BASEL II & Reference Data

In the autumn of 2006, I was working on one of the assignments in State Street Corp, assigned by my employer Ebusinessware Inc. During those days I got a chance to work upon Basel II project. So, I am sharing my knowledge of Basel II & Reference Data.

Basel II :-

Basel Committee on Banking Supervision has come up with new comprehensive framework for Risk management .Basel II accord provides a comprehensive guideline for capturing risk, it allows banks and bank supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks.

Three pillars of the Basel II norms are:-

1. Minimum Capital Requirement: It focuses on the capital requirement with reference to credit risk, market risk and operational risk.
Credit risk: It is risk arising due to the default of borrower.
Market risk: Risk is arising due to the change in market condition.
Operational risk: Risk arising due to people, process and system, it is new addition in risk management system.
2. Supervisory review process: It provides different options for the bank for capturing risk. There are three different way of capturing the risk: Basic indicator approach, standardized indicator approach and Advanced approach. In basic approach.
Basic Approach: In this approach a fix percentage of capital is kept aside as minimum capital requirement
Standardized approach: In revenue, sources are divided into 8 business lines and weights are assigned as per business and then risk is calculated.
Advanced approach: In this approach, a bank has its internal rating board that assigns weights as per the bank appetite. It depends upon the bank as to which business would be assigned on the amount of weight.
3. Market Discipline requirement: It is the methodology of making the policy more transparent, it allows the bank to make series of disclosure on the capital requirement, risk measurement etc. Market participant can assess the bank’s capital adequacy .It requires that disclosure should be made in regular interval.

Reference Data :-

Reference data is a defined set of core elements that are used in the mission-critical computer applications and basic work flow of a company. It is the group of basic data on which the whole project depend or the work flow of the project depends Examples of Reference Data:-

Cricket match Reference data : If we are working on the data of IPL matches the most important part would be the name of the teams , captain of the team , name of the players , location where it played etc. With the help of this data,one can describe the whole IPL matches .

Retail Data: The product detail of the retail outlet buy and sell, maintaining the customer data and employer data would be also important. With the help of this important data, one can describe the whole retail outlet

Criticality of RD with respect to Basel II :-

Basel II implementation can be done in three steps:
1.Identifying the risk
2.Capturing the risk
3.Mitigating the risk

One of the important issues in implementation of Basel II norms is missing historical data for identifying the risk. One needs to have reference data which can describe the banking process. Finding the correct data is one of the biggest challenges that most of the banks are facing. Placing the powerful MIS system which can capture the reference data is also one of the important challenges. Robust MIS system can help in capturing both external and internal data for the whole system.

Based on the data obtained, the risk mitigation policy can be accepted. Under Basel II, norms banks are given the option of internal rating board in which one can set up it’s policy for meeting the risk appetite.