Basel II

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

Introduction
Basel 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:
Credit Risk The Standardized Approach (TSA) is to be
adopted, however all forms of corporate claims will be treated
as unrated.
Market Risk The Standardized Approach (TSA) is to be
adopted.
Operational Risk The Basic Indicator Approach (BIA) is to be
adopted.

Basel II/III Milestones Audit

Our 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.

Our Proposal
A 5-Day Basel II/III Diagnostic
audit, review and gap analysis,
Implementation of Basel II/III
in your organization

Process Breakdown:
Implementing Basel II (III) generally involves the
following assessments and addressing their outcomes:
Internal Impact Assessment: Improved Risk Management
Drives Need for Quality Data (Pillar 1 & 2)
Key Questions To Be Answered:
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?
Customer Impact Assessment: Changing Business
Relationships (Pillar 2) Key Questions To Be Answered:
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?
Global Impact: Improved Financial Market Stability
(Pillar 3) Key Questions To Be Answered:
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?

Specific Deliverables

Documents Required (if available)

Credit Policy Documents

Internal Probability of Default Model

Modeling Policy Documents

Internal Credit Rating Model

Market Risk Policy Documents

Operational Risk Policy Documents

Supervisory Rating Scale Mapping

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

Model Documentation for all the models the bank has

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

Market Risk Simulator (VaR Simulator)

Stress Testing Framework

Operational Risk Charge (Capital) Model

(Basic Indicator Approach)

Basel II/III Implementation Progress Reports

ICAAP Reports (latest)
Model Validation Framework

Portfolio & Bank-wide Expected Loss Model

Others

Capital Allocation (Provisioning) Model

(for Regulatory Capital & Economic Capital)
Risk Weighted Assets Calculator

Timeframe

Tier 1 & 2 Capital/Ratio Calculator

The Basel II Compliance Diagnostic Analyzer 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.

Bank Systems Integration

Basel II/III Compliance Audit Sheet

Credit Risk
Necessary Units

Credit Risk Models

Modeling

Probability of Default
(all)
Loss Given Default (all)

Model Validation
Group Model Risk
Audit
Group Internal Audit

Exposure at Default (all)

Credit Risk Policy Docs

Group Risk Policy

Group Modeling Policy
Group Model Validation
Framework

Market Risk
Market Risk Models Market Risk Docs

Market Risk Charge

(FX, IR, Equities,
Commodities, etc)

Market Risk Policy

Documents

Operational Risk
Operational
Risk Models

Operational Risk
Charge model

Scorecards
(AS, BS, CS, etc)
EL = PD x LGD x EAD
Credit RWA
= Kx12.5xEAD
K = f(PD, LGD, M, R)

Market RWA

OR RWA

Operational Risk
Policy Documents

Operational Risk
Documents

Recent Projects
Consultancies: A

Built Corporate PD Model for

a leading Commercial Bank in
Zimbabwe Basel II Implementation
(2012)
Built SMEs PD Model for a leading
Commercial Bank in Zimbabwe Basel
II Implementation (2013)
Built Retail PD Model for a leading
Commercial Bank in Zimbabwe
Basel II Implementation (2013)
Built Market VaR Simulator for
a leading Commercial Bank in
Zimbabwe Basel II Implementation
(2013)
Setting up CBZ Modeling and Model
Validation Units (2012)
Developing CBZ Modeling Policy
document in line with Basel II (2012)
Built the CBZ Bank LGD and EAD
Models for all products (Wholesale &
Retail) (2014)

Consultancies: B

Built Corporate PD Model for

FBC Bank - Zimbabwe Basel II
Implementation (2013)
Built SMEs PD Model for FBC Bank Zimbabwe Basel II Implementation
(2013)
Built Retail PD Model for FBC Bank Zimbabwe Basel II Implementation
(2013)
Developing their Model Validation
framework (2013)
Validating their current Application
Scorecards. (current)
Developing their Behavioral
Scorecards. (current)
Developed their LGD and EAD Models
for all their products (2013)
Produced the FBC ICAAP Report
(March 2014)

Our Basel II/III Solutions

Consultancies: C

Built the Wits Universitys Top

100 University Milestone Model Forecasting The Financial Implications
& Progressions From 2007 to 2015.
(under the Strategic Planning Division
of the Chancellors Office) (2011)
Built the Bulawayo City Council
Revenue Forecasting & Modeling
sponsored by GIZ (2013)
Consulted for Other local municipalities
(2013)
Built the Champions Insurance:
Minimum Capital Required Model for
Solvency II (2011)
Built the Champions Insurance:
Solvency Capital Required Model for
Solvency II (2011)
Built the CBZ Insurance: Solvency
Capital Required Model for Solvency II
(2014)
Built the CBZ Insurance: Minimum
Capital Required Model for Solvency II
(2014)
Nedbank: Various high level Credit
Risk Modeling Assignments & Training
for Nedbank Group Risk Model Risk
Audit (Contact: Bulelwa Soci) (since
2009)

Our solutions include topics such as:

There 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.

Basel II/III Awareness Workshops and Training for Senior

Management,

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.

Quantitative Impact Analysis,

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.

Basel Diagnostic audit, reviews and gap analysis,

Development/Validation of Internal
Rating Models and Overall Risk Management Framework, and
IT System-Implementation and systems integration
Market Risk Modeling & Implementation
Operational Risk Modeling & Implementation
Scorecards Modeling & Implementation

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

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

Adebola Akapo
Adebola@avantgardenig.com
+234 80 9179 9577

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

www.avantgardenig.com
Our Partners