Achieve compliance to the Foundation Internal Ratings Based (FIRB) Approach for a large Asian bank (asset size of USD 60 billion) in order to improve capital adequacy standards. The project mandate was to assist the bank in implementation of the Basel II standardised approach and then the implementation of the FIRB approached.

The Approach

The project was divided into three distinct work streams in order to facilitate the implementation of the project, given the complexity of the bank and the multiple stakeholders involved.

• Data Work Stream delved into the client's complex data systems to source the data required for capital calculation.  The data gap analysis was conducted using Aptivaa's proprietary framework, and a resolution strategy charted in coordination with the bank's IT and risk teams. Aptivaa worked closely with the bank and supported them throughout the process of data preparation, data cleaning, testing and validation of capital calculation.
• Business Work Stream worked with the risk management team of the bank to identify gaps between the Basel II / local regulatory guidelines and bank's existing policies and procedures. Aptivaa used a consultative approach, based on dialogue with the bank, to change the Risk Organisation structure in line with industry best practices and to modify the bank's Credit Risk Management Framework, Risk Management Policies and Procedures, as well as the bank's Credit Programs.
• Rating Work Stream developed a comprehensive rating landscape encompassing the entire ratings system: rating models / methodologies, procedures and processes of the bank. A new Master Rating Scale was developed for the bank and the associated risk parameters (PD) estimated using the bank's own historical data over the last five years. Aptivaa's team of statistical and banking experts also validated the bank's existing corporate rating model using Aptivaa's proprietary Validation framework.

The (top tier) Corporate rating model was modified using a combination of statistical analysis and consultative dialogues with the bank's risk management team. New rating models were developed for the bank's divisions, like Small and Medium enterprise and margin lending. A Monte Carlo simulation-based approach was used to develop rating models for the bank's asset backed securitisation portfolio and historical data of the past ten years was used to estimate PD, LGD and EAD.

The Results

The bank achieved full compliance under the audit process, supervised by the local regulator, for adherence to Basel II guidelines. In addition to compliance, the bank's overall credit risk management process was enhanced. The new risk management organisation structure also helped improve the bank's operating efficiency.