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DSS News
D. J. Power, Editor
July 18, 2004 -- Vol. 5, No. 15
A Bi-Weekly Publication of DSSResources.COM
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Check the interview with Shaku Atre "What is
Business Intelligence?" at DSSResources.COM
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Featured:
* Ask Dan! - How can DSS help implement Basel II?
* What's New at DSSResources.COM
* DSS News Releases
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How can DSS help implement Basel II?
by Dan Power
Unless you work for a financial institution, or a DSS vendor or an IS/T
consulting firm this question may not be directly relevant to you, but
this Ask Dan! question is important. The presumption of bankers and bank
regulators is that appropriate deployment of computerized decision
support systems CAN help implement Basel II and that DSS and Information
Technologies SHOULD be used to help implement Basel II. The major
challenge and issue facing bank executives is how to do this! Design,
development and implementation of relevant risk management DSS is an
important topic because it has been estimated that some large banks may
spend USD $100 million or more over the next five years trying to change
processes and implement information systems to comply with Basel II
requirements.
So what is Basel II?
Briefly, Basel II is a global capital regulatory accord that has and is
being developed by the Basel Committee on Banking Supervision in Basel,
Switzerland. On June 26, 2004, central bank governors and the heads of
bank supervisory authorities from the Group of Ten (G10) countries
endorsed the publication of a revised framework for bank capital
measurement and capital standards. This new framework has been under
development for many years and some banks have been making changes in
technologies and processes in anticipation of them. All of the
procedures and details are still however not developed. This new
capital adequacy framework is commonly known as Basel II and it will
replace the 1988 Basel I standards for major banks.
The overriding goal of Basel II is to insure the stability of the global
banking system. The primary focus is on managing the risk associated
with bank lending activities. Because some loans are riskier than others
(i.e. the chance of default differs), the reasoning of regulators is
that banks should adjust their capital reserves to reflect the risk in
their loan portfolios. Basel II specifies guidelines for managing
credit, market and operational risk. Credit risk focuses on the
characteristics of the borrower, market risk focuses on the external
capital market and operational risk focuses on the processes and
procedures of the lender. The framework is tied to 3 pillars for
achieving regulatory compliance: capital reserves, supervision and
disclosure. In general, Basel II requires banks to measure, monitor,
mitigate and disclose risk. Basel II is primarily focused on adjusting
capital requirements based upon measuring and managing credit and
operational risk. But according to Gartner, banks will still need to
address risks involving technology, market forces, liquidity and capital
allocation.
Why is Basel II important? In general, I think the Basel II accord is
important because of the increasingly global nature of banking and
lending activities, because of the sheer magnitude of the regulatory
effort involved, and because the accord is breaking new ground by
focusing upon operational risk. What does the accord mean for banks?
Initially only the very largest banks in the world will need to comply
with Basel II including the 10 largest US banks. The carrot that has
been held out to these banks is that if their risk management, lending
practices and business processes result in a conservative risk exposure
for the bank, then the bank's capital requirements would be lowered. So
if a bank's managers can demonstrate to regulators that processes,
procedures and systems are in place to insure stable, low risk lending
activities, then the bank will not need to keep as much capital (money)
in reserve. Instead of today's 8% requirement for reserves, a bank
might only be required to maintain a 7.5% reserve. That might not seem
important or significant, but for a large loan portfolio that bank may
be able to lend millions of dollars that it can not lend now, hence
improving bank profits. Basel II can potentially improve the stability
and profitability of the global banking system. Also, Basel II is an
enormous business opportunity for DSS and Information Technology
software vendors.
What is the role of DSS/IT? The working presumption is that information
technology is the only way to help loan officers make appropriate credit
risk decisions, that IT can help reduce operational risk and that IT is
absolutely essentially to meet the reporting requirements of Basel II.
Some constraints on using IT to implement Basel II include data
collection, data quality and data integration problems, data storage and
access issues, decision support application design and development and
infrastructure and related technology issues.
For the past few years, I have been tracking the development of the
Basel II accord. Growing up in America, I had learned to pronounce Basel
as "bay sul". One of the first adjustments I had to make while
following this topic was to call Basel -- "baa suhl." I still hesitate
occasionally and need to remember that Basel rhymes with the sound sheep
make when they are happy! Baa! Baa! Recently, I learned that some
consultants promoting Basel II solutions refer to the accord as "Baa"
II. By whatever pronunciation, "Baa" II is a complex, ambitious global
regulatory initiative. Bank managers face the prospect of spending
millions of dollars on initiatives to achieve compliance. If the
initiatives do not reduce risk appropriately, capital requirements might
actually increase and hence profits would be reduced. Getting the DSS
technology, processes and training correct is important so Basel II is a
"win-win" proposition for the banks that implement the accord.
Providing decision support will require additional data gathering, some
integration of data from diverse transaction systems, some redesign of
business processes, and development and implementation of multiple DSS.
Quantitative and qualitative data relevant to operational risk will need
to be collected. Middle and senior-level managers will need decision
support for monitoring risk scorecards and other metrics. More than
likely a major bank will need a sophisticated data-driven DSS based upon
a data warehouse to provide business intelligence about operations and
to meet reporting requirements. A computerized system for providing
lending officers with credit risk scores and other risk data about
borrowers will need to be expanded and enhanced in many banks. Some
banks will want to develop document-driven and even knowledge-driven DSS
as part of improved lending work flow processes. A variety of
model-driven DSS will be needed to support lending decisions, credit
allocation decisions, risk management assessments and risk forecasts.
The major challenge will be creating some integration among all of the
systems that can be deployed. Integrating decision support systems
across the various levels of decision makers and across the interrelated
business and decision processes will be challenging. Given the time
constraints and cognitive complexity of understanding and meeting the
new requirements it seems likely that overlapping, incompatible and
needlessly redundant systems will be deployed in some banks and that
gaps will exist in the systems deployed in other banks. The challenge
for many banking executives is avoiding "ready made" solutions from a
vendor that meet only part of the regulatory compliance need and that
then fail to integrate with solutions from other vendors. Decision
support for Basel II compliance is hindered by both information
procurement problems and data integration problems.
What do the DSS/IT vendors say about Basel II?
Sungard (sungard.com) argues "The new Basel Capital Accord gives banks
the opportunity to reduce their economic and regulatory capital through
efficient data management and reporting. Basel II also provides a unique
opportunity for banks to modernize and upgrade their risk practices,
policies and technology so that they can manage their credit, market and
operational risk in a holistic fashion. Based on The SunGard Basel II
Capital Manager, SunGard offers a complete Basel II solution covering
capital calculation and reporting, data consolidation, credit risk and
operational risk." SunGard markets both Credient and BankWare.
According to the accenture.com website, Accenture "has formed
relationships with key software providers across credit risk,
operational risk, risk analytics, data management, reporting and finance
capabilities and can help you navigate the vendor landscape and select
the right tools for your organization." Accenture claims it has a Basel
II Diagnostic Tool that "helps banks quickly assess the requirements and
challenges presented by the Basel II Accord." The tool highlights the
key Basel II requirements and their impact on the bank; classifies a
bank's current and target capabilities in the required Basel II areas;
identifies a bank's gaps in operational and credit processes created by
Basel II requirements; and enables the development of prioritized action
plans for achieving Basel II compliance.
IBM's Business Intelligence solutions group is "preparing templates that
will help Basel II-affected companies respond to the regulation's
requirements." Informatica and IBM are offering a solution to help
financial companies address the information management challenges of
Basel II. The solution includes Informatica’s PowerCenter,
PowerExchange, PowerAnalyzer, and SuperGlue - and IBM’s Banking Data
Warehouse (BDW). Accenture worked with IBM, Informatica and Business
Objects to help Dresdner Bank AG’s Information Technology unit for
Credit and Risk Systems build a data warehouse to improve decision
support and internal auditing.
Experian-Scorex (experian.com) offers a complete, flexible retail
banking solution for institutions complying with the New Basel Capital
Accord (Basel II) Advanced Internal Ratings Based (A-IRB) approach.
"Experian-Scorex's market leading decision support software, Strategy
Management, stores the data needed to support Basel II implementation
and to provide the basis for ongoing monitoring and validation."
Fair Isaac (fairisaac.com) advertises that it "can help turn compliance
into competitiveness". Fair Isaac's website states "Basel II aims to
reward the adoption and use of best-practice risk management as a means
of compliance. Lenders that take a more effective approach to assessing
risk by improving credit risk management processes for estimating risk
exposure - and integrating this knowledge into decision-making processes
- are expected to reap the rewards of reduced capital reserves. By
lowering their capital requirements, these lenders will have more
capital available for investment. By contrast, lenders with higher risk
portfolios or with inadequate risk management preparation could be faced
with increased reserve requirements, and decreased competitiveness."
SeE Consulting (seeconsulting.com) argues "Traditional approaches to
managing credit risk deliver neither the insight nor the agility
demanded by emerging complex credit environments. The challenges to
match information content, detail, format, mode, and periodicity to
decision support needs and knowledge of potential users is what makes a
complete risk calculation model in the modern era more complex."
Additional vendors that are promoting their Basel II compliance
solutions include FNX Sierra global system, HSBC, Norkom, SAS, Standard
& Poor's, Summit System, Teradata, webMethods, and Wipro Technologies.
Some other IT consulting firms that are active with Basel II solutions
and systems development and integration include Accenture, Ernst &
Young, KPMG, Deloitte, and Paragon Consulting.
Challenges associated with building DSS to help with Basel II compliance
include building operational loss databases, data integration,
collecting new data to calculate probability of default, exposure at
default and the amount of loss given default, delivering data and
analytics for real-time lending decision support and monitoring, and
developing audit trails associated with the "risk informed" decision
making and enhanced lending decision processes.
Many "hard issues" remain controversial including how to incorporate
Basel II requirements into the corporate governance framework. "Baa" II
is about much more than decision support and information technology
(although those issues are mission critical to compliance and
conceptually challenging). "Baa" II is about risk management and risk
mitigation. "Baa" II may be another Y2K like project for banks -- high
cost, complex, high time pressure. So will Basel II be the IT challenge
of the decade in banks? YES! Will Basel II affect competition among
banks? YES! The banks that get it right will grow, expand and be more
profitable.
What is the current status for implementing DSS to meet the
requirements? According to a survey by Mercer Oliver Wyman, only about
one-third (31%) of banks have developed advanced modeling programs for
quantifying operational risks and allocating capital. More than one-half
(57%) of respondents identified Key Risk Indicators (KRIs) as a critical
area for improvement. My guess is that bankers are being overly
optimistic about their actual and needed implementation of computerized
decision support.
What is the timetable for compliance? The implementation schedule seems
to creep or slip forward in time, but as of June 26, 2004 the "Basel
Committee intends for the new framework to be available for
implementation in member jurisdictions as of year-end 2006. The most
advanced approaches to risk measurement will be available for
implementation as of year-end 2007, in order to allow banks and
supervisors to benefit from an additional year of impact analysis or
parallel capital calculations under the existing and new rules."
What should bank executives do to implement effective DSS and help
insure compliance with Basel II? Start with an audit of the bank's
lending decision process, model the current portfolio and assess the
possibilities for lowering capital requirements, develop and prioritize
DSS/IT projects, allocate resources to projects, find partners and
evaluate proposed solutions.
As always your feedback and questions are welcomed.
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References
What is operational risk?
http://www.frbsf.org/publications/economics/letter/2002/el2002-02.pdf
Basel II: A Worldwide Challenge for the Banking Business, KPMG white
paper, http://www.kpmg.ca/en/industries/fs/banking/baselII.html
Bardoloi, S., "Basel II: New Wine in an Old Bottle", DMReview,
September 2003,
http://www.dmreview.com/editorial/dmreview/print_action.cfm?articleId=7359
Connelley, M., "Ensuring Success in Basel II",
http://www.sas.com/news/sascom/2003q2/column_guest.html
IBM, "Dresdner Bank addresses regulations, internal demands and future
growth with IBM solution",
http://www-306.ibm.com/software/success/cssdb.nsf/CS/
TKNC-5Q4TRX?OpenDocument&Site=default
Lawrence, M., "Marking the cards at ANZ", Risk Magazine, Nov. 2000,
http://www.financewise.com/public/edit/riskm/oprisk/opr-case00.htm
World Bank Basel II Links, Speeches, and Background Readings
http://www.worldbank.org/wbi/banking/bankingsystems/risk2004/readings.html
Relevant recent press releases at DSSResources.COM
07/15/2004 Research and Markets: Basel II - a catalyst for a whole
redesign of the banking process.
06/30/2004 Teradata announces Basel II and risk-management enhancements
in latest Teradata Financial Services logical data model.
06/26/2004 G10 central bank governors and heads of supervision endorse
the publication of the revised capital framework.
06/07/2004 New Global Banking Survey by Mercer Oliver Wyman finds
industry making significant progress in operational risk management for
Basel II.
05/18/2004 BearingPoint's EPMOne(SM) Methodology Can Help Financial
Services Companies Manage Performance and Comply With Basel II Reporting
Guidelines.
05/17/2004 Experian launches Decision Insight commercial credit
decisioning tool.
05/11/2004 BearingPoint report cites the need for data convergence;
explains excessive spending on risk and compliance.
05/06/2004 Experian-Scorex and Standard & Poor's Risk Solutions host
Basel II Accord seminar.
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Put your ad here! Reach more than 1000 specialists
interested in DSS Email power@dssresources.com for details
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What's New at DSSResources.COM
07/09/2004 Posted interview with Shaku Atre "What is Business
Intelligence?" conducted by Tony Shaw. Check the interviews page.
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DSS News - July 3 to July 16, 2004
Read them at DSSResources.COM and search the DSS News Archive
07/16/2004 Tim Berners-Lee, inventor of the World Wide Web, knighted by
Her Majesty Queen Elizabeth II.
07/16/2004 Infineon introduces new security chip card controllers to
make electronic identity cards and passports even more secure.
07/16/2004 Knowledge management: managing intellectual assets helps
reduce costs.
07/15/2004 Best Buy expands relationship with Accenture.
07/15/2004 Intel validates Hyperion Financial Management performance and
scalability.
07/15/2004 Research and Markets: Basel II - a catalyst for a whole
redesign of the banking process.
07/15/2004 Primus Knowledge Solutions announces the worldwide
availability of Primus KnowledgeCenter 6.0.
07/15/2004 Breaching the leadership skills gap: AchieveGlobal defines
how interpersonal skills support organizational success.
07/14/2004 Marines in Iraq find battlespace information faster with
content-based network from Semandex.
07/14/2004 Sales and operations planning programs drive competitive
advantage and business performance, says Aberdeen Group Report.
07/14/2004 eMason introduces IWorkS Image Workflow System; First
offering to integrate document management with business process
workflow.
07/14/2004 Most large companies see Sarbanes-Oxley compliance as part of
broader corporate governance initiative.
07/14/2004 IBM to acquire Alphablox Corporation, strengthens leadership
in business intelligence.
07/14/2004 Security is top concern for corporate networks, according to
global survey of senior executives.
07/13/2004 TIBCO Software unveils new business process management road
map.
07/13/2004 VisiRule: a new graphical business rules tool from LPA.
07/12/2004 Expert Choice unveils latest enterprise portfolio analysis
solutions.
07/12/2004 First Financial Planners standardizes on Information
Builders' WebFOCUS for enterprise business intelligence.
07/12/2004 Netspoke leverages Business Objects for business intelligence
deployment.
07/12/2004 Kalido and SAIC enter systems integrator agreement to meet
needs of global business intelligence market.
07/12/2004 National Bank & Trust chooses next-generation banking
technology from ITI unit of Fiserv.
07/12/2004 3M and HealthShare Technology to integrate software for
health care performance measurement, decision support.
07/12/2004 Groove Networks ships Groove Virtual Office v3.0 to
commercial enterprises worldwide.
07/09/2004 Teradata surveys show executives roll the dice when making
business decisions due to lack of integrated data foundation.
07/08/2004 Intergraph ships G/Technology version 9.2.
07/08/2004 Wonderware enhances ActiveFactory data analysis and reporting
software; upgraded to improve web-based reporting and support for
Wonderware Industrial Tablets.
07/08/2004 Business Objects recognized as the worldwide revenue leader
in business intelligence tools by leading industry analyst firm.
07/07/2004 Answerthink launches Sarbanes-Oxley compliance service
enabling companies to document internal controls and improve business
processes using proven best practices from The Hackett Group.
07/07/2004 Elior uses Business Objects to build a Business Intelligence
System in an SAP Environment.
07/07/2004 Will the real "iRobot" please stand up?
07/07/2004 Welcome to the new Web: bloglines unveils more features for
searching, subscribing, publishing and sharing news feeds and blogs.
07/06/2004 Air One selects Sabre Airline Solutions' SabreSonic New
Generation Passenger Suite for growth and operational excellence.
07/06/2004 Alphablox teams with Tangent Analytics to extend operational
analytics in BI Navigator 4.0.
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DSS News is copyrighted (c) 2004 by D. J. Power. Please send your
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