Basel II

Aptivaa's experienced team of consulting professionals assists banks in achieving Basel II compliance.

Our structured approach to Basel II compliance consists of five major phases, which offer detailed attention to the local regulations applicable to our clients. Our proprietary tools allow us to accelerate and effectively manage the implementation process.

Business Gap Assessment Data Gap Assessment Pillar I Pillar II Pillar III

Business Gap Assessment

Assessment of gaps in current policies and procedures.
B2CASE - our proprietary framework - is used in assessing these gaps with respect to Basel II compliance.

B2CASE

(BASEL II - Compliance Analysis and Status Evaluation)

B2CASE is a questionnaire-based tool used to undertake detailed business gap analysis. It has inbuilt features to configure a bank's business and risk profile for assessing compliance with the Basel II Accord.

B2-CASE simplifies the complex requirements of the Basel II Accord into a manageable set of questions and actions for various approaches in credit and operational risk analysis. It has more than 3,000 granular qualitative questions organized into 48 question-sets with capabilities to undertake gap analysis at the Legal Entity, Business Unit or Product level. It permits single or multiple respondents to the questionnaire, and has the capability to capture source documents to support the responses.

The question-sets are customised for each jurisdiction to include the areas of national discretion, based on local regulatory guidance.

B2CASE also helps the programme manager by keeping a complete history of various actions taken, together with the updated status of the programme on an ongoing basis. This facilitates the implementation and monitoring of compliance requirements and enables the prioritising of key gap areas and action plans to mitigate the identified gaps. Overall, the tool is useful for supporting supervisory reviews and compliance audit examinations.

Data Gap Assessment

Assessment of data gaps with respect to all products of the bank, relative to that required for Basel II compliance.
B2DMARC - our proprietary metadata library - is used in assessing and accelerating implementation of the clients' Risk Weighted Asset calculation engine.

B2 D-MARC

(BASEL II - Data Modelling for Applicable Regulatory Capital Calculations)

B2 D-MARC is a quantitative framework-based tool used to carry out detailed data gap analysis. It has a repository of more than 20 calculation processes broken into 300 sub processes covering requirements under Pillar I, Pillar II and Pillar III of the Basel II Accord.

Comprehensive Basel II data definitions, based on regulatory capital calculation processes, are integrated into the tool. This facilitates data gap analysis both at derived as well as at raw level.

B2 D-MARC has capabilities to undertake gap analysis at source system level, business unit and product levels for various approaches under Basel II with the completely flexibility to configure bank specific processes. The tool provides auditable and transparent data analysis along with drilldown capabilities from derived data to raw data.

The tool assesses the current state of data against accreditation requirements and highlights the missing data elements along with providing a common understanding of the data requirements for both business unit and IT department. B2 D-MARC helps banks in analysing the complete data requirement for building a Basel II compliant metadata framework based on proprietary or third party LDM (Logical Data model)

The Configurable Calculation WorkBench facilitates modelling across a variety of asset and liability structures for retail and wholesale banking books along with ability to easily configure and change complex calculations for estimating PD, LGD, EAD, RWAs for arriving at Regulatory Capital requirements under various risk-sensitive approaches . It is customized for different jurisdictions and provides a detailed data analysis document for each relevant country as specified by local regulators in which the bank or its subsidiary is operating. It also provides listing of areas where National Discretion is allowed.

Pillar I - Implementation Phase

Under this phase, our structured approach to Basel II compliance comprises a number of inter-related modules:

Credit risk: eight modules.
Market risk: five modules.
Operational risk: five modules

Pillar I

Credit Risk Market Risk Operational Risk

Credit Risk: Our structured approach consists of eight inter-related Basel II compliance modules.

Credit Risk Governance Module
Defining the bank's risk charter, its risk governance and risk organisation structure. Mapping the roles and responsibilities of the risk organisation to the objectives of the defined risk charter.

Credit Risk Policy & Procedure Module
Developing the risk policy architecture of the financial institution and mapping the procedures to enhance the efficiency of the credit risk function. Policies and procedures are specifically designed to meet Basel II compliance requirements.

Credit Risk Mitigation (CRM) Module
Modifying / developing credit risk mitigation related policies to ensure the bank's compliance with Basel II regulations. Supporting the establishment of a CRM management unit and credit risk mitigation system.

Corporate Rating Module
Developing rating models / scorecards for non-retail portfolios. For instance, this could include corporate rating models, middle enterprise rating models, small enterprise scorecards and specialised lending rating models for areas such as project finance, real estate finance and securitisation rating frameworks.

Retail Scorecard Module
Developing an application and behavioural scorecards for different retail products. Bank specific scorecards are built using judgmental and statistical techniques, depending on the availability of data.

Retail Portfolio Segmentation Module
Segmenting portfolios into homogeneous risk pools using statistical techniques which comply with Basel II guidelines covering different types of retail portfolios.

Parameter Estimation & Validation Module
Estimating credit risk parameters (PD, LGD and EAD) for each portfolio, and conducting validation tests of existing models and their risk parameters.

Regulatory Capital Calculation Module
Conducting regulatory capital impact studies under different approaches, and calculating the capital required under Basel II regulations using the Standardised and Internal Rating Based approach.

Market Risk: Our structured approach consists of five inter-related Basel II compliance modules.

Market Risk Governance Module
Aligning the bank's market risk function (i.e. middle office) to its overall risk governance structure. This includes mapping the roles and responsibilities of the market risk function to the objectives of the defined market risk charter.

Market Risk Policy & Procedure Module
Developing market risk policy components or aligning existing components with Basel II guidelines. Such components would include areas such as trading book policies, internal model management policies and revaluation policies.

Market Risk Measurement Module
Developing and implementing VaR methodologies based on the market's level of sophistication. This encompasses the development of valuation models of market risk-related portfolios while taking into consideration the client's key risk drivers, specific risks and risk correlations.

Validation Module
Validating existing VaR and valuation models employed at the bank to measure market risk, including testing of model assumptions and parameter estimates.

Regulatory Capital Calculation Module
This proprietary tool is used for estimating the capital required under both the Standardised and Internal Model approach to comply with the Basel II guidelines.

Operational Risk: Our structured approach consists of five inter-related Basel II compliance modules.

Operational Risk Governance Module Defining the bank's operational risk organisation and governance structure, with clear roles and responsibilities.

Operational Risk Policies Module Modifying or framing the bank's operational risk management policy, including aspects such as its RCSA policy, outsourcing policy, business continuity policy, IT security policy and disaster recovery policy.

Self Assessment Module Implementing the Self Assessment Framework applicable for the bank.

KRI (Key Risk Indicator) Module Developing and implementing the Key Risk Indicator Framework.

Regulatory Capital Calculation Module Estimating the capital required for using the Basic Indicator, Standardised and Advanced Measurement approaches, to comply with the Basel II guidelines.

Pillar II - Regulatory Review and Capital Planning

Under this phase of the process, Aptivaa undertakes the following activities:

Formulation of the bank's risk appetite
Estimation of risk capital.
Stress-testing across different risk types.
Documentation of ICAAP

Pillar II

Aptivaa has an established track record in assisting our clients to comply with Pillar II requirements as stipulated in Basel II. We align our consulting framework to the guidelines issued by the local regulators' which helps us to accelerate the implementation of Pillar II for our clients.

Diagnostic Services

As a part of our diagnostics services, we conduct a scoping study to assess the as-is status of the financial institution with respect to Pillar II requirements. We use a structured questionnaire-based approach to conduct this exercise. Diagnostic templates have been created based on our practical experience while working with clients across the world. At the end of this phase, we develop a detailed implementation project which will be required to comply with Basel II guidelines.

Implementation Services

Our approach to implementation of Pillar II compliance focuses on the following areas:

Support in defining the overall risk appetite of the financial institution.
Development and documentation of the internal capital adequacy assessment process.
Institutionalisation of the capital planning and budgeting process.
Development of appropriate methodologies and models for assessment of Pillar II risks.
Estimation of risk capital charge for Pillar II risks based on the scale and complexity of the financial institution's operations.
Development and implement of stress-testing frameworks for all risk types.

We use five step process for implementation:

Step 1

Assessment of bank's current structure

Assessing the bank's current risk structure.

Step 2

Develop ICAAP

Studying the bank's policy, procedures and systems in order to develop ICAAP.

Step 3

Risk profile assessment

Developing a methodology for quantitative and qualitative assessment of Pillar II risks.

Step 4

Capital budgeting & ICAAP Documentation

Developing a capital budgeting framework and documentation of ICAAP.

Step 5

Stress testing framework

Developing a stress-testing framework for the bank.

Validation Services

In cases where the bank requires validation services of existing practices, we offer to review its ICAAP approach vis-à-vis global best practice and local regulatory requirements.

B2-SPARC (BASEL II - Supervisory Pillar II Assessment of Risk & Capital)

Based on our experience on working with various banks across the world, we have developed a proprietary consulting framework for Pillar II, B2-SPARC, using a Scorecard- based assessment approach. We combine deep industry knowledge with specialised expertise in risk management, capital management, risk modeling and risk framework development.

Key Components:

Assessing the adequacy and quality of the ICAAP processes, and undertaking Pillar II compliance based on a detailed assessment of the risk governance framework.
Measuring, either through quantitative models or through a score card based approach, various inherent and material risks which a bank ought to consider under its ICAAP.
Analysing the bank's risk profile with the help of over 100 qualitative and quantitative risk measures spread across the various risk categories.
Computing the level of capital a bank would require under the Pillar II Supervisory Review Process by aggregating the risks, adjusted to reflect the effect of diversification.
Preparing ICAAP documentation for the bank.
Establishing corporate governance and Enterprise Risk Management frameworks and practices, general risk management policies and practices.
Establishing specific risk management policies and practices relating to liquidity, interest rate management, concentration risk, related exposures and other residual or specific risks.
Stress testing and scenario analysis in line with the business profile of the bank.
Completing a detailed simulation to project the risk profile of the bank based on identified risk factors. This would be done for the bank as a whole and separately for significant business units, and would project the bank's business risk profiles under a different combination of scenarios for different risk factors.

Pillar III - Reporting

Development of a reporting framework and disclosure policy, as well as support for quantitative and qualitative disclosure.
Exhaustive mapping of all bank information, data and practices in line with Pillar III compliance requirements.

Pillar III

We assist banks in the following areas as a part of our Pillar III offerings:

Reporting Framework: We support our clients in developing a reporting framework which articulates the general principles to be followed regarding market disclosures and the roles of various functions in relation to these disclosures.
Qualitative Disclosures: We help financial institutions frame qualitative disclosures based on the best practice followed by leading banks. Our consultative process brings together management's views of the firm's risk management philosophy which, together with the operational processes followed by the bank, presents a transparent view of the risk and control mechanism within the bank.
Quantitative Disclosures: Based on the reporting templates issued by the local regulator, we identify the data required, map the data with the source systems, develop the reports and test the accuracy of the reports.
Disclosure Policy: For compliance with the Pillar III requirements, we also support our clients by developing a disclosure policy for Pillar III as well as Pillar I reporting requirements.

Our comprehensive approach to defining the bank's reporting structure is preceded by a detailed analysis of the bank's risk management framework.