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		Basel II

The Basel II accords are a broad set of requirements that have profound implications on some practices within the financial institution.

The need to allocate capital to safe guard financial institutions against unexpected losses arising from credit risk requires that they implement systems for quantifying their exposure to credit risk.

The advanced implementation options of Basel II explicitly require financial institutions to assess the credit exposure for each customer and for each credit facility using the following measures:

Probability of Default (PD) - the probability that a specific customer will default within the next 12 months.

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	Loss Given Default (LGD) - the percentage of each credit facility that will be lost if the customer defaults.
	Exposure at Default (EAD) - the expected exposure for each credit facility in the event of a default.

Once the financial institution is able to assess the PD, LGD and EAD for its customers and for its credit facilities, the calculation of the minimum capital requirement is straightforward. The main challenges faced by financial institutions are the aggregation of the risk-related information needed to assess the PD, LGD and EAD for their customers and the implementation of a risk rating system that can correctly model these parameters and that is statistically valid.

Peldec Decision Systems can help financial institutions comply with these requirements in a number of ways:

	Development of an internal customer risk rating model that is compliant with the Foundation IRB and Advanced IRB approaches defined in Basel II.
	Provide the systems that collect and analyze the relevant customer-related information.
	Implement a system that calculates the minimal capital requirements and provides the necessary reporting, portfolio analysis and portfolio drill-down capabilities.

Development of Rating Models Compliant with Foundation or Advanced IRB

Peldec Decision Systems has developed a framework that enables financial institutions to quickly develop a proprietary IRB-compliant risk rating model. The framework includes provisions for leveraging the various sources of customer-related information that the financial institution possesses into a statistically valid, Basel II-compliant internal risk rating model.

For more information about Peldec Decision Systems' internal rating development services, click here.

Providing Systems to Collect and Analyze Customer-related Information

Gathering the necessary risk-related information about a financial institution's customers is one of the key challenges that financial institutions face in complying with Basel II.

Peldec Decision Systems provides state-of-the-art software solutions that address this issue:

ProFin - a next-generation financial statements management and analysis software - financial statements (and financial ratios) are probably the most important risk-related sources of information about commercial customers. Peldec's ProFin provides a central database that stores the financials for all of the financial institutions' customers and provides a vital component of a customer risk rating system.

ProFile - end-to-end commercial credit management software - manages a central database of customer risk-related data that offers a complete view of the relationship between the customer and the financial institution. ProFile manages several risk-related information sources such as judgmental scores assigned by credit analysts and loan officers, information about customer profitability, level of banking activity and more. ProFile also administers and enforces the credit approval workflow, observing credit approval limits and generating an audit trail.

Calculating Minimum Capital Requirements and Managing the Credit Portfolio

Peldec Decision Systems' ProRisk is a credit risk repository that manages and enhances the financial institution's credit risk rating model. ProRisk extracts and stores PD, LGD and EAD for each customer and facility type, figures that are at the heart of the Basel II formulas.

ProRisk also calculates the credit-risk related minimum capital requirements for the financial institution's entire credit portfolio and enables to "drill-down" into the credit portfolio, to identify which customers or segments require the highest levels of capital allocation.

For more information on ProRisk, see the ProRisk product page.

For more information on how Peldec's solutions and services can help your bank to comply with Basel II, please contact us at info@peldec.com.