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BASEL II Compliance

Basel II is a worldwide banking accord with the stated goal of improving global financial stability though adjustment of loan reserves to match risk. The final version of the Accord was published June 2004 and has an all-encompassing impact on credit and risk management practices.

For Basel II, key components for compliance appear simple on the surface and have three pillars: Pillar I requires Data Models, Validation and Documentation; Pillar II requires oversight, stress testing, governance and functional independence; Pillar III requires reporting disclosure. In addition demonstrated compliance requires banks to meet the "Use Test". Any approach adopted will need to be “proven” to supervisors, requiring clarity and ease of replication while very tight implementation timelines leaves little room for “reinventing the wheel”. Add to this the use of distinct systems, separate lines of business, the mix of centralised and decentralised processes and the fact that lenders are beginning from a variety of levels of sophistication and an apparently straightforward process becomes complex to implement - no one can offer “Basel in a box”.

So banks trying to meet this accord will need an automated method for consistent, enterprise-wide risk weighted asset calculation flexible enough for local variation. But they have a significant investment in existing infrastructure, software and processes. Additionally, little, not even the core calculations, is static. This requires a modifiable system that can evolve with the Accord / Framework (Basel 2.1 etc) and simultaneously allow reaction to dynamic economic and competitive conditions. Such a system must also allow a bank to adjust functionality in line with differences in national discretion and support best-practice risk management. Lastly it must meet the ‘Use Test’ by integrating transaction, account, borrower and portfolio level risk-based decisioning everywhere.

The solution adopted by many banks is the use of a business rules management system. This allows greater business agility, lower programming costs, easier maintenance, more visibility into and control over how business decisions are being made, and better consistency in carrying out the best actions for any business condition. So why do companies choose Blaze Advisor, Fair Isaac's business rules technology, for this kind of project? Think about the key requirements:

  • Auditability and Traceability
    • Blaze Advisor allows all changes to rules to be controlled, logged and auditable as well as allowing for the logging of all rules executed in a specific transaction to allow traceability of each decision.
  • Administration of an operational standard and common framework but implementation to support distinct geographic or product focused lines of business
    • Blaze Advisor's structured repository allows for both shared and local rules, re-use and overriding in a controlled way and access rules based on structure.
  • Performance for real-time, nightly and monthly processing
    • Blaze Advisor, particularly with the addition of RulesPower recently, has very high interactive performance as well as compiled sequential and COBOL-code generating versions to maximize the perofmrance in batch scenarios.
  • Implementation and update of the models and decision rules by the user (independently of the IT function)
    • Blaze Advisor's rule maintenance applications are perfect for this.
  • Speed of implementation and implementation adjustments
    • See lots of the other examples.

The right solution for BASEL II should should leverage existing investments in decision technology like scoring systems which measure risk (Fair Isaac, Internal or other third-party models and analytics) as well as software that supports originations and account management decisions such as Fair Isaac Capstone®  and TRIAD® adaptive control system and reporting and analysis capabilities from any of the leading BI vendors. A powerful business rules management system like Blaze Advisor is perfect. Here's a summary architecture:

Rulesbasedcompliance

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