How to support the Basel Accord

The ability of a financial institution to deem itself Basel compliant involves a complex list of tasks and actions. The Basel Accord has evolved over a number of decades now, and requires a financial institution to quantify the risk of its assets and provide a buffer in the form of a capital requirement to be available if such risks being even partially realized. While stated simply, the requirements have changed over time, and involve the ability to aggregate financial information using specific categories and classifications of asset and risk, and performing complex calculations of risk factors to quantify both exposure and risk in the financial institution’s books.

Such a substantial undertaking involves multiple parts of the organization, who need to understand the underlying business needs, specify the ongoing operational and reporting requirements and probe the capability of the underlying information systems to support such requirements.

By creating a data warehouse of the atomic information about the bank’s assets, customers, counterparties, and resources, the bank allows an integrated view of its business to emerge. A major challenge consists of ensuring the accuracy and availability of detailed information requirements for Basel compliance.

It is often a major struggle for banks to understand and specify the entirety of what is required. The Basel publications by the Basel Committee on Banking Supervision (BCBS) provide a description of the reasons behind the requirements, and are subject to consultative refinement; the final requirements for any aspect of Basel emerge after a succession of documents have been published, and are often lengthy, wordy documents, rather than a clear specification of data requirements. Banks are also subject to local refinements by the supervising bank of their jurisdiction. What is required in such an undertaking is a way to translate the multiple and layered sets of publications into a clear set of information requirements, and from this to set about supporting the required data elements in a consolidated way.

Support for Basel in IBM Banking and Financial Markets Data Warehouse

Basel support has been evolving in Banking and Financial Markets Data Warehouse (BFMDW) over a number of releases, from as far back as BFMDW 3.1 in 2002:

  • BFMDW 3.1 included enhancements to the existing risk components to extend the support for Basel II Credit Risk.
  • BFMDW 3.2 further extended the existing structures to support Credit Risk IRB Advanced that is based on Consultative Paper 3 (CP3).
  • BFMDW 3.3 provided explicit support for Operational Risk assessment and loss information, and the final changes that are presented in the Basel II Framework, June 2004.
  • BFMDW 3.4 included support for the Basel II paper (July 2005) on Counterparty Credit Risk, Double Default, and Maturity Adjustments for trading related activities that affect the banking book.
  • BFMDW 7.0 supported the Comprehensive Version of the Revised Framework (2006), which is a compilation of the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the November 2005 paper on Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework.
  • BFMDW 8.0 provided more support for Basel II Notice of Proposed Rulemaking (NPR) allowing financial institutions in the US to start implementing the Basel II advanced approaches before they became an official requirement.
  • BFMDW 8.3 included full support for the Advanced Capital Adequacy Framework and Standardized Framework for the US.
  • BFMDW 8.3 incorporated support for July 2009 paper, Enhancements to the Basel II Framework published by BCBS, as well as the finalized ruling as published in the US Federal Register on the Advanced Capital Adequacy Framework and Risk-Based Capital Guidelines for Capital Adequacy using the Standardized Framework.
  • BFMDW 8.4 supported the Guidelines for computing capital for incremental risk in the trading book (BCBS 159, July 2009) and also addressed the market risk considerations that are published in Revisions to the Basel II market risk framework in July 2009. This release also addressed the then recently published documents on liquidity and global capital framework and counterparty credit risk considerations that are published in Basel III: International framework for liquidity risk measurement, standards, and monitoring and Basel III: A global regulatory framework for more resilient banks and banking systems.
  • BFMDW 8.5 addressed the European based CRD and COREP interpretations of Basel, as well as newly published considerations for Global Systemic Important Banks (BCBS207) and back testing for counterparty credit risk (BCBS185).
  • BFMDW 8.6 addressed the Liquidity Coverage Ratio breakdown, as specified in the workbook that is periodically updated by the BCBS, and, which specifies how various Basel III quantitative disclosures should be made (Basel III monitoring workbook).

Given the long history of the analysis of what is required by a succession of BCBS and local government published findings, BFMDW has accumulated a wealth of support for Basel. The purpose of this document is to help unlock the potential of the material that is contained in BFMDW to help banks who are aiming to identify the Basel requirements.

The intended audience of this book includes:

  • Business Users who need to gain an overview of the requirements for Basel support and how BFMDW facilitates this understanding and implementation – both those who have already implemented some level of support for the Basel requirements and those who are just starting that task
  • Data Modelers who want to understand how various parts of the Basel requirements are supported by the data model
  • Business Users and Data Modelers who already have a risk management system in place, and want to understand how to extend that to support the specific requirements in Basel
  • Data Modelers who are using Basel as a focus by which to understand BFMDW

In presenting the material in this book, it is not assumed that this is the first project involving BFMDW. The bank may have already implemented a data warehouse solution for a different area of the bank, such as relationship management, or an area that is related, such as credit risk analysis. For the purposes of the material that is discussed in this book, no assumptions are made about what has already been implemented; nor do we discuss the process of merging new model content with what is already in place. The issues of model management and project management are outside the scope of this book.

The book is presented for an organization that is implementing a three tier architecture, from source systems to Atomic Warehouse Model (AWM) to Dimensional Warehouse Model (DWM) to provide reporting to business users. The same approach is valid for those organizations who want to implement only a DWM, as the analytical requirements can be used to scope just the dimensional elements of a warehouse solution. Examples in this book of modeling at AWM and DWM are shown in InfoSphere Data Architect. BFMDW also supports Computer Associates ERwin as an alternative modeling tool.