Basel II Compliance&

Credit Risk- Functional and Solution

Overview

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Overview TopicsOverview Topics

4. TCS Risk Management Assets4. TCS Risk Management Assets

3.TCS Basel II Offerings3.TCS Basel II Offerings

1. Introduction to Basel II1. Introduction to Basel II

2. Credit Risk Management Overview- Approaches, Processing steps- Architecture, bBIDS support

2. Credit Risk Management Overview- Approaches, Processing steps- Architecture, bBIDS support

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Basel II - BackgroundBasel II - Background

• First Basel guidelines - 1988

• Amended for Market Risk – 1996

• Destabilizing events in International Financial Markets

– Collapse of East Asian economies

– Barings Bank, Sumitomo Capital, Enron, Mannesmann

• Need for holistic Business Risk Mgmt. especially for

internationally active banks

• Need for better risk cushion, disclosure and monitoring

mechanism

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Basel II - OverviewBasel II - Overview

• Guidelines added for Market and Operational Risk

• Option of using Internal Risk Assessment

• Standardization of supervisory and disclosure norms

Capital ChargeMarket Risk(VAR, Stress)Credit Risk(Std, IRB )Operational Risk(Std, IRB )

Risk Monitoring/Rprtg. Regulatory (std, IRB) Or internal model

SupervisoryProcess(Integrated fully auditedprocess fromData Collectionto reporting)

MarketDiscipline& Disclosure-Qualitative& QuantitativeDisclosure

Regulatory Rules & Reporting

Enterprise Data Management

Pillar 1 Pillar 2 Pillar 3

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Basel II – Scope of ApplicationBasel II – Scope of Application

(1) Basel II accord is to be at this level on a consolidated basis, i.e. up to holding company level

(2), (3), (4): Basel II accord is also applied to all internationally active banks on a stand-alone basis

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Basel II - Architecture ApproachBasel II - Architecture Approach

Centralised vs. de-centralised approach

– Defining Basel II systems & data architecture design

• Key issue - the degree of centralised or de-centralised approach• A high level of consistency and integration will be needed for both

Reported data

Calculated data

Transformed data: PD,

LGD, EAD, EI, PE, LGE

Source data

Group level

Business unit level

Operational Data Store (ODS)

Reporting Applications

Extraction

Data Sources

Extraction, Conversion, Mapping, Cleansing, Transfer

Operational Data Store (ODS)

Data Store

Market data Disclosure

Basel IIRisk Calculators

Basel II Data Mart

Credit Risk

Operational Risk

Market Risk

Management data Analysis

Collateralsystem

Paymentdata

Creditrating

Valuation data

Loss data

Centralised approach

Decentralised approach

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Business Risks

Credit Risk Default Risk / Counterparty Risk Portfolio Risk

− Intrinsic Risk− Concentration Risk

Market Risk Interest Rate Risk Exchange Rate Risk Capital market Risk Commodity Risk Liquidity Risk

Operational Risk Internal /External Fraud Employ. Practices & safety Clients, Prod & Biz Practices Physical damage to Assets Business disruption & Systems Failure Execution, Delivery & Process Management

Type of Risks in BFSType of Risks in BFS

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Basel II - Regulatory Capital Basel II - Regulatory Capital

Eligible capital = Tier 1 + Tier 2+ Tire IIITier 1: Shareholders’ equity + disclosed reserves/ retained earningsTier 2: Supplementary capital (e.g. undisclosed reserves, provisions)Tier 3: Short Term Sub-ordinate Debt (Only for Market Risk)

Total Capital

Market RiskThe risk of losses in trading positions when prices move adverselyForeign Exchange and Commodities open positions

Credit Risk The risk of loss arising from default by a creditor or counterparty

Operational RiskThe risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

Total capital

Credit risk + Market risk + Operational risk= Bank’s capital ratio (minimum 8%)

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Overview TopicsOverview Topics

4. TCS Risk Management Assets4. TCS Risk Management Assets

3.TCS Basel II Offerings3.TCS Basel II Offerings

1. Introduction to Basel II1. Introduction to Basel II

2. Credit Risk Management Overview- Approaches, Processing steps- Architecture, bBIDS support

2. Credit Risk Management Overview- Approaches, Processing steps- Architecture, bBIDS support

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Credit Risk ManagementCredit Risk Management

Approaches• Standardized• Internal Rating Based

− Foundation− Advanced

Data Requirements• Customer Information, Rating / Scores, Categories• Products, Risk Weights, Categories, A/Cs, Securitization• Exposure / Facility & their Categories, Exposure Rating• Default, Overdue Amounts, Settlement• Adjustments – Collateral, Guaranties, Haircuts, Maturities• Reference – Basel parameters, Currency / Rates, Org Str.

Terminology• PD, LGD, EAD• RWA, K, EL• CCF, Security

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CRM – Comparison of ApproachesCRM – Comparison of Approaches

Standardised Internal ratings-based

Simple Approach

Estimation of risk variables (PD, LGD, EAD)

Collateral, guarantees, credit derivatives, netting

Comprehensive Approach

Foundation Level Advanced level

RW determined through ratings

Internal estimates

Determined by supervisor

Determined by supervisor

Determined by supervisor

No limitation

Approach

HaircutsDetermined by

supervisorDetermined by

supervisorInternally

determined

Basel I

RW prescribed for Asset Classes

Determined by supervisor

Determined by supervisor

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CRM – Basel II Processing StepsCRM – Basel II Processing Steps

• Standardized Approach– Obligor Categorization– Exposure categorization (Retail /Wholesale, Asset

Classification)– Exposure Computation (includes CCF application for NFB prod)– Security Recognition and Application of Adjustments– RWA & Regulatory Capital Calculation

• IRB Approach– Exposure categorization (Retail /Wholesale)– Segmentation of Exposures (for Retail)– Calculation / Recalc of Basic Risk Parameters, Adjustments

(PD, LGD, EAD), both Historical and Estimated

– Calculation of Advanced Risk Parameters(EL, K, RWA, RC)

– Post-Securitization Adjustments

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CRM – Logical Centralized Solution for HOCRM – Logical Centralized Solution for HOHigh-level Process Flow

Data GatheringData Gathering

Pre - ProcessingPre - Processing

Verification & Approval (Optional)

Verification & Approval (Optional)

Data TransmissionData Transmission

Distributed Processing

Central Processing

Data ConsolidationData Consolidation

Regulatory Capital Calculation

Regulatory Capital Calculation

Reporting & AnalysisReporting & Analysis

Logical ArchitectureCentral Components

Distributed Components

Reporting AnalysisReporting Analysis

Results RepositoryResults Repository

Calculation EngineCalculation Engine

Risk Data RepositoryRisk Data Repository

Consolidation ScriptsConsolidation Scripts

Staging AreaStaging Area

Data SourcesData Sources

Extract ScriptsExtract Scripts

Staging AreaStaging Area

ECTL JobsECTL Jobs Risk Data RepositoryRisk Data Repository

FTP / MediaFTP / Media

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CRM – Logical Host (Unit level) SolutionCRM – Logical Host (Unit level) SolutionHigh-level Process Flow

Logical Architecture

Data GatheringData Gathering

Pre - ProcessingPre - Processing

Verification & Approval (Optional)

Verification & Approval (Optional)

Unit level Reporting

Reporting & AnalysisReporting & Analysis

Regulatory Capital Calculation

Regulatory Capital Calculation

Unit level Components

Data SourcesData Sources

Extract ScriptsExtract Scripts

Staging AreaStaging Area

ECTL JobsECTL Jobs Risk Data RepositoryRisk Data Repository

Reports, AnalysisReports, Analysis

Calculation EngineCalculation Engine

Results RepositoryResults Repository

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Overview TopicsOverview Topics

4. TCS Risk Management Assets4. TCS Risk Management Assets

3.TCS Basel II Offerings3.TCS Basel II Offerings

1. Introduction to Basel II1. Introduction to Basel II

2. Risk Management Overview- Approaches, Processing steps- Architecture, bBIDS support

2. Risk Management Overview- Approaches, Processing steps- Architecture, bBIDS support

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Basel II Readiness Blueprint Solution Strategy & Planning Solution Requirements Anal Data Management Strategy Data Preparation Consulting Package evaluation Implementation Plan

End-to-end Risk Management Solution Implementation

Basel II Readiness Blueprint

Implementation & Support System Integration Solution Configuration Integration Testing IPR Support Stress & Back Testing Maintenance

TCS Basel II OfferingsTCS Basel II Offerings

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TCS Risk Management AssetsTCS Risk Management AssetsMarket Risk/ALMMarket Risk/ALM Credit RiskCredit Risk Operations RiskOperations Risk

ALM /Market Risk Framework

• Probability of Default Model for Corporate loans• Credit Appraisal & Monitoring Model• Process Model for Basel II Standardized Approach• IRB Framework for Retail Business Lines• Data Model Solution Template

Operational Risk Framework

Phase 1 Phase 2 Phase 3 Phase 4

B A S E L I I P R O J E C T M A N A G E M E N T

ORGANIZATION

PROCESSES

METHODS

DATA

SYSTEMS

ASSESS AND PLAN SOLUTION CONFIGURATIONUSE TEST

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Corporate Governance/Risk Management

Credit Risk

Operational Risk

Market and Other Risks

Capital Planning

Disclosure

Supervisory Review Process

MethodologyMethodology

AQ&Q U E S T I O N SQ U E S T I O N SA N S W E R SA N S W E R S