Solutions

Regulatory Requirements

Financial regulations and directives represent a comprehensive set of measurements that strengthen regulation, supervision and risk management in the banking sector. These measurements 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, Eurorisk Systems' modules include:

  • Credit Risk measurement and management, according to Basel III.
    The Credit Risk Module for Basel III is based on the 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.
    The Market Risk Module for Basel III 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.
    The Operational Risk Module for Basel III 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.
    The Solvency II Module is based on the QIS5 technical specifications from July 5th, 2010, concerning financial institutions, insurance and pensions. The specification includes market, default and life underwriting risk.

Regulatory Calculation Data Flow

The data flow, the steps and the implementation plan for Basel III regulatory capital evaluation process for credit risk include:

  • Analysis of country specific regulations, adjustment of models and reports, preparation of export files.
  • Import of data, directly from a bank’s core database or via the 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

The following modules and models ensure the functionality of regulatory requirements:

Module List Functionality
1
  • Basel III requirements:
  • Market Risk - standardised approach
  • Specific interest rate risk
  • Maturity based approach
  • Duration based approach
  • Security investment risk
2
  • Basel III requirements:
  • Foreign exchange risk - standardised 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)
  • Internal Rating Based Advanced Approach (IRB A)
  • Exposures, customers, collaterals and optimisation
  • Credit risk data: LGD, PD, migration matrix, rating
  • Collateral management and collateral Optimisation
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
  • Calculation 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

The assignment, calculation, management and optimisation of collaterals are important aspects for credit risk calculations.

An exposure claim can partially be protected on a percentage basis by a set of different collaterals, e.g. 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

The Regulatory Requirements Module is highly extendable due to a simplified process of adding new or extending already existing rule-based models. Any regulation can be described, calculated and reported through a set of models, directives or user definitions. This set ot models directly affects the application and makes the system highly extendable in an unlimited number of application areas. This ensures a rapid development and adaptation, depending on user requirements. Additional modules, that are currently integrated into the Basel III framework are:

  • 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

The Regulatory Requirements Module inherits the features of Risk Framework Interfaces and Connectors.