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Compliance or Strategic?? March 23, 2007

Posted by riskopedia in Basel II, Model, Of interest, Regulator, Retail Risk, Risk Management, Uncategorized.
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It is not that far away to the date of Basel II implementation. Most banks would be on their final hurdle, well, at least for Pillar 1.

Up until now, firms who were planned to be beyond standardized, have spent millions. With lot of projects start winding up. One question has floated to the surface, which somehow, did not have a clear answer back then.

The question is, with all this cost and fuzz, along with the regulator caps the capital savings at least in the starting few years, is this all worth it in the end? The compelling discussion is around, was this a compliance or strategic project? Now, obviously the starting was compliance, if the regulator insisted banks to achieve AIRB. Then, it was also strategic, so you are not the only firm who got left behind.

If firm was leaning more to the compliance side, they would not have realised the full benefit of Basel, apart from regulatory capital savings, better pricing and better CRM. However, there would probably be no tactical planning or resources for on-going business as usual activities. Furthermore, the AIRB models themselves would most likely not as sophiscated as if other firms took on Basel as a strategic move.

Hence, just a little survey, so we could understand how Basel is being treated from region to region.

Question: From your point of view, does your firm try to achieve Basel as compliance, or, strategic? If it is compliance, how you think the firm would have done differently if going for strategic (vice versa)?

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Comments»

1. Gerald Deutsch - April 11, 2007

Let me start with a statement that I don’t think that this semantics compliance vs strategic plays that much of a role, at least not for the major players in the field which typical opt for AIRB. Strategic in this context is supposed to be what? I’l offer a few, explain and then will try to anwer your question frommy point of view.Ok,her we go:

1:) Is startegic meant in a way that the bank would not only use AIRB to csalculate RWA charges and derive regulatory capital from that but uses Basel II figures to steer the enterprise?

If so, consider again. Would implicate that the institute used Basel I for that purposes before. Fat chance 🙂 In fact all major European banks I know (among those ABN Amro, Deutsche Bank, Credit Suisse) arrive at the actual risk figures via EC charges of their internal portfolio models. Deutsch Bank has afaik a home breed using Monte Carlo simulations where as CS relies on ther CSFB developed model Credit Risk Plus, or more likely a slight extension theroof leveraqing the fact that they do not to simualte, Credit Risk Plus arrives at the loss distribtion via analytic solutions. So we currently have economic capital and regulatory capital

Is strategic meant to refer to the banks data warehouses? If so,this really is a valid and often overlooked point. Basel II presented unique chances for those having various legacy data buckets and terming them DWHs, aka all, to consolidate, cetralize, implement qulity assurance and so on. Those who did,wiill say immediate payoffs and this investment will continue to pay of when Basel III (regulators accept internal models not only formatrket but also for credit risk) starts coming around. Added tranparency, more and more to the point information, you name it.

Consider one last point. Although Pillar 1is not concerned with EC, Pillar 2 is. And apart from that, what sort of input parameters does i.e. Credit Risk Plus expect. You can look it up for nfree on the Credit Suisse First Boston website but if memory serves me correctly then ther is for one ‘a probaility measure for company or an asset to default within a 1 year horizon. Some conversion factors to turn offbalancxe sheet transactions undrawn facility parts into exposure equivalents. Oh and they metioned a loss given default, although that one wasw a Bernouilli type random number, I think).Synergies should be clear.

Anaywayx mail me, if you like – I’m always very happy to discuss stuff like that and always eager to learn.

share what you know, learn whzat you don’t

2. riskopedia - April 11, 2007

Thanks for your input, its good to hear how Basel II likes at the other side of the world.

To answer your first point around the use of AIRB estimates as part of the strategic direction. You are correct in the point where banks / financial instituation would of have RC and EC as part of their performance monitoring. What I was referring to is whether Banks / Financial instituation would have already used these type estimates (PD, LGD and EAD) or similar to drill down right to the bottom (prior of pillar II). For example, a marketing campaign has been developed, would marketing considered the risk profiles of the targets using PD,LGD and EAD estimates (I know some banks used Scoring at the moment), as well as evaluating return of capital etc.
Also, if there is a shift of EC or RC, prior of Basel II, would they be able to drill down to the cause of the shift (may be due to change in operation process, acquistion strategy, marketing campaign etc.)

For your second point, totally agree with you, if the data warehouse is only designed for compliance sake, less likely (from my experience) to have the warehouse designed to the direction of a Business intelligence framework, instead, become more a data storage.

By assumping you have experience in Europe, what do you think the immediate impact of Basel II to Europe banks, from analytics point of view? (i.e. would they do anything different from before?)


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