Globalisation and growing sophistication of financial technology have created new risks. Financial services are battered by market fluctuations, tight budgetary controls, regulatory issues and an increasingly complicated risk environment. To add to this, the world economy is extremely volatile. Most countries have begun imposing highly complicated regulatory conditions on enterprises operating in financial industries.

The Basel II framework was developed to strengthen the soundness and stability of the international banking system. The Capital Adequacy Accord has evolved into a complex set of recommendations that has createed a variety of compliance challenges for financial organisations across the globe.

Basel II places increased emphasis on internal controls, risk management processes & models, supervisory review processes and market discipline. This ensures that institutions have enough capital to cover their risks, because the regulatory capital requirement, as per Basel II, will be dependent on internal risk assessments. This implies that the lower the risks and the better the risk management, the lower the regulatory capital requirement.

An large array of approaches for measuring credit, operational and market risks are available and organisations can adopt methodologies that best suit their organization and risk profile. The iCAST Compliance Suite is designed to help financial institutions comply with Basel II by providing regulatory and economic capital requirement computation models and regulatory returns reporting capabilities with proven technologies.

The Three Pillars of Basel II

Pillar I: Minimum capital requirements have been specified to ensure that financial institutions hold enough capital to cover their exposure to credit, market and operational risk. The framework provides a continuum of approaches from basic to advanced methodologies for assessing both credit and operational risks to determining capital adequacy. It provides a flexible structure in which banks, subject to supervisory review, will adopt approaches that best fit their level of sophistication and their risk profile.

Pillar II: Supervisory review of an institutionís capital adequacy and internal assessment process is carried out to ensure that they have adequate capital to support all the risks in their business and to develop and use better risk management techniques in monitoring and managing their risks. Another important aspect is the assessment of compliance with the minimum standards and disclosure requirements of the more advanced methods in Capital Adequacy, in particular the IRB framework for credit risk and the Advanced Measurement Approaches (AMA) for operational risk. Supervisors must ensure that these requirements are being met, both as qualifying criteria and on an ongoing basis.

five main features of this rigorous process are:

  • Board and senior management oversight
  • Sound capital assessment
  • Comprehensive assessment of risks
  • Monitoring and reporting
  • Internal control review

Pillar III: Market discipline sets out a framework for public disclosures and encourages safe and sound banking practices through effective disclosure. It aims to enforce market discipline with a set of disclosure requirements that will allow market participants to assess key pieces of information with regard to the scope of application of capital, quantum of capital, risk exposures and risk assessment processes whereby the capital adequacy of the institution is maintained in control.

iCAST enables banks and financial institutions to model a comprehensive Basel II framework that automates compliance activities and processes with risk based reporting. With the structured and disciplined approach of iCAST, banks can begin to achieve the intended Basel II benefits by enhancing risk management and lowering capital requirements accordingly. The flexibility of iCAST Basel II Suite can be used to develop advanced models across a broad range of risk spectrum with risk segmentation analysis and stress testing. iCAST incorporates state-of-art technology, best-practices, methodologies and processes to deliver a future proof, scalable platform.