The Basel II Accord may reduce risks for banks, but the regulation is complicated and time consuming. In search of a global compliance solution, The Bank of New York partnered with Financial Architects (FinArch) based in Belgium.

For nearly two decades, banks have had to set aside 8 percent of risk-weighted assets to offset credit risk to meet the requirements of the Basel Accord. The regulations have been revised a couple of times to include minimum regulatory capital requirements to offset market risk. Now, the measurement of operational risk adds a new level of complexity to the regulation.

FinArch leverages Microsoft technology to offer a best-of-breed solution that helps banks simplify the adoption of risk management and compliance initiatives and embed best practices in their daily activities.

To comply with Basel II, banks need to put in place a systematic process or set of standardized activities across the company to measure, monitor, and manage operational risk. They can adopt one of three approaches. The simplest is called the Basic Indicator Approach. The next most complex is the Standardized Approach. The most rigorous is the Advanced Measurement Approach (AMA). Over and above that, banks have to calculate their internal capital requirements using their own methodologies. Regulators and supervisors review each bank’s calculations and determine what their overall capital requirement should be.

In the US, only about the top 20 banks adopted a variation of Basel II known as Notice of Proposed Rulemaking (NPR). The AMA and IRB-A are used to calculate minimum capital requirement to offset operational and credit risk respectively. The new Pillar II Internal Capital Adequacy Assessment Process (ICAAP) is used to identify and measure material risks, set capital goals related to risks, and provide governance and controls to ensure that internal capital assessments are subject to proper oversight. In Europe all financial institutions regardless of size must adopt Basel II, but they are free to decide the approach. The rules came into effect in Europe at the end of 2007, but implementation has been delayed in the US.

As a global bank, The Bank of New York Mellon, must comply with different flavors of the regulation. To this end, finding one Basel II compliance solution was a challenge.

“Each of the countries has its own little twist on Basel II,” says Julie Behounek, a VP for The Bank of New York Mellon’s regulatory reporting office. “Even though there are similarities, there are differences in the way things are treated.”

The Bank of New York Mellon built a data warehouse that enables it to comply with Basel II and enhance credit and other internal reporting. Data is pulled out of the warehouse and fed into FinArch’s Financial Studio (FinStudio) product. Business units within the bank can extract the data from FinStudio to create reports, and FinArch’s Basel engine is used to generate compliance reports for each local area.

Some entities within the bank have local reporting obligations and others have consolidated reporting obligations. The FinArch solution can be used regionally, for example in Europe, or it can feed data via a global architecture into the solution in New York to produce consolidated reports.

The data is reconciled with the general ledger twice, once when it enters the warehouse and again when it goes into FinStudio. “We’re all using the same core set of data,” says Behounek. “Because we’re bringing in transactional level data, it gives us data transparency as far as ensuring the data is complete, accurate, and reported correctly.”

So far, The Bank of New York Mellon has implemented the FinArch solution in New York, London, Brussels, and Luxembourg. The system is about to go live at Pershing in London and Ireland, and it is being implemented in ABN Mellon in the Netherlands.

The Bank of New York, which completed its merger with Mellon Financial in 2007, chose FinArch because of the broad scope and flexibility of its software. It implemented the Basel II solution, but within the same box it can comply with Federal Financial Institutions Examination Council (FFIE) rules and International Financial Reporting Standards (IFRS). The availability of a Web version was a key benefit. But the deciding factor in the purchasing decision was FinArch’s Basel engine. “A lot of the competitors that we looked at had a lot of ideas on paper and theories in how they would do things, but they really didn’t have anything built yet,” says Behounek. “FinArch already had it built and it was functioning.”

FinArch leverages Microsoft technology to offer a best-of-breed solution that helps banks simplify the adoption of risk management and compliance initiatives and embed best practices in their daily activities. Microsoft technology makes the solution cost-effective as well. “The value for The Bank of New York is that as a scalable enterprise platform, it comes with considerably lower TCO than other platforms such as Oracle Unix,” notes Nigel Lee, chief commercial officer at FinArch.

www.bnymellon.com

By Sherree DeCovny