Basel II Implementation: A Guide to Developing and Validating a Compliant, Internal Risk Rating System by Ozdemir, Bogie; Miu, Peter;

Short description:

The primary guide to the financial industry's largest risk-management initiative

How do you comply with the Basel Accords using your financial institution's data, time, and resources? With the help of Basel II Implementation, not only will you reach full compliance efficiently, you will also enhance your bank's risk-management practices and improve its competitive position in the market-all while targeting bottom-line growth.

This how-to guide provides step-by-step techniques from two world leaders in Basel II implementation. Sections conveniently unfold in the same manner that internal risk rating systems (IRRS) are developed under Basel II, and each covered technique is accompanied by implementation examples from the authors' personal experiences assisting major banks around the world. With a focus on Basel II, this thorough resource integrates best practices echoed in both Basel I and II Accords, while covering:

• How to design such IRRS to assess PD, LGD, and EAD?
  
  
• IRRS quantification, including the estimation of long-run PD and downturn LGD
  
  
• EAD estimation, written by Stuart Brannan, Managing Director, BMO Financial Group
  
  
• LGD estimation and LGD discount rate
  
  
• Validation and governance
  
  
• Capital management under Pillar II, dealing with pro-cyclicality

Basel II Implementation goes beyond the nuts and bolts of compliance by illuminating the theoretical foundation that the regulations are built upon. The effective mix of hands-on practicality and academic credibility makes this book a powerful tool for achieving compliance with real-world solutions that are defendable to regulators. An accompanying CD-ROM provides numerous ready-to-use spreadsheets that will ensure a successfully thorough implementation of IRRS.

Put yourself ahead of the competition today by transforming research results into operational tools with the help of Basel II Implementation.

Long description:

Many financial institutions around the world must prove minimum compliance to the Basel II Accord by 2015. For several banks, implementing internal risk rating systems (IRRS) is simply Basel II compliance. However, when carried out with a proper focus on bottom-line growth, this regulation has been shown to enhance a bank's risk-management practices and competitiveness in the market. Basel II Implementation is an invaluable guide that puts a potent combination of theory and real-world practice at your fingertips.

Written by two of the most globally recognized and sought-after thought leaders in Basel II implementation, this how-to book maps out, step-by-step, implementable solutions that are both academically credible and practical, making them defendable to regulators and executable within the constraints of data, resources, and time. Organized to sequentially follow IRRS development under Basel II, each section of this go-to guide provides:

• An introduction to the Basel II concept
• A variety of techniques for reaching compliance, based on research conducted by the authors and supported by Standard & Poor's
• Corporate case examples that illustrate implementation in the real world

To complement the holistic approach in Basel II Implementation, which offers end-to-end analysis of various credit risk problems, an accompanying CD-ROM features a wealth of useful spreadsheet templates that will facilitate the efficient and accurate execution of covered techniques.

Stay ahead of the curve with the expert strategies and advice found in Basel II Implementation.

Many financial institutions around the world must prove minimum compliance to the Basel II Accord by 2015. For several banks, implementing internal risk rating systems (IRRS) is simply Basel II compliance. However, when carried out with a proper focus on bottom-line growth, this regulation has been shown to enhance a bank's risk-management practices and competitiveness in the market. Basel II Implementation is an invaluable guide that puts a potent combination of theory and real-world practice at your fingertips.

Written by two of the most globally recognized and sought-after thought leaders in Basel II implementation, this how-to book maps out, step-by-step, implementable solutions that are both academically credible and practical, making them defendable to regulators and executable within the constraints of data, resources, and time. Organized to sequentially follow IRRS development under Basel II, each section of this go-to guide provides:

• An introduction to the Basel II concept
• A variety of techniques for reaching compliance, based on research conducted by the authors and supported by Standard & Poor's
• Corporate case examples that illustrate implementation in the real world

To complement the holistic approach in Basel II Implementation, which offers end-to-end analysis of various credit risk problems, an accompanying CD-ROM features a wealth of useful spreadsheet templates that will facilitate the efficient and accurate execution of covered techniques.

Stay ahead of the curve with the expert strategies and advice found in Basel II Implementation.

Table of Contents:

Introduction
Chapter 1 Risk Ratings System Design
Overview
The Use of Credit Risk Assessment Templates in IRRS
The Use of Quantitative Models in IRRS
The Use of Hybrid Models in IRRS
The Use of Retail Models in IRRS
The Use of LGD Models in IRRS
The Choice of LGD Discount Rate
Discount Rate for Workout Recoveries: An Empirical Study
Conclusions
Chapter 2 Risk Ratings System Quantification
Overview
Risk Rating Philosophy
Long-run PD
Downturn LGD
Downturn EAD
Downturn LGD: A Case Study
Establishing a Master Scale
Stress Testing
EAD Estimation
Chapter 3 Validation of Internal Risk Rating System
Overview
Confirmation of the Conceptual Soundness and Initial Risk Quantification of the Design of the IRRS
Confirmation of Risk Rating System Operations
Annual Examination of the Overall Performance of the Risk Rating System
Validation of Mappings between Internal and External Risk Rating Systems
Annual Health Check
Governance
Conclusions
Chapter 4 Pillar II, Challenges, and Dealing with Procyclicality
Introduction
Background Definitions
Some Pillar II Implementation Issues
Capital Planning and Capital Adequacy Assessment Framework with Respect to Pillar II
Conclusions
Notes
Index
About the Authors