Octagon Advisors

BASEL II CAPITAL FRAMEWORK

Overview

The impending introduction of the Basel II Capital Framework should be seen as an opportunity for banks to embrace the latest risk management processes to improve their competitive edge.

Adoption of the Basel II Capital Framework will result in:

	generally lower capital requirements for banks that have a large retail portfolio
	more efficient allocation of capital based on levels of risk of various lines of business and portfolios
	ability to offer competitive loan pricing vis-à-vis banks that are not Basel II ready (particularly for borrowers with good credit)
	potential for more favourable credit ratings and hence lower cost of funding for banks that have adopted Basel II

Our Services

Our consulting services for Basel II Capital Framework include the following:

Advice on Basel II strategies and options

Pillar 1 and Pillar 3

	Evaluation of approaches and scope
	Assist banks in Basel II readiness assessment through the conduct of detailed gap analysis for both SA and IRB approaches:
		Understanding and interpretation of national discretion issues
		Conduct detailed Process Gap Analysis, covering asset classification, credit risk mitigation, internal models, treatment of NPLs and equities, etc, depending on the approach selected
		Conduct detailed Data Gap Analysis to identify data required for RWA computation
		Develop Gap Closure Plan including priorities and any dependency of tasks
	Advise banks on implementation of SA and IRB approaches:
		Definition of policies and processes on asset classification, external ratings, use of internal ratings, credit risk mitigation, etc, in line with the deployment of relevant Basel II-related systems
		User requirements for system enhancements in line with SA and IRB requirements
		Evaluation and selection of RWA computation engine
		Calibration of model outputs
		Preparation for certification by national supervisor
	Credit Rating Model Development and Validation (please refer to section on Credit Risk Management)
	Use Test: In line with Basel II requirements, banks must have a credible track record in the use of internal ratings information in its business and support operations. We provide advice to assist banks in the development of Use Test framework, policies and processes for areas such as:
		Credit Approval
		Limit Management
		Reporting of Credit Risk Information
		Other broader risk management activities, such as provisioning, credit risk appetite, regulatory capital calculation, profitability and performance measurement, etc.

Pillar 2 Capital Computation and Management

One of the key requirements of Pillar 2 is that banks should have an internal process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining the required level of capital.

To assist banks in meeting Pillar 2 requirements, we provide consulting services in the following areas:

	Development of an Integrated Capital Management framework and processes, which will incorporate a set of recommendations covering the framework that the bank should put in place on monitoring of capital adequacy, capital planning and capital management.
	Capital Adequacy Assessment: Assist banks in developing the necessary framework, approaches and processes to identify, measure and monitor the types of risks that are not specifically covered under Pillar 1, and estimate the amount of additional capital required.
	Capital Planning and Management: Assist banks in drawing up an overall plan for meeting its total capital requirements, and adopting measures to address any expected capital shortfall and ensuring optimal use of any expected capital excess
	Capital Allocation: Provide advice on how capital can be most appropriately allocated to the business units based on the expected returns and in accordance with their credit, market, operational and other risk exposures.