Basel II Solutions

The Basel II guidelines promulgated by the Bank for International Settlements (BIS) establish capital adequacy requirements and supervisory standards for banks to be implemented by 2007. Basel II compliance is probably the single greatest challenge – and opportunity – for banks during the next few years. The challenge of Basel II comes from the significant changes to bank policies, procedures and methods it implies and from the need for technological solutions that do not exist or are inadequately developed in most banks today. But Basel II also provides banks with opportunities to realize many managerial and financial benefits, especially under the IRB advanced approach, as indicated below.

Potential Benefits Of The Basel II IRB Advanced Approach

Managerial Benefits

  • Clear communication of risk appetite and processes in place to amend appetite (expressed through credit limits) in changing environment
  • Improved capability for setting and monitoring risk limits
  • Opportunity to measure risk consistently across products and business units
  • Opportunity to identify and manage inter-relationships between risks
  • Improved internal audit approaches resulting from potential connections between risk indicia and audit plans
  • A better framework for new business development

Profit Benefits

  • Lower loan losses resulting from better credit risk evaluation capacities for new credits
  • Lower loan losses resulting from earlier detection of deteriorating credits
  • Lower loan losses resulting from better diversification
  • Better risk adjusted pricing
  • Potentially higher yields from previously under priced credits
  • Reduction in long term adverse portfolio selection
  • Lower operational losses resulting from better controls and monitoring
  • Potential to increase leverage/gearing 

Kamakura Corporation offers a range of Basel II solutions to help banks realize these opportunities. The Kamakura Risk Manager (KRM) software offers a comprehensive set of solutions to assist banks in developing credit, market and operational risk models and in performing Basel II analyses. Kamakura Risk Information Services (KRIS) complements KRM by providing banks with a solution for the default probability (PD) estimates from an external source required under the IRB Approaches. And Kamakura can also provide a range of Basel II related consulting services to help banks implement their Basel II solutions. These solutions offer support relevant to all three Basel II pillars:

  • Pillar 1: minimum regulatory capital requirements
  • Pillar 2: supervisory oversight of the minimum requirements and other capital issues, and
  • Pillar 3: disclosure requirements providing market discipline on bank capital adequacy

Kamakura's solutions also cover the three separate sources of risk explicitly covered by Basel II's Pillar 1 regulatory capital requirements: credit risk, operational risk, and market risk. Kamakura's credit risk solutions help banks determine the minimum capital needed to offset potential future losses from credit defaults. The potential for future losses from operational risks, such as from inadequate or failed internal processes, people and systems or from external events, and the related minimum capital requirement for operational risk can be analyzed with assistance from Kamakura's operational risk solutions. And Kamakura's market risk solutions can help determine the minimum capital requirement for market risk in a bank's trading book. So banks can look to Kamakura for a comprehensive set of Basel II solutions.