Basel II May a Few Years Away, But Technology Work Shouldn't Be Put Off

Meridien Research's Deborah Williams discusses some of the technology implications Basel II and what financial services firms should be doing to prepare

The implementation of Basel II Capital Accord recommendations set forth by the Bank for International Settlements may be three years away, but the technology work required to be ready for the next round of capital charges is already apparent.

In order to prepare for some of the changes Basel II looks to bring, Deborah Williams, research director at Meridien Research, explained in a recent Webinar that financial firms should already be starting their work on technology to support their Internal Ratings Based approach for credit risk and internal models for operational risk. More specifically, Williams said that if they have not already, firms should be looking for data and systems to support their IRB and operational risk efforts and should start planning for the integration and data architectures in these two areas.

In terms of credit risk, Williams says that the basic principals of Basel II aim to differentiate between capital allocated to credit risks, to closer mimic market practice and to encourage more sophisticated practices. She explained that while most large banks have internal ratings, capital allocation and regulatory reporting approaches in place, there is still a need for more advanced database technology and integration with front-office-decisioning tools in order to be ready for Basel II's guidelines.

Operational risk on the other hand presents a newer area of risk technology, with Basel II for the first time recommending capital allocations in the operational area. Here the technology will need to focus mainly on data collection, tracking and monitoring, analysis and reporting of operational risks. Williams said that some examples of specific enhancements to comply with Basel II include technology to identify and gather key risk indicators; databases for both internal and external current and historical data; mechanisms for gathering loss data; methodologies for identifying and estimating frequency and severity of losses and reporting technologies.

Williams also explained that during the next year to 18 months firms should define their architecture, find the necessary data and build their databases to support these areas. She concluded that because the road to Basel II compliance will require a significant investment in technology, firms would need to devise a staged implementation to address the various areas of risk covered in the recommendations.