About Risk Management and Basel II
Due to regulatory events, such as the Basel II Capital Accord (Basel II), the Turnbull Report in the U.K., the Higgs Report, the European Union Capital Requirements Directive, Solvency II and the Sarbanes-Oxley Act and International Accounting Standards (IAS), the interest in identifying, measuring and managing risks is increasing among the Financial Institutions around the world.
Basel II is an extension of the original risk and capital management guideline (Basel I) created by the Bank for International Settlements (BIS) in 1988. Basel I was largely limited to the treatment of credit and market riskhad a flat assessment of 8 percent of risk-weighted assets for the calculation of risk capital requirements related to credit risk charges.
The realization that the financial markets and their participants are more sophisticated than they were in the past, and that operational risk will affect a financial institution's financial viability, has led the industry to develop a broader risk framework.
This Basel II framework is more risk sensitive, includes operational risk as part of the risk capital calculation, and deliberately links the efficient and profitable provision of capital, across all aspects of the business, to risk measurement and management activities. It includes expanded provisions that also apply to subsidiary companies, such as asset management and brokerage businesses, as well as the traditional banking operations.
The new Basel II guidelines take effect in 2007 and will be applied globally, albeit with the implementation and interpretation by local regulatory authority jurisdictions. Local interpretation will not remove the requirement for financial institutions to wrestle with "home host" challenges such as cross-border ownership, advanced treatments in foreign jurisdictions and subsidiary significance.
The global aspect will also introduce technological challenges, including data architecture and integration, data structure for management and calculation and external reporting, and application integration.
Basel II and similar the other regulatory and compliance initiatives have created a significant challenge and opportunity for Financial Institutions. These regulatory initiatives will affect policies, processes, client and industry relationships, and technology infrastructures for the next years. Much of the business and process infrastructure to address these regulatory initiatives is not in place or is at an early stage of maturity.
Compliance with Basel II and the other regulatory and compliance initiatives will require software products that can maximize a Financial Institutions's ability to capture, measure and report on specific risks in the organization. Banks will need to consider software platforms that can contribute to the strategic management of enterprise risk, linking risk to performance management.
Although the Basel II Risk Management application software market is still evolving with multiple methodologies and approaches, vendors with proven applications, a platform approach and long-term viability are likely to be the most successful.
ObjectRisk's software help Banks leverage their Risk Management Systems implementation, through the use of our unique integrated suite.
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