IntroductionBasel II is a Best Practice international standard for bank capital risk management. It is the international standard of choice for most banks to measure and manage the amount of risk and capital. It is in the interest of each bank to be able to survive adverse economic cycles in order to continue to offer an attractive return for its shareholders. The ability to survive is linked to the quality of its risk selection and management processes and to its capital endowment.

The Central Bank of Nigeria (CBN) issued the guidance notes on Regulatory Capital Measurement and Management for the Nigerian Banking System (for the Implementation of Basel II/III) (BSD/DIR/CIR/GEN/LAB/06/053).

Accordingly, all bank and banking groups are expected to adopt the basic approaches for the computation of capital requirements for credit risk, market risk and operational risk as follows:

CreditRisk The Standardized Approach (TSA) is to be adopted, however all forms of corporate claims will be treated as unrated.

MarketRisk The Standardized Approach (TSA) is to be adopted.

OperationalRisk The Basic Indicator Approach (BIA) is to be adopted.

Your first step to review your banks state of Basel II compliance.

Our Proposal

A 5-Day Basel II/III Diagnostic audit, review and gap analysis,

Implementation of Basel II/III in your organization

Process Breakdown: ImplementingBaselII(III)generallyinvolvesthefollowingassessmentsandaddressingtheiroutcomes:

InternalImpactAssessment: ImprovedRiskManagementDrivesNeedforQualityData(Pillar1&2)KeyQuestionsToBeAnswered:o Are internal risk management systems and processes

adequate to determine all your risk exposures (for example, market, credit, operational, and liquidity risks) and to derive your capital requirement calculations?

o Are internal controls sufficiently aligned with the risks?o How does your risk profile affect your regulatory and

economic capital requirements? Can it be optimized? How does it react to crises?

o How will regulatory capital costs be allocated to business lines? Do we have a code of ethics supported by the appropriate tone at the top to ensure that risks are properly managed?

o Do we recognize our shareholders expectations for risk appetite?

CustomerImpactAssessment:ChangingBusinessRelationships(Pillar2) KeyQuestionsToBeAnswered:o Do you collect the right data about both our existing

and new customer relationships and make sure that it is complete, consistent, sufficiently frequent, and available as necessary?

o Do you analyze data appropriately to manage and mitigate customer risks and to strengthen the relationship with the customer?

o Do you make use of rating systems appropriate to customers, the business, and your inherent risks?

o What information do you need to determine who should be your customers? How will you make those decisions?

o Do you use data to offer the right product to the customer?

GlobalImpact:ImprovedFinancialMarketStability(Pillar3)KeyQuestionsToBeAnswered:o Which disclosure strategy/policies should you adopt?o What are your competitors or peers doing, both banks

and non-banks? o How can you communicate information externally in a

meaningful way? Should you disclose stress-testing and scenario analysis efforts?

o What are the possible approaches to disclosure? Can disclosure become a competitive advantage?

o What additional impact will rating agencies gain on cost of capital via market disclosure?

Basel II Compliance Diagnostic Analyzer

Basel II/III Milestones AuditOur approach starts with an internal Basel II milestones audit. The aim of the independent audit is to identify the work the bank has done in as far as systems, data issues, modelling, documentation, model validation and risk quantification are concerned. In a nutshell, the aim is to identify the progress so far made and the gaps that need to be filled for the bank to be fully Basel II/III compliant. The findings will be presented in the form of a report.

Among others, the report presents the findings for each risk category, and then it proposes some improvements so as to achieve the best results and to help the bank make decisions based on accurate figures. Risk quantification is such a crucial exercise for the bank as the outputs are inputs to regulatory and economic capital calculations, among others.

NecessaryUnits

Modeling

Model Validation

Group Model Risk Audit

Group Internal Audit

CreditRiskModels CreditRiskPolicyDocs MarketRiskDocs OperationalRiskPolicyDocuments

MarketRiskModels OperationalRiskModelsProbability of Default

(all)Group Risk Policy Market Risk Policy

Documents Operational Risk Documents

Market Risk Charge

Loss Given Default (all)Group Modeling Policy (FX, IR, Equities,

Commodities, etc)Operational Risk Charge model

Exposure at Default (all)Group Model Validation

FrameworkScorecards

(AS, BS, CS, etc)

EL = PD x LGD x EAD

Credit RWA = Kx12.5xEAD

K = f(PD, LGD, M, R)

Market RWA OR RWA

Basel II/III Compliance Audit SheetCredit Risk Market Risk Operational Risk

Documents Required (if available) Credit Policy Documents Modeling Policy Documents Market Risk Policy Documents Operational Risk Policy Documents Model Documentation for all the models the bank has

to date. (PD, EAD, LGD, Market VaR, OR models, propensity, all scorecard models, etc)

Stress Testing Framework Basel II/III Implementation Progress Reports ICAAP Reports (latest) Model Validation Framework Others

Timeframe

The BaselIIComplianceDiagnosticAnalyzer is a comprehensive assessment completed in 5 days with all concerned departments. This includes the presentation of findings, gap analysis and developing a road-map towards Basel II/III Compliance.

Specific Deliverables

InternalProbabilityofDefaultModel

InternalCreditRatingModel

SupervisoryRatingScaleMapping (for risk-based lending; risk-based loan pricing & provisioning)

MarketRiskSimulator (VaR Simulator)

OperationalRiskCharge(Capital)Model(Basic Indicator Approach)

Portfolio&Bank-wideExpectedLossModel

CapitalAllocation(Provisioning)Model (for Regulatory Capital & Economic Capital)

RiskWeightedAssetsCalculator

Tier1&2Capital/RatioCalculator

BankSystemsIntegration

Contact Us:Victor Nkomovictor@avantgardenig.com(NG) +234 81 0323 1613(SA) +27 11 655 7225

Our Partners

Adebola AkapoAdebola@avantgardenig.com +234 80 9179 9577

Physical Address: Pro Space Center, 18A Olu Holloway (formerly Temple) Road, Ikoyi, Lagos, Nigeria

Funmi Tytlerfunmi@avantgardenig.com (NG). +234 80 2448 4963

Consultancies: A BuiltCorporatePDModelfor

a leading Commercial Bank in Zimbabwe Basel II Implementation (2012)

BuiltSMEsPDModelforaleadingCommercial Bank in Zimbabwe Basel II Implementation (2013)

BuiltRetailPDModelforaleadingCommercial Bank in Zimbabwe Basel II Implementation (2013)

BuiltMarketVaRSimulatorfora leading Commercial Bank in Zimbabwe Basel II Implementation (2013)

SettingupCBZModelingandModelValidation Units (2012)

DevelopingCBZModelingPolicydocument in line with Basel II (2012)

BuilttheCBZBankLGDandEADModels for all products (Wholesale & Retail) (2014)

Consultancies: B BuiltCorporatePDModelfor

FBC Bank - Zimbabwe Basel II Implementation (2013)

BuiltSMEsPDModelforFBCBank-Zimbabwe Basel II Implementation (2013)

BuiltRetailPDModelforFBCBank-Zimbabwe Basel II Implementation (2013)

DevelopingtheirModelValidationframework (2013)

ValidatingtheircurrentApplicationScorecards. (current)

DevelopingtheirBehavioralScorecards. (current)

DevelopedtheirLGDandEADModelsfor all their products (2013)

ProducedtheFBCICAAPReport(March 2014)

Consultancies: C BuilttheWitsUniversitysTop

100 University Milestone Model - Forecasting The Financial Implications & Progressions From 2007 to 2015. (under the Strategic Planning Division oftheChancellorsOffice)(2011)

BuilttheBulawayoCityCouncilRevenue Forecasting & Modeling sponsored by GIZ (2013)

ConsultedforOtherlocalmunicipalities(2013)

BuilttheChampionsInsurance:Minimum Capital Required Model for Solvency II (2011)

BuilttheChampionsInsurance:Solvency Capital Required Model for Solvency II (2011)

BuilttheCBZInsurance:SolvencyCapital Required Model for Solvency II (2014)

BuilttheCBZInsurance:MinimumCapital Required Model for Solvency II (2014)

Nedbank:VarioushighlevelCreditRisk Modeling Assignments & Training for Nedbank Group Risk Model Risk Audit (Contact: Bulelwa Soci) (since 2009)

Our Basel II/III SolutionsThere are many challenges along the way but we have both the local and global expertise to assist you in actualizing your Basel II/ III objectives.

Through our proprietary tools, we offer support in assessing and benchmarking your Basel II/ III compliance and the related decision-making process. All of this is done in consideration of the local regulatory requirements. Our consulting approach is to work with clients in an integrated and combined team.

This approach has proven to yield significant benefits in terms of solution design quality, knowledge transfer and client acceptance to a new way of working.

Oursolutionsincludetopicssuchas:

BaselII/IIIAwarenessWorkshopsandTrainingforSeniorManagement,

BaselDiagnosticaudit,reviewsandgapanalysis,

QuantitativeImpactAnalysis,

Development/ValidationofInternal

RatingModelsandOverallRiskManagementFramework,and

ITSystem-Implementationandsystemsintegration

MarketRiskModeling&Implementation

OperationalRiskModeling&Implementation

ScorecardsModeling&Implementation

Recent Projects

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