As the deadline for Basel II compliance nears, IBMs business intelligence solutions group is readying a new DB2-based tool to help financial institutions comply.
Karen Parrish, vice president of World Wide Sales for IBMs Business Intelligence Solutions, told eWEEK.com that Big Blue, of Armonk, N.Y., is preparing templates that will help Basel II-affected companies respond to the regulations requirements. IBM has not yet released details on what the product will be named, nor on a ship date or pricing.
Basel II is a set of regulations that establishes how such companies should report on cash and credit risks, to ensure against loss that results from faulty internal processes, people or systems, or from external events. The regulation comes from the Basel Committee, a group of 10 countries that includes the United States.
Full Basel II compliance will be required by the end of 2006. At this point, financial institutions are in the process of revamping their internal systems, supervisory processes and reporting processes.
IBM already provides data-warehousing models for specific industries that are structured to feed data into the data warehouse. In the case of a bank, a data warehouse feeds off of data from sources including investment services or credit card divisions, for example. Data housed in a banks data warehouse then has to be reported on according to regulatory requirements.
Basel IIs impact
Regulatory requirements have proliferated madly since 9/11 and the Enron debacle, with the passage of regulations controlling data privacy, risk and compliance that include HIPAA, Sarbanes-Oxley, the Patriot Act and Basel II. That heady mix of regulations is now the biggest pain point for IBMs business intelligence customers, Parrish said. “Our customers are being driven by tremendous regulatory environments,” she said.
Basel II is considered by some experts to be the next Y2K or Euro conversion project when it comes to the overhauling of systems it will entail. Forrester Research pegs IT budgets for the conversion between $20 million and $30 million for large banks.
In early 2003, industry estimates said that between one-third and one-half of banks were not sufficiently prepared for Basel II. Systems integration is one of the major challenges of Basel II and is likely one of the most significant hitches holding banks up, according to Jost Hoppermann, vice president of Giga Research, a division of Forrester Research.
The situation has improved somewhat since then, Hoppermann said, but there are still banks that will be caught unprepared when the final deadline for compliance arrives in 2006. “[Unprepared banks] will consequently not be able to use more sophisticated Basel II approaches, probably resulting, for example, in higher capital adequacy requirements, depending on their credit portfolio,” he said.
Kevin Sexton, vice president and division manager within the Key Technology Services division of KeyBank, an $84 billion bank based in Cleveland thats been working to ready the banks data collection systems for Basel II compliance since the late 90s, said theres still “a significant amount of work” to do in terms of pulling data together. “Were well on the way and further on the way than many of our peers and competitors,” he said, with significant work remaining to be done in terms of data analytics and the creation of risk models.
Regulators have told KeyBank to prepare to have from five to seven years worth of data history in each of the banks portfolios, according to Bob Kula, director of economic capital. “In some cases, if you only have three years of data, you need to continue to expand, and not throw historical information away,” he said. “Over time, by the time [Basel II] takes effect, you can get to the historical data requirements Basel is expecting.”
Work on Basel II at KeyBank has included building an enterprise data warehouse with a downstream-dependent data mart—in other words, the data warehouse passes information on to the data mart, as opposed to the data mart collecting its own information, applying its own business rules and populating the data warehouse. KeyBank uses an IBM DB2 database on an OS/390 platform for the data warehouse. The bank has various data marts: some on the same OS/390 DB2 setup, while some are Oracle Corp. data marts. The bank uses analytics tools from SAS Institute Inc., Business Objects S.A. and MicroStrategy Inc.
The downstream data mart is significant in that it allows for consistency of information, Kula said. “We dont all walk into a room with 10 reports that should say the same thing and dont,” he said.
Working on Basel II has not been without benefit. One example of data-improvement opportunities that have popped up at KeyBank is a single view of customers, Sexton said. “Before we began all this, there were multiple, authoritative views of the customer, quote unquote,” he said.
As a matter of fact, KeyBank isnt even technically required to comply, since Basel II is mandatory only for large banks that have assets with international presence. The bank finds the benefits to be compelling enough to comply, however. “To not be a part of it would be a mistake,” Kula said. “Wed be at a disadvantage [in terms of competition] not to be moving along this path.”