Compliance with the Basel II regulatory capital requirements is mandatory in many countries.
The main objective of the Basel II Accord is to:
Strengthen the soundness and stability of international banking systems
Create and maintain a level playing field for internationally active banks
Promote the adoption of more stringent practices in the field of risk management
The Basel II Framework consists of three pillars:
- Calculation of minimum capital requirements
- Supervisory review
- Market discipline (public disclosure)
ITS Universal Risk Management solution to Basel II
ITS Universal Risk Management provides a sophisticated Basel II module with the ability to calculate the capital charge for market and credit risk as required under Pillar 1. For Pillar II, interest rate risk in the banking book, liquidity risk and concentration risk are covered. The Risk Management database enables the reporting requirements set out in Pillar III.
Liquidity risk tolerances
The allocation of liquidity risks to business lines and activities
A robust and operational contingent liquidity funding plan
The design and use of severe stress test scenarios
Risk Management functionality
Basel II Pillar 1 – Market Risk
Risk Management provides functionality for the calculation of the capital requirement to cover potential losses resulting from market risk in the trading book, under standard and internal model methods.
Standard Approach: Risk Management covers the Basel II standardized calculations for the following:
- Equity risk
- FX risk
- Interest rate risk: maturity and duration ladder approaches
- Commodities risk: maturity ladder and simplified approaches
- Options: delta-plus method - this looks into delta, the non-linearities represented by gamma and the reaction of option prices to volatility changes on the basis prices (represented by lambda or vega)
- Internal Models Approach: Three Values at Risk (VaR) methodologies are available using Risk Management and enable the calculation of market risk under the internal models approach:
Parametric VaR
Historical simulation
Monte Carlo simulation
Basel II Pillar 1 – Credit Risk
Risk Management provides functionality for the calculation of the capital requirement for credit risk under the standardized and Internal Ratings Based (IRB) methods defined in Basel II.
Risk Management covers the calculation of risk-weighted assets and the capital charge, taking into account credit risk mitigation. Both the comprehensive and simple approaches for credit risk mitigation are supported.
Risk Management covers the requirements for the IRB approach (foundation method). Basel II risk parameters (Probability of Default (PD), Loss Given Default (LGD), risk weight functions) and formulas are modeled in a transparent and flexible way.
Risk Management covers the requirements for the IRB approach (advanced method). Risk Management inputs the calculated LGD, Credit Conversion Factor (CCF) and maturity into the Basel II formulas.
Risk Management allows the bank to use a combination of standardized and advanced IRB approaches within a portfolio.
Risk Management provides results at the level of the individual exposure, which allows aggregation and various groupings during post-processing.
Basel II Pillar 2
Sound internal risk management practice relies on deep understanding of the fundamental mechanisms that affect the bank in changing market and economic conditions. This can be achieved only when management is provided with precise and informative indicators by an adequate quantitative analysis structure. For Pillar II, Risk Management covers these needs for the interest rate risk analysis of the banking book, liquidity risk and concentration risk analysis.
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