An online survey conducted by FRSGlobal has found that 41% of respondents consider their business’ reporting process lacking in standardisation, with 17% of respondents saying that a standardised process is non-existent.
Over a quarter of respondents (25.5%) expressed low levels of confidence in their organisations ability to measure operational risk.
The survey was conducted following a webinar to discuss Basel II implementation in the US. The Final Rule agreed by US regulatory agencies on the implementation of the advanced approach for capital adequacy measurement was announced just on November 1st 2007.
The webinar, attended by over 100 financial services and compliance professionals, saw Andrew Liegel, product management specialist at FRSGlobal run through the key features of the Final Rule for US institutions.
“It’s striking how much can be achieved through taking a strategic view of the compliance reporting process. Failure to do so can leave banks trying to integrate manual and automatic processes across business lines and regions which can actually increase the operational risks they are seeking to measure,” says Fiegel.
Slated for implementation in 2009 by US regulatory agencies, Basel II is intended to create a global ‘level playing field’ for banks in terms of risk/reserve ratios. Variation in worldwide implementation has been common.
Basel I was adopted by the vast majority of countries with any significant financial services industry in various forms during the late 80s and early 90s, however its formulaic focus on credit risk limited the effectiveness of the regulation as institutions expanded globally and entered more complex businesses.
Basel II broadens the area of coverage to include operational risk with differing levels of complexity in the risk measurements for credit risk the Accord offers a Standardised Approach, a Foundation Internal Ratings Based (IRB) Approach and an Advanced IRB; for operational risk there is a Basic Indicator Approach (BIA), a Standardised Approach (STA) and an Advanced Measurement Approach (AMA); market risk is simply measured by the Value at Risk calculation (VaR). These variations allow banks to reduce their capital reserves by providing more detailed analysis of their individual risk exposures.
Where the New Accord offers banks floors of 90% and 80% for the first and second years respectively, the Final Rule floors are much more conservative, set at 95%, 90% and 85% for each respective year. With three of the top five world banks based in the US, the levels of capital in question are significant.
Retail banks have the same data requirements except LGD calculations only require 5 years of data. Overall, American regulatory agencies are looking for greater detail as to the exposures a bank has than those in other countries. For example, if there are multiple credit risk mitigants to cover a single asset the exposure must be split into parts with each covered by one mitigant and the risk- based capital requirement must then be calculated for each portion separately. This is not the method used by all banks currently and many will be required to adapt their data models accordingly.
Operational risk measurements are also tighter. A big difference between those required in other countries and the US is the historical data requirements. Under Final Rule requirements, banks need 5 years of historical data where the US implementation requires just 3 years of data.
Banks are already struggling at the 3 year history level, so this could prove problematic. In addition, the operational risk weighting of assets has only been looked at recently historically there has not been the same level of attention paid to it this as to the credit risk side of the business.
In calculating operational risk exposures, regulators are requiring a 99.9% VaR value over a 1-year horizon which is a very high level of accuracy to be calculated.
However they realise that many institutions are struggling to have that data and achieve this level of accuracy, so they are allowing institutions to use a standardised approach or an allocation approach if they cannot reach the 99.9% level.