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Given that Market risk has largely been left
untouched, the implementation of Basel II centers
around choosing the appropriate approaches for Credit
and Operational risk and ensuring that their existing
source systems provide all the necessary data with
the desired accuracy for risk analytics and capital
calculations.
The Basel Committee of BIS has set aggressive deadlines
for banks to comply with Basel II and the regulators
have -- based on the realities in their respective
jurisdictions -- extended the implementation deadlines
by about 12-18 months. However, large international
banks in Europe and US, which have to adopt the advanced
approaches have already embarked on their Basel II
compliance program and have
spent a significant
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amount of resources
(money, effort and management focus) on this.
While banks had recognized the difficulties involved
in implementing the Basel II regulations, the
problems they have encountered in the implementation
have turned out to be much bigger and challenges
much greater than was initially estimated. In
this article we take a look at a few key challenges
on the shopfloor.
Data Challenge
Basel II is extremely data intensive and requires
good quality data for better results. Data, both
current and historical, is required for internal
estimation of the PD, LGD, EAD and Maturity (M)
parameters in the Capital calculation. The most
popular solution centres around building a data
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warehouse
that will store all the data necessary to support the
risk analytics and capital calculation. The largest
challenges have been in the following areas
- Data Sourcing:
Banks will have to develop an exhaustive
list of data elements that will be required to support
the Basel II calculations in their banks. These
will then have to be mapped to the source systems
and checked for their availability. Gaps if any
must be noted. These gaps will require enhancements
to the source systems. The mapping process is extremely
slow and will have to cover all the source systems.
Decisions on which source system a particular data
element
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