Skip to Main Content
Access your saved content
Investment banks must realign their operational strategy and level up their capital allocation processes to successfully implement an internal model method (IMM) approach to counterparty credit risk (CCR) regulatory projects, while adhering to Basel III standards.
Under Basel III, regulators have proposed a set of measures to increase the control and management of banking-related risks. Our in-depth analysis of Basel III and the challenges it brings reveals that banks can meet these new regulatory requirements while driving operational improvements to address key post-project issues, such as managing complex and interlinked risks, and reducing the overall impact of market transactions’ capital requirements.
This point of view discusses how banks can structure a CCR IMM Basel III project and its key success factors.
The framework established under Basel II has broadened and banks seeking to use their internal models for calculating their CCR regulatory capital must deal with new rules and constraints. Simultaneously, the stakes for using the IMM approach in terms of capital have been raised for investment banks.
Banks working to comply with Basel III will face numerous complex and interrelated tasks, as well as technological issues arising from the data and the sophisticated calculus methodologies used during tight production periods.
Bank inspection and regulatory teams should consider a plan that addresses methodologies and functional requirements as well as budgeting, project management and documentation.
While there are a number of factors contributing to the successful implementation of an IMM project, banks should consider allocating time and resources for detailed project qualification. This includes:
Scoping phase: This phase covers a methodological, functional and technical gap analysis of the “as is” and the “to be” states in terms of regulatory requirements. After this, banks should:
Outline the action plans and responsibilities for tasks and assignments.
Define the “to be” functional and application macro architecture.
Develop accurate estimates of the financial and human resources needed for the project.
Create a business case for the entire program by evaluating the budget plan against the project’s financial impact assessments in terms of capital gains.
Define an efficient project governance structure for the implementation program.
Create an efficient work breakdown structure, with tasks and responsibilities clearly identified, and covering every functional and technical issue.
Establish key milestones to accurately measure project progress.
Deploy coordination teams to ensure that the key transversal topics (involving several streams) are closely managed and monitored.
Throughout the course of the project, it is important to keep a tab on the financial impact assessment results that will eventually help evaluate the impact of key issues on risk metrics.
Finally, due to its complexity, the success of an IMM project also depends on the performance capabilities of the information system—one that is flexible and robust to meet the performance needs of constrained financial closing periods.
For a project aimed at implementing an IMM approach to counterparty credit risk on market transactions, banks should consider the following work streams:
Data feeding: Offers the necessary elements for providing the regulatory indicators data to the calculation engine.
Effective expected positive exposure (EEPE) and stressed EEPE calculations: Encompasses the definition and implementation of methodologies for calculating regulatory indicators, including EEPE, stressed EEPE and specific wrong way risk (WWR), as well as methodological, functional and technical documentation.
Credit valuation adjustment (CVA) value-at-risk (VaR) calculations: Involves implementing the feed streams and treatments required for the calculation, analysis and back-testing of a CVA VaR and a stressed CVA VaR measure.
Validation of internal models: Defines the methodological framework for back-testing the indicators related to CCR, develop scenarios to stress-test the CCR indicators, collects the required data, and processes and analyzes the back-testing results and stress-testing exercises.
Collateral management and monitoring: Creates a collateral management unit to address tasks such as driving IT changes to align operations with regulatory constraints.
Regulatory risk-weighted assets (RWA) calculation: Makes all necessary adjustments to the RWA calculation engine.
Quality control of calculated indicators: Helps meet the regulatory requirements of establishing a data control and validation unit.
Risk analysis and management: Helps address the challenges of implementing a risk management unit responsible for second-level CCR analysis.
Valérie Villafranca is a managing director with the Risk Management practice at Accenture. She is responsible for risk management consulting activities for banking and capital markets in France, Belgium, the Netherlands and Luxembourg. Based in Paris, Valérie has 20 years of consulting experience, over half in the risk management space.
Jérôme Grelier is a senior manager with the Risk Management practice at Accenture. Based in Paris, and with 13 years of broad-based industry and management consulting experience, he has worked at the risk and finance departments of numerous banks, mainly focusing on the regulatory agenda.
Frédéric Benacin is a senior manager with the Risk Management practice at Accenture. Based in Paris, he has nine years of management consulting experience, mainly in the risk and regulatory areas for the banking sector.
November 19, 2013
Skip Footer Links