Basel II Capital Accord introduces new technology challenges

The introduction of strict new laws for better capital management and reduced exposure to risk as embodied in the Basel II Capital Accord presents financial institutions with something of a double-edged sword. While compliance will reduce operational hazards, it may also result in over-stressed systems and excessive pressure on financial technology systems.

The upshot of this is that reducing capital risk can potentially expose banks to new dangers - the reduction of efficiency and customer service.

"Basel II requires banks to demonstrate results of model consistency over a minimum period of five years of historical data. This requires data integrity and timeliness of figures to effectively address different risk types, and guarantee accurate calculation of risk measures," explains Marianne Prins, key account manager at Compuware SA.

The implications of Basel II upon IT systems are twofold, says Prins. "Firstly, it concerns the assessment of operational risk and the reduction of operational risk in connection with applications and systems. Secondly, it requires gathering and documentation of data concerning 'loss and risk` within the financial organisation."

When translated into IT terms, the first issue requires the delivery and maintenance of reliable, stable and scalable applications, which in turn, demands a thorough assessment of the quality of testing and proof of testing.

The second factor is concerned with the collection, consolidation, analysis and reporting of 'loss and risk` data. This includes information about the stability and performance of live systems. "This will require the modification of existing applications or the writing of new applications to add required functionality and to provide measures and metrics about system stability," she says.

These implications for financial institutions must be tackled with tools, solutions and services that help IT professionals build, test and manage applications, or the provisions of Basel II may be rendered impotent by the inability of IT systems to cope with the increased demands.

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"Banks will shortly require solutions that cover application development, application fault management and tracking, interactive analysis and debugging, application performance management, automated testing and file and data management. These functions are all key to Basel II preparation and implementation," says Prins.

Some of the requirements that banks will have to fulfil include monitoring and capturing the names of all programs executed, to provide understanding of which programs in a large system are executed for any given business function. Institutions must also go deeper than that to ensure that application performance and code reliability are met.

Additionally, banks must work with large files, multiple database types, mainframe and distributed environments, analysing and viewing the data before transforming it to a Basel II compliance state.

"Further compliance issues surround Quality Assurance, as functional and regression testing must be performed on applications, requirements must be managed, while new applications must be tested and debugged to remove potential error conditions," says Prins.

While the various requirements and conditions to reach Basel II compliance may appear to be daunting and complex, Prins says tools, methodologies and testing environments are already available that step up to the new challenges presented by the Accord.

"Ultimately, the Basel II Capital Accord has got the endorsement of financial institutions around the world as its criteria will deliver a more secure banking industry. Getting to a compliant state is not a simple undertaking, but with the use of the right technologies and techniques that are available in the market, banks can effectively bring themselves into a compliant state without undue interruption of their business activities," she concludes.