Solutions

Regulatory Requirements

Financial regulations and directives are a comprehensive set of measures that strengthens regulation, supervision and risk management in the banking sector. These measures aim to improve risk management and the banking sector's ability to absorb shocks arising from financial and economic stress, as well as to strengthen banks' transparency and disclosures. In terms of financial regulations, our modules include:

  • Credit risk measurement and management, according to Basel III.
    Module Basel III for credit risk is based on EU Regulation (No 575/2013 of the European Parliament and of the Council from June 26th, 2013) on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012.
  • Market risk measurements and management, according to Basel III.
    Module Basel III for market risk is based on revisions to the Basel II market risk framework of the Basel Committee on Banking Supervision, July 2009.
  • Operational Risk measurements and management, according to Basel III.
    Module Basel III for operational risk is based on revisions to the Basel II operational risk framework of the Basel Committee on Banking Supervision, July 2009.
  • Self-assessment Questionnaires (SAS), according to Basel III.
    SAS are developed for different categories (Asset Damage, Execution Delivery, System Failure, Business Practice, Internal and External Fraud, Employment Practice).
  • Insurance risk, according to Solvency II.
    Module Solvency II is based on the QIS5 Technical Specifications of July 5th, 2010, concerning financial institutions, insurance and pensions. The specification includes market, default and life underwriting risk.

Our modules reduce costs and enhance efficiency through automation of complex processes that require highly specialized skill sets and business knowledge, and enable faster analyses and reports.

Regulatory Calculation Data Flow

When it comes to credit risk, for example, data flow, steps and implementation plan for Basel III Regulatory Capital evaluation process include:

  • Analysis of country specific regulations, adjustment of models and reports and preparation of export files.
  • Import of data, directly from a bank’s core data base or via standard importer.
  • Classification and analysis of the imported data.
  • Running of batch procedures and calculation according to specific regulations.
  • Generation of COREP output and aggregation of results.
  • Reporting locally in different formats (Excel, Crystal report, OLAP reporting and QlikView)
  • Reporting to the Central Bank or to a regulation advisory, using COREP XML/XBRL.

Functionality

We offer the following modules and models to ensure the functionality of regulatory requirements:

Module List Functionality
1
  • Basel III requirements:
  • Market risk - standardized approach
  • Specific interest rate risk
  • Maturity based approach
  • Duration based approach
  • Security investment risk
2
  • Basel III requirements:
  • Foreign Exchange risk -standardized approach
  • Foreign Exchange position
  • Capital requirement for FX risk
3
  • Basel III requirements:
  • Credit risk
  • Standard Approach(SA) Simple method
  • Standard Approach(SA) Comprehensive method
  • Internal Rating Based Foundation Approach (IRB F) (not released)
  • Internal Rating Based Advanced Approach (IRB A) (not released)
  • Exposures, customers, collaterals and optimization
  • Credit risk data: LGD, PD, Migration matrix, Rating
  • Collateral Management and Collateral Optimization
4
  • Basel III requirements:
  • Operational Risk
  • Basic Indicator Approach (BIA)
  • Standard Approach (STA)
  • OR loss database and loss event data entry
  • Self-assessment models
5
  • Basel III requirements:
  • Liquidity risk
  • Portfolio structure/filtering for liquidity classes
  • Liquidity Attributes for position filtering
  • Calculate of portfolio liquidity, LCR and NSFR
6
  • Solvency II: Insurance risk
  • Market risk
  • Default risk
  • Life Underwriting risk
  • Insurance Instruments, mortality tables and scenarios
  • Regulatory settings, market data and solvency attributes
  • Calculation structure
  • Market risk, Default risk, Life Underwriting risk
  • Solvency II Capital Requirements

An important aspect of credit risk calculations is the assignment, calculation, management and optimization of collaterals.

An exposure claim can partially be protected on a percentage basis by a set of different collaterals, for example cash deposits, securities or guarantees. One approach is the credit quality replacement, where the better part of the credit quality covers the exposure’s bad credit quality (better rating and smaller probability of default). The derivation of the credit rating starts from the exposure rating. If not available, issuer rating is taken into account. If this, too, is not available, country rating can be applied. In some cases, both country and issuer rating apply.

Future Developments and Extensions

Module “Regulatory requirements” is highly extendable. This is achieved by adding new or extending existing rule-based models. Any regulation can be described, calculated and reported via a set of models, directives or user definitions. This set of models directly affects the application and makes the system highly extendable to unlimited application areas, which ensure rapid development and adaptation, depending on user requirements. Integration of additional modules within the Basel III framework is currently in progress:

  • Internal Rating Based Foundation Approach (IRB F)
  • Internal Rating Based Advanced Approach (IRB A)
  • Stressed VaR and Incremental Risk Charge
  • Credit Value Adjustment (CVA) and Deposit Value Adjustment (DVA)
  • XBRL COREP Reporting and compliance check

Interfaces and Connectors

Module “Regulatory requirements” is part of the risk management system, which runs as a Windows application or operates as an Internet server application, accessed via WEB Browsers. The module inherits the features of Risk Framework Interfaces and Connectors.

FAQ

1. What are EU regulations and directives?
Regulations are the most direct form of the EU law. As soon as they are passed, they represent binding legal forces throughout every Member State. National governments do not have to take action themselves to implement EU regulations. Regulations are passed either jointly by the EU Council and European Parliament or by the Commission itself. Directives are addressed to national authorities, which must then take action to make them part of the national law.
2. How can a new regulation or directive be implemented into our software system?
Our software system runs program scripts, written in a very high-level artificial intelligence language (Clips). The new regulation/directive has to be described in a new script model or a set of models, using specific rules. This new set of models constitutes a module, which directs the application in the desired area.
3. Is it possible for the generated reports to be in a language different than English?
Yes. Not only reports, but the whole interface can be represented in a language different than English. Our system supports a multi-language translation tool for all models and modules.
4. Can an existing module (for ex. module Basel III) be adjusted to meet specific requirements of the law within a particular country?
Yes. User interface, rules and reports can be easily adjusted by changing the model scripts, and thus meet the user requirements.