Leveraging XBRL for Basel II

1. Leveraging XBRL for Basel II Daniel D’Amico, IBM Business Consulting Services, UK

2. Agenda • Basel II background • Basel II is an opportunity • The data management challenge • XBRL and Basel II

3. A couple of quotes • “Regulators and customers are demanding greater focus on risk management. …This call for transparency will challenge traditional business practices and will require more auditable processes throughout the business” Morgan Stanley analyst (on market timing), FT 11/03 • “US regulators expect Basel II will apply to a total of around 20 large US banks. All US banks operating under Basel II will be obliged to use only the most advanced Basel II approaches for assessing banking risks, which means the IRB approaches in the case of credit risk.” Global Risk Regulator 10/03

4. NewAccord Full force CP 3 Parallel runBasel I + II Integrate into National law EU directive PreparationNew Accord Consultationphase EvaluationQIS 3 QIS 3 Oct 02 Dec 02 July 03 Nov 03 Jan 06 Dec 06 May 03 Basel II Background What is Basel II Accord? The publication of the Basel II Accord will mark the end of long process that will have effectively re-written the rules of banking. Basel II will affect the conduct of monetary policy and the stability of financial institutions all over the world What is it trying to achieve? • To promote safety and soundness in the financial system • To align regulatory capital requirements more closely with underlying risks • To offer incentives for institutions to pursue more sophisticated & effective risk management When does it happen? Commercial imperative • Basel II will significantly impact FS institutions and the change is such that preparation needs to begin now to ensure readiness for a parallel run starting 1st Jan 2006 • Key strategic decisions need to be taken now on the approach to be taken and the benefit that should be achieved over and above compliance

5. Basel II is an Opportunity – not just a Mandate Basel II Opportunities: • Improve shareholder value • Economic capital savings • Improve/maintain credit rating • Improve risk management strategy • Alignment of Risk & Finance • Cost reduction through organizational process improvement • Identify potentially dangerous portfolio positions and other risk sources Basel II Pillar 1: Pillar 2: Pillar 3: • Minimum Capital requirements • Supervisory Review Process Market Discipline Calculation and Management of: • Credit Risk • Operational Risk • Market Risk • Ensure sound processes • Ensure adequate capital at all times • Ensure motivation improving risk management practices • Quantitative and qualitative disclosure of undertaken risks and risk methodologies Basel II Challenges: • Setting up Basel II program • Data management • Systems management • Establishing Risk Framework Data Foundation

6. Key challenges – Systems & Data Management 10 Common signs of unstable data foundation Data Management is the key challenge in meeting Basel II • Inability to gather data for new reporting requirements. • Difficulty complying with regulatory requirements like Basel II Accord • Senior management questions quality, timeliness, reliability of information used to make multi-million dollar decisions • Inability to consolidate data from multiple diverse sources • Senior Management requests for information require intensive manual effort to respond, and far longer than desired. • Difficulty in building a single architecture to address both data consolidation and data aggregation requirements. • Multiple databases or spreadsheets storing similar data; no common data “dictionary” across the enterprise • No ownership of data • There’s no single enterprise view of data • Difficulty answering questions about the origins and business processes performed against data Source: IBM Institute for Business Value analysis, Banks and Basel II: How Prepared Are They?, October 2002 interviews with 32 Financial institutions worldwide

7. Capital allocation • Capital Calculation • Risk Strategy • External Reporting Cross Modelling Solution Common definition of LGD, PD, EAD Common customer identifier A complex International banking group Group Private Banking and Asset Management Wholesale Banking Corporate Personal Finance Credit Cards Asia Pacific Discretionary Portfolio Management Fixed Income, Equity and derivatives UK retail North America Japan Singapore Hong Kong

8. Basel II Credit Risk Engine Data Warehouse Basel II Market Risk Engine Extraction, Validation Basel II Op. Risk Engine Non-Basel II Risk Engines Transformation Enterprise Extraction Data store & calculation IBM’s Basel II Architecture External Audience Loss Data Result Data Disclosure Customer Result Data Regulatory Collaterals Result Data Group Credit Result Data Management Data Core Banking Products Rating, PD, LGD, CCF Models Internal Audience Data Marts Reporting Data source Metadata Warehouse Administration

9. Basel II Credit Risk Engine Data Warehouse Basel II Market Risk Engine Extraction, Validation Basel II Op. Risk Engine Non-Basel II Risk Engines Transformation Enterprise Extraction Data store & calculation Where does XBRL fit? 1 XBRL 2 XBRL External Audience Loss Data Result Data Disclosure Customer Result Data Regulatory Collaterals Result Data Group Credit Result Data Management Data Core Banking Products Rating, PD, LGD, CCF Models Internal Audience Data Marts Reporting Data source Metadata XBRL 3 Warehouse Administration

10. XBRL for Basel II analytics • Many Analytics requirements • Credit Risk Profile • Credit Risk Assessment • Credit Risk Mitigation Assessment • Operational Risk Assessment • Portfolio Credit Exposure • Security Analysis • Liquidity Risk • Collections Analysis • Involved Party Exposure • Location Exposure • Non Performing Loan • Aggregate data for analytics • Multiple Sources • Different periods • Different rules

11. XBRL for Basel II reporting • Many reporting requirements • External • Disclosures • Regulatory • Internal • Group • Subsidiary • Management reporting • Integration with other reporting requirements • IAS • Aggregate data for reporting • Multiple Sources • Different periods • Different rules

12. Common definition using XBRL • Definition of Internal Basel II taxonomies: • Define an organizational metadata layer • Traceability back to transactions • Common repository for changes and updates to requirements • Enhance group ability to consolidate data • Improve data quality Basel II is an opportunity for banks to force its subsidiaries and business units into following a common understanding of data, driving common standards into the organisation . XBRL can be THE standard

13. How is XBRL solving some of the data management issues? • Inability to gather data for new reporting requirements. • Difficulty complying with regulatory requirements like Basel II Accord • Senior management questions quality, timeliness, reliability of information used to make multi-million dollar decisions • Inability to consolidate data from multiple diverse sources • Senior Management requests for information require intensive manual effort to respond, and far longer than desired. • Difficulty in building a single architecture to address both data consolidation and data aggregation requirements. • Multiple databases or spreadsheets storing similar data; no common data “dictionary” across the enterprise • No ownership of data • There’s no single enterprise view of data • Difficulty answering questions about the origins and business processes performed against data XBRL for Basel II Analytics XBRL for Basel II reporting Common definitions using XBRL

14. Leveraging XBRL for Basel II Daniel D’Amico, London UK IBM BSC, Financial Services Sector, Risk and Compliance Daniel.Damico@uk.ibm.com