Basel II - Turning Opportunities to Value Final Chandrasekhar

Treasury

International

Impact of Basel II Norms on Indian Banks –

A Technologists View

V Chandrasekhar

Bank of Baroda

BASEL II - OPPORTUNITIES IN TURNING RISK IN TO VALUE

InternationalTreasury

Drivers for Emergence of Global Indian Banks

• WTO –in 2005 India and China two vibrant economies in this millennium

• Emergence of Indian MNCs

• Overseas Indian Businessmen

• Globe Trotting Indians

• Consolidation


Financial System Instabilities

• US — Enron, WorldCom, Global Crossing, Merck, Xerox —accounting scandals

• There was 9/11, SARS, Asian Financial Crisis / Frauds

• Size, Scale, Complexity – Technology, Products• Financial Services Industry going cross border• Heightened Risks• Dwindling faith of investors in earning statements

and forecasts


Risk Mitigation Measures• Corporate Accountability• Basel II• Sarbanes-Oxley Act 2002 section 302/906, 404 on

internal controls and transparency and accuracy in reporting, CEO CFO Auditors responsibilities

• Stringent SEC 17a-4 on electronic records management and other norms for listing

• US Patriot Act – AML in 2001• Gramm Leach Bliley Act privacy laws on customer

data• IAS 30


Basel 88• Broad classes of assets assigned “risk

weightings” • Focus on a single risk measure• One size fits all approach• Regulatory capital established as a % of risk

weighted assets (currently 8%) • Regulatory capital established at bank level not at

transaction level • Regulatory capital assigned based only on vanilla

credit and market risk • Ignores operational risk completely


Why Basel II

• One size fits all – First Basel Accord 1988 – no distinction made between good and bad banks

• Three Pillars – Capital Adequacy requirement based on risk

measurement– Risk based Supervision– Market Disclosures to prevent yet another

financial crisis


Indian Banks – Capital Needs

• All assets ( sovereign, corporate, individual) are to be risk weighted including sovereign investments in gsecs increasing capital needs

• Risky lending – Rated, Fuzzy Rating, Unrated - Few Large Corporates, Retail lending, SMEs, Service / Knowledge industries, Rural Lending

• Mounting NPAs – stringent provisioning norms• Investment IT , Delivery Channels, Premises – low skill

levels etc resulting in banks need for continuous capital to meet their operational risks


IT & Basel II Indian Banks

• Accounting Driven

• Transaction Driven

• Customer Driven

• Information Driven

• 3 Pillar Policy Driven

Emergence of Enterprise view of Financial Services


Indian Banks - Weaknesses• Slow pace of computerisation• Reluctance to automate asset side • Distributed data bases & controls• Lack of DRS in IT Systems • Focus on more glamorous front office • Neglected Back office / supervisory controls• Weak process / people failure • Disruptive transfers aggravate this• Quality of Operations is affected• Low IT Literacy Levels• Great operational risk – higher provisioning

increasing capital needs


New IT Framework• Real-Time Data capture – ODS ( Operational Data

Store ) • Single version of Truth - provide a complete,

consolidated overview of a bank's totality of relationships with customers, suppliers and counterparties across all LOBs

• Integration of internal & external data• Datawarehousing – storage mgt tools• Analysis & Reporting• Multiple views of massive data• Need for Financial Services Model / Rating Model

which is flexible and adaptive


Indian Banks - Readiness• Only conceptual and academic view• Organisational / technological readiness• CIS• Customer / Market Segmentation• Robust Rating Models (ISO 15022 and its successor

ISO 20022 or UNIFI )• Data Dictionary• Fully reconciled reference data for 5 years – single

view of enterprise. • Even where processes are automated, 30 per cent of

transactions on average will fail due to bad data • Historical Data on probability of default – rating model


Indian Banks - Readiness• Storage Management, DWH , Analytical / BI Tools • High quality skills• Banks also need to comply with AML or face

reputation risk – you need strong IT backbone for this

• Move to ERM – Measure, Monitor, Control Enterprise Risk

• Manage Risk across all Lines Of Businesses• They need to act now to be compliant by at least

by next 5 yrs• During this period they become vulnerable


IT Integration Issues• Silo Applications• Multiple Platforms• Multiple sites running divergent software using

varying terminology.• Multiple definitions of the same thing, such as

"profit". – semantic integration• These various definitions may all be valid, it just

depends on your perspective • Banks will also need to consider the integration of its

Basel II solution with its existing technical infrastructure and any other major systems implementations that are already planned.


Business - IT - Transformation

• Every major business decision results in IT decisions

• Every IT decision has serious business implications

• Yet another major transformation issue awaiting PSU


Disruptive Transformations

• Phase – I : MANUAL, Y2K, CVC-1, CVC-2, RBI• Phase – I : CBS, PAYMENT SYSTEMS • Phase - III: BASEL, SOX, SEC, AML

EACH NEEDS COMPLETELY DIFFERENT ORGANISATIONAL CULTURE – CONSOLIDATION

MAKES IT GIGANTIC


Indian Banks - Organisation

• CHAIRMAN ( STRATEGIC)• DMD (OPERATIONAL)

– DMD ( CURRENT OPERATIONS)• ED ( DOMESTIC)• ED ( INTL)• ED ( SUBSIDIARIES)

– DMD ( CBS / TECHNOLOGY TRANSFORMATION)– DMD ( COMPLIANCE – BASEL, SOX, SEC)


Basel II implications• Basel II is essentially a data management issue• Risk-weighted assets and capital requirements,

supervisory processes, and market discipline and disclosure - all these pillars stand or fall in relation to the way the bank utilises the speed, quality, accuracy, completeness and transparency of data.

• Most institutions will need to enhance their systems partly or wholly in terms of integration, data capture, data storage, security and reporting because of the sheer volume of data to be sourced, extracted, stored, calculated, reconciled and reported to comply with Basel II.

• Doing cost effective business


Risk mitigation

• Insurance

• Quality of controls


Summing up


Basel II Benefits• Opportunity to reduce the capital charge and use

freed capital for more productive use• Increase in trust / reputation in the market place• CRM data will be fallout of Basel II implementation

– segmentation is natural• Better rating models, improved Credit Decisions • Realistic Product Pricing• Better Asset Quality • Better recovery strategies lower NPAs• Reduced Operational Risk• Digital Dash Board for real time Mgt of Bank


Basel II Benefits

• Allows insurance to cover operational risks• New insurance products will emerge• Needs heavy management focus – that

should not result in revenue loss to current operations of bank

• It also provides opportunity for Bank to review its LOB operations, plan for M&A etc


Strategy

• Risk management processes must be integral to everything the entire organisation does

• Risk metrics and methodologies must be consistent – both globally and locally

• In many jurisdictions all the business must comply completely or none of the business complies at all


Steps

• Modify existing systems • Move the organisation as one • Optimise the risk profile of banks portfolio • Improve the visibility and reliability of

internal processes / skills particularly in the area of operational risk

• Integrate international / other operations


Benefits to Indian Vendors / Consultants• Bank is a real time system , some how it is

implemented in as Batch• There is a huge gap• For vendors it is a huge opportunity• Large Investments in Technology & Skills by Banks• Yet another opportunity for Indian Vendors• World’s state of the art systems are being

implemented in India• Indian Scale, Complexity etc allow opportunities to

develop world class software for meeting international compliance


Yet another Transformation Program of a different kind

BASEL II TURNING RISK IN TO VALUE

MANAGE BANK WITH A REALTIME DIGITAL DASHBOARD


THANK YOU

Basel II - Turning Opportunities to Value Final Chandrasekhar

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