credit data warehouse project into four distinct implementation work streams, executed in parallel to meet critical deadlines. We developed functional and technical specifications and, using the development environment previously configured by the bank, built extract, transform and load maps along with integrated interfaces. In addition, we worked with the bank to establish a communication strategy and define the high-level test and training approach for the implementation.

Benefits

As a result of Z&A’s Regulatory Capital Solution Framework, the bank will be at the forefront of Basel II compliance. It will have the potential to impact U.S. regulatory interpretation of Basel II, shaping the demands of regulators and influencing credit and operational risk management standards. The bank can also leverage the credit risk data warehouse for other management reporting activities, since the database establishes consolidated data store for a majority of the bank’s financial information.

• Successful implementation of Basel-II to meet the supervisory compliance needs.
• Credit Risk Data Warehouse implementation and significant risk reduction.
• Allows for RAROC(Risk Adjusted Return on Capital) to the business data for regulatory Reporting.
• Centralized Regulatory Capital Calculation system enables more advanced and sophisticated way of managing the credit risk and setting aside capital required for the regulatory purposes.
• Regulatory Compliance System increased the productive efficiency and better risk management.
• Underlying risk models integration enabled better manage the default and loss arising out of default and exposure amount to better manage collateral.
• Credit Risk being the largest risk, the solution implemented enabled enterprise wide to quantify the correct risk data.

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