Part - I

Credit Risk can be regarded as an inherent component of the banking business. The introduction of customized banking products and services has made the task of judging the risk impact of credit decisions all the more challenging and time consuming. Also the increasing inter-linkages amongst the various financial institutions since the late eighties have ensured that any risk event experienced by one financial institution has the potential to impact others also. In order to improve credit risk monitoring & measurement so that capital requirements of banks are more in line with the nature of risks, they are being exposed to new accords. The BASEL Committee on Banking Supervision proposed the New BASEL II Accord in 1999, which will replace the exiting Accord of 1988.

This white paper tries to analyze the various requirements and issues confronting banks while implementing a Credit Risk BASELII Solution. It also offers a solution framework for banks based on a series of highly flexible and inter-connected modules that capture and monitor every aspect of all possible credit risk variables in a bank. Every module is highly parameter driven to take care of changing credit risk requirements and local regulations. Capital Charges and Risk Weights for all the three approaches of Credit Risk BASELL II can be obtained from a single platform.

INTRODUCTION

In 1988, the BASEL Committee on Banking Supervision introduced global standards for regulating the capital adequacy of banks. The Accord commonly referred to as BASEL I, aimed at promoting banking stability established a minimum requirement of 8% of capital to risk - weighted assets for banks.

The exact figure of 8% has always been a matter of debate, but the BASEL I Accord has been adopted by over 100 countries worldwide and is a major milestone in the history of banking regulations. Since the end of the 1980s, the business of banking, risk management and financial markets have undergone such profound changes, that the BASEL I standards were found to be inadequate.

In June 1999 the BASEL Committee released a proposal for a New Capital Accord to replace the existing one, which came to be referred to as BASEL II. The final version of the BASEL II Accord will be published towards the end of the fourth quarter of 2003.

Next

* Contributed by -
Prashant Jadhav,
2nd Year PGeMBA (Finance),
Mumbai Educational Trust (MET) Schools of Management, Mumbai.