from DSSResources.com

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                         DSS News 
                    D. J. Power, Editor 
                July 18, 2004 -- Vol. 5, No. 15
         A Bi-Weekly Publication of DSSResources.COM 

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        Check the interview with Shaku Atre "What is  
        Business Intelligence?" at DSSResources.COM

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Featured: 

* Ask Dan! - How can DSS help implement Basel II?
* What's New at DSSResources.COM
* DSS News Releases

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How can DSS help implement Basel II?
by Dan Power 

Unless you work for a financial institution, or a DSS vendor or an IS/T 
consulting firm this question may not be directly relevant to you, but 
this Ask Dan! question is important. The presumption of bankers and bank 
regulators is that appropriate deployment of computerized decision 
support systems CAN help implement Basel II and that DSS and Information 
Technologies SHOULD be used to help implement Basel II. The major 
challenge and issue facing bank executives is how to do this! Design, 
development and implementation of relevant risk management DSS is an 
important topic because it has been estimated that some large banks may 
spend USD $100 million or more over the next five years trying to change 
processes and implement information systems to comply with Basel II 
requirements.

So what is Basel II?

Briefly, Basel II is a global capital regulatory accord that has and is 
being developed by the Basel Committee on Banking Supervision in Basel, 
Switzerland. On June 26, 2004, central bank governors and the heads of 
bank supervisory authorities from the Group of Ten (G10) countries 
endorsed the publication of a revised framework for bank capital 
measurement and capital standards. This new framework has been under 
development for many years and some banks have been making changes in 
technologies and processes in anticipation of them.  All of the 
procedures and details are still however not developed.  This new 
capital adequacy framework is commonly known as Basel II and it will 
replace the 1988 Basel I standards for major banks.

The overriding goal of Basel II is to insure the stability of the global 
banking system. The primary focus is on managing the risk associated 
with bank lending activities. Because some loans are riskier than others 
(i.e. the chance of default differs), the reasoning of regulators is 
that banks should adjust their capital reserves to reflect the risk in 
their loan portfolios. Basel II specifies guidelines for managing 
credit, market and operational risk. Credit risk focuses on the 
characteristics of the borrower, market risk focuses on the external 
capital market and operational risk focuses on the processes and 
procedures of the lender.  The framework is tied to 3 pillars for 
achieving regulatory compliance: capital reserves, supervision and 
disclosure. In general, Basel II requires banks to measure, monitor, 
mitigate and disclose risk. Basel II is primarily focused on adjusting 
capital requirements based upon measuring and managing credit and 
operational risk. But according to Gartner, banks will still need to 
address risks involving technology, market forces, liquidity and capital 
allocation. 

Why is Basel II important? In general, I think the Basel II accord is 
important because of the increasingly global nature of banking and 
lending activities, because of the sheer magnitude of the regulatory 
effort involved, and because the accord is breaking new ground by 
focusing upon operational risk.  What does the accord mean for banks?  
Initially only the very largest banks in the world will need to comply 
with Basel II including the 10 largest US banks. The carrot that has 
been held out to these banks is that if their risk management, lending 
practices and business processes result in a conservative risk exposure 
for the bank, then the bank's capital requirements would be lowered. So 
if a bank's managers can demonstrate to regulators that processes, 
procedures and systems are in place to insure stable, low risk lending 
activities, then the bank will not need to keep as much capital (money) 
in reserve.  Instead of today's 8% requirement for reserves, a bank 
might only be required to maintain a 7.5% reserve. That might not seem 
important or significant, but for a large loan portfolio that bank may 
be able to lend millions of dollars that it can not lend now, hence 
improving bank profits. Basel II can potentially improve the stability 
and profitability of the global banking system. Also, Basel II is an 
enormous business opportunity for DSS and Information Technology 
software vendors.

What is the role of DSS/IT?  The working presumption is that information 
technology is the only way to help loan officers make appropriate credit 
risk decisions, that IT can help reduce operational risk and that IT is 
absolutely essentially to meet the reporting requirements of Basel II. 
Some constraints on using IT to implement Basel II include data 
collection, data quality and data integration problems, data storage and 
access issues, decision support application design and development and 
infrastructure and related technology issues.

For the past few years, I have been tracking the development of the 
Basel II accord. Growing up in America, I had learned to pronounce Basel 
as "bay sul".  One of the first adjustments I had to make while 
following this topic was to call Basel -- "baa suhl." I still hesitate 
occasionally and need to remember that Basel rhymes with the sound sheep 
make when they are happy! Baa! Baa! Recently, I learned that some 
consultants promoting Basel II solutions refer to the accord as "Baa" 
II. By whatever pronunciation, "Baa" II is a complex, ambitious global 
regulatory initiative. Bank managers face the prospect of spending 
millions of dollars on initiatives to achieve compliance. If the 
initiatives do not reduce risk appropriately, capital requirements might 
actually increase and hence profits would be reduced. Getting the DSS 
technology, processes and training correct is important so Basel II is a 
"win-win" proposition for the banks that implement the accord. 

Providing decision support will require additional data gathering, some 
integration of data from diverse transaction systems, some redesign of 
business processes, and development and implementation of multiple DSS. 
Quantitative and qualitative data relevant to operational risk will need 
to be collected.  Middle and senior-level managers will need decision 
support for monitoring risk scorecards and other metrics.  More than 
likely a major bank will need a sophisticated data-driven DSS based upon 
a data warehouse to provide business intelligence about operations and 
to meet reporting requirements.  A computerized system for providing 
lending officers with credit risk scores and other risk data about 
borrowers will need to be expanded and enhanced in many banks.  Some 
banks will want to develop document-driven and even knowledge-driven DSS 
as part of improved lending work flow processes.  A variety of 
model-driven DSS will be needed to support lending decisions, credit 
allocation decisions, risk management assessments and risk forecasts.  
The major challenge will be creating some integration among all of the 
systems that can be deployed.  Integrating decision support systems 
across the various levels of decision makers and across the interrelated 
business and decision processes will be challenging.  Given the time 
constraints and cognitive complexity of understanding and meeting the 
new requirements it seems likely that overlapping, incompatible and 
needlessly redundant systems will be deployed in some banks and that 
gaps will exist in the systems deployed in other banks.  The challenge 
for many banking executives is avoiding "ready made" solutions from a 
vendor that meet only part of the regulatory compliance need and that 
then fail to integrate with solutions from other vendors. Decision 
support for Basel II compliance is hindered by both information 
procurement problems and data integration problems.

What do the DSS/IT vendors say about Basel II? 

Sungard (sungard.com) argues "The new Basel Capital Accord gives banks 
the opportunity to reduce their economic and regulatory capital through 
efficient data management and reporting. Basel II also provides a unique 
opportunity for banks to modernize and upgrade their risk practices, 
policies and technology so that they can manage their credit, market and 
operational risk in a holistic fashion. Based on The SunGard Basel II 
Capital Manager, SunGard offers a complete Basel II solution covering 
capital calculation and reporting, data consolidation, credit risk and 
operational risk." SunGard markets both Credient and BankWare.

According to the accenture.com website, Accenture "has formed 
relationships with key software providers across credit risk, 
operational risk, risk analytics, data management, reporting and finance 
capabilities and can help you navigate the vendor landscape and select 
the right tools for your organization." Accenture claims it has a Basel 
II Diagnostic Tool that "helps banks quickly assess the requirements and 
challenges presented by the Basel II Accord." The tool highlights the 
key Basel II requirements and their impact on the bank; classifies a 
bank's current and target capabilities in the required Basel II areas; 
identifies a bank's gaps in operational and credit processes created by 
Basel II requirements; and enables the development of prioritized action 
plans for achieving Basel II compliance.

IBM's Business Intelligence solutions group is "preparing templates that 
will help Basel II-affected companies respond to the regulation's 
requirements." Informatica and IBM are offering a solution to help 
financial companies address the information management challenges of 
Basel II. The solution includes Informatica’s PowerCenter, 
PowerExchange, PowerAnalyzer, and SuperGlue - and IBM’s Banking Data 
Warehouse (BDW). Accenture worked with IBM, Informatica and Business 
Objects to help Dresdner Bank AG’s Information Technology unit for 
Credit and Risk Systems build a data warehouse to improve decision 
support and internal auditing.

Experian-Scorex (experian.com) offers a complete, flexible retail 
banking solution for institutions complying with the New Basel Capital 
Accord (Basel II) Advanced Internal Ratings Based (A-IRB) approach. 
"Experian-Scorex's market leading decision support software, Strategy 
Management, stores the data needed to support Basel II implementation 
and to provide the basis for ongoing monitoring and validation."

Fair Isaac (fairisaac.com) advertises that it "can help turn compliance 
into competitiveness". Fair Isaac's website states "Basel II aims to 
reward the adoption and use of best-practice risk management as a means 
of compliance.  Lenders that take a more effective approach to assessing 
risk by improving credit risk management processes for estimating risk 
exposure - and integrating this knowledge into decision-making processes 
- are expected to reap the rewards of reduced capital reserves. By 
lowering their capital requirements, these lenders will have more 
capital available for investment. By contrast, lenders with higher risk 
portfolios or with inadequate risk management preparation could be faced 
with increased reserve requirements, and decreased competitiveness." 

SeE Consulting (seeconsulting.com) argues "Traditional approaches to 
managing credit risk deliver neither the insight nor the agility 
demanded by emerging complex credit environments. The challenges to 
match information content, detail, format, mode, and periodicity to 
decision support needs and knowledge of potential users is what makes a 
complete risk calculation model in the modern era more complex."

Additional vendors that are promoting their Basel II compliance 
solutions include FNX Sierra global system, HSBC, Norkom, SAS, Standard 
& Poor's, Summit System, Teradata, webMethods, and Wipro Technologies. 
Some other IT consulting firms that are active with Basel II solutions 
and systems development and integration include Accenture, Ernst & 
Young, KPMG, Deloitte, and Paragon Consulting.

Challenges associated with building DSS to help with Basel II compliance 
include building operational loss databases, data integration, 
collecting new data to calculate probability of default, exposure at 
default and the amount of loss given default, delivering data and 
analytics for real-time lending decision support and monitoring, and 
developing audit trails associated with the "risk informed" decision 
making and enhanced lending decision processes.

Many "hard issues" remain controversial including how to incorporate 
Basel II requirements into the corporate governance framework. "Baa" II 
is about much more than decision support and information technology 
(although those issues are mission critical to compliance and 
conceptually challenging).  "Baa" II is about risk management and risk 
mitigation.  "Baa" II may be another Y2K like project for banks -- high 
cost, complex, high time pressure. So will Basel II be the IT challenge 
of the decade in banks? YES! Will Basel II affect competition among 
banks? YES! The banks that get it right will grow, expand and be more 
profitable.

What is the current status for implementing DSS to meet the 
requirements? According to a survey by Mercer Oliver Wyman, only about 
one-third (31%) of banks have developed advanced modeling programs for 
quantifying operational risks and allocating capital. More than one-half 
(57%) of respondents identified Key Risk Indicators (KRIs) as a critical 
area for improvement. My guess is that bankers are being overly 
optimistic about their actual and needed implementation of computerized 
decision support.

What is the timetable for compliance?  The implementation schedule seems 
to creep or slip forward in time, but as of June 26, 2004 the "Basel 
Committee intends for the new framework to be available for 
implementation in member jurisdictions as of year-end 2006. The most 
advanced approaches to risk measurement will be available for 
implementation as of year-end 2007, in order to allow banks and 
supervisors to benefit from an additional year of impact analysis or 
parallel capital calculations under the existing and new rules."

What should bank executives do to implement effective DSS and help 
insure compliance with Basel II? Start with an audit of the bank's 
lending decision process, model the current portfolio and assess the 
possibilities for lowering capital requirements, develop and prioritize 
DSS/IT projects, allocate resources to projects, find partners and 
evaluate proposed solutions. 

As always your feedback and questions are welcomed.

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References

What is operational risk?
http://www.frbsf.org/publications/economics/letter/2002/el2002-02.pdf

Basel II: A Worldwide Challenge for the Banking Business, KPMG white
paper, http://www.kpmg.ca/en/industries/fs/banking/baselII.html

Bardoloi, S., "Basel II: New Wine in an Old Bottle", DMReview,
September 2003, 
http://www.dmreview.com/editorial/dmreview/print_action.cfm?articleId=7359


Connelley, M., "Ensuring Success in Basel II",
http://www.sas.com/news/sascom/2003q2/column_guest.html

IBM, "Dresdner Bank addresses regulations, internal demands and future 
growth with IBM solution",

http://www-306.ibm.com/software/success/cssdb.nsf/CS/
TKNC-5Q4TRX?OpenDocument&Site=default


Lawrence, M., "Marking the cards at ANZ", Risk Magazine, Nov. 2000,
http://www.financewise.com/public/edit/riskm/oprisk/opr-case00.htm

World Bank Basel II Links, Speeches, and Background Readings
http://www.worldbank.org/wbi/banking/bankingsystems/risk2004/readings.html


Relevant recent press releases at DSSResources.COM

07/15/2004 Research and Markets: Basel II - a catalyst for a whole 
redesign of the banking process. 

06/30/2004 Teradata announces Basel II and risk-management enhancements 
in latest Teradata Financial Services logical data model. 

06/26/2004 G10 central bank governors and heads of supervision endorse 
the publication of the revised capital framework. 

06/07/2004 New Global Banking Survey by Mercer Oliver Wyman finds 
industry making significant progress in operational risk management for 
Basel II. 

05/18/2004 BearingPoint's EPMOne(SM) Methodology Can Help Financial 
Services Companies Manage Performance and Comply With Basel II Reporting 
Guidelines. 

05/17/2004 Experian launches Decision Insight commercial credit 
decisioning tool.

05/11/2004 BearingPoint report cites the need for data convergence; 
explains excessive spending on risk and compliance.

05/06/2004 Experian-Scorex and Standard & Poor's Risk Solutions host 
Basel II Accord seminar. 

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What's New at DSSResources.COM

07/09/2004 Posted interview with Shaku Atre "What is Business 
Intelligence?" conducted by Tony Shaw. Check the interviews page.

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DSS News - July 3 to July 16, 2004
Read them at DSSResources.COM and search the DSS News Archive

07/16/2004 Tim Berners-Lee, inventor of the World Wide Web, knighted by 
Her Majesty Queen Elizabeth II.

07/16/2004 Infineon introduces new security chip card controllers to 
make electronic identity cards and passports even more secure.

07/16/2004 Knowledge management: managing intellectual assets helps 
reduce costs.

07/15/2004 Best Buy expands relationship with Accenture.

07/15/2004 Intel validates Hyperion Financial Management performance and 
scalability.

07/15/2004 Research and Markets: Basel II - a catalyst for a whole 
redesign of the banking process.

07/15/2004 Primus Knowledge Solutions announces the worldwide 
availability of Primus KnowledgeCenter 6.0.

07/15/2004 Breaching the leadership skills gap: AchieveGlobal defines 
how interpersonal skills support organizational success.

07/14/2004 Marines in Iraq find battlespace information faster with 
content-based network from Semandex.

07/14/2004 Sales and operations planning programs drive competitive 
advantage and business performance, says Aberdeen Group Report.

07/14/2004 eMason introduces IWorkS Image Workflow System; First 
offering to integrate document management with business process 
workflow.

07/14/2004 Most large companies see Sarbanes-Oxley compliance as part of 
broader corporate governance initiative.

07/14/2004 IBM to acquire Alphablox Corporation, strengthens leadership 
in business intelligence.

07/14/2004 Security is top concern for corporate networks, according to 
global survey of senior executives. 

07/13/2004 TIBCO Software unveils new business process management road 
map. 

07/13/2004 VisiRule: a new graphical business rules tool from LPA.

07/12/2004 Expert Choice unveils latest enterprise portfolio analysis 
solutions.

07/12/2004 First Financial Planners standardizes on Information 
Builders' WebFOCUS for enterprise business intelligence.

07/12/2004 Netspoke leverages Business Objects for business intelligence 
deployment.

07/12/2004 Kalido and SAIC enter systems integrator agreement to meet 
needs of global business intelligence market.

07/12/2004 National Bank & Trust chooses next-generation banking 
technology from ITI unit of Fiserv.

07/12/2004 3M and HealthShare Technology to integrate software for 
health care performance measurement, decision support.

07/12/2004 Groove Networks ships Groove Virtual Office v3.0 to 
commercial enterprises worldwide. 

07/09/2004 Teradata surveys show executives roll the dice when making 
business decisions due to lack of integrated data foundation.

07/08/2004 Intergraph ships G/Technology version 9.2.

07/08/2004 Wonderware enhances ActiveFactory data analysis and reporting 
software; upgraded to improve web-based reporting and support for 
Wonderware Industrial Tablets.

07/08/2004 Business Objects recognized as the worldwide revenue leader 
in business intelligence tools by leading industry analyst firm.

07/07/2004 Answerthink launches Sarbanes-Oxley compliance service 
enabling companies to document internal controls and improve business 
processes using proven best practices from The Hackett Group.

07/07/2004 Elior uses Business Objects to build a Business Intelligence 
System in an SAP Environment. 

07/07/2004 Will the real "iRobot" please stand up?

07/07/2004 Welcome to the new Web: bloglines unveils more features for 
searching, subscribing, publishing and sharing news feeds and blogs. 

07/06/2004 Air One selects Sabre Airline Solutions' SabreSonic New 
Generation Passenger Suite for growth and operational excellence. 

07/06/2004 Alphablox teams with Tangent Analytics to extend operational 
analytics in BI Navigator 4.0.

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