The New Basel Capital Accord, or Basel II as it has become known, has been likened to Y2K for the banking industry. However, it need not be a burden, but rather an opportunity for banks to consolidate their data and learn what information they are actually holding.
The opportunity banks have of gaining a holistic view of their risk profiles - and, as a consequence, their data - is enormous.
Julian Field, MD, CenterField Software
In a nutshell, Basel II requires banks to ensure they have enough cash on hand to cover any risks they are exposed to. This is not simply a case of saving some money, but identifying all the risks the company is exposed to and presenting a report detailing the processes in place for identifying and measuring risks, and monitoring them into the future.
Compliance will ensure banks have sound processes, are adequately capitalised at all times and are incentivised for improving their risk management practices. All of which would benefit the banks, their customers, investors and confidence in the institutions generally.
What makes Basel II very much like Y2K for the banks is that most institutions have little idea of all the data they have or where it is. And this is the data they need to collate into intelligent reporting if they are to comply with Basel II.
Most enterprise resource planning and business intelligence companies focus on the collecting of certain types of data in a data warehouse and reporting on that limited information. What they cannot provide is a fast solution for the enormous task banks now face of finding, transforming, integrating and managing their data from a host of different systems they have been using for years.
Moreover, even that process is broken down into yet more complex phases. The first step is to find all the appropriate data from various operational systems. These can include the company`s general ledger, line-of-business databases, external market data, customer data and other sources used for independent activities and transactions.
Once identified, the process of data integration begins. First data needs to be reengineered - transformed, aligned and consolidated from its separate stores into one single format the bank will need to decide on as its standard data format. To accomplish this, the company needs to understand the physical and logical data characteristics, determine data consistency and cleanliness, and discover related data elements to facilitate gap analysis.
It can take nine months
Doing all of this manually will take years - ask any bank`s CIO. If a bank is determined to complete this first phase manually, it can count on the process taking at least nine months in an average South African banking environment. Since the Basel II deadline is 2006, CIOs should ask themselves if they have a year to spend on integrating their systems when automated integration tools can increase the time and accuracy while reducing the costs substantially - in some cases a 16X enhancement over manual methods is attainable.
The simplest solution is to adopt a single tool to manage and execute the entire process, from identification through to collecting and matching the data. Matching is the next phase in which all redundancies and errors are removed from the data. For example: before the bank can determine any risks associated with John Smith, it needs to find all the John Smiths and distinguish which accounts and transactions belong to the same entity from those of other John Smiths.
Once data quality has been achieved, it can then be transferred into an enterprise data warehouse, ready for reporting and other tasks the firm will now find itself in a position to do - such as customer relationship management based on one complete, accurate view of the customer.
Additionally, the ability to control the process and all future data manipulation, additions and deletions is paramount for Basel II, as the bank needs to maintain an audit trail of the entire process for future reporting.
If it does not, the process may need to be started from the beginning again.
Leaving aside the mammoth data integration and profiling task of Basel II, the opportunity banks have of gaining a holistic view of their risk profiles - and, as a consequence, their data - is enormous. Once complete, banks will be able to offer improved shareholder value through an improved risk management strategy and better visibility. This naturally leads to a better alignment of risk and finance, along with cost reductions through organisational process improvements.
By identifying potentially dangerous portfolio positions and other risk sources, the institutions will also find they improve their long-term cash situation, not to mention maintaining or improving their credit rating. Basel II is a double-edged sword; on the one hand there is the Y2K-like burden of bringing corporate data under control, on the other, unlike Y2K there are substantial, measurable benefits to the process. The opportunities of improved risk management and visibility, as well as having one view of the customer, open doors banks have only dreamed of in their many - mostly unsuccessful - business intelligence and data warehousing projects.
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