BASEL II Compliance

Writing by AppLabs on Tuesday, 17 of March, 2009 at 11:35 am

BASEL II is a very comprehensive and complex document, which will have a large impact on systems in many cases. The new Accord will enable some firms to use their own internal risk-management methodology to calculate the capital they require as opposed to a prescribed regulatory calculation. However, this will require them to amass and process a considerable amount of historical-loss data. These databases will have to be built and integrated with the banks processes. Data must be available to the banks and their subsidiaries across all geographical locations.

The solutions that will be delivered to cater for the BASEL II regulation changes must supply several key points of functionality. They must be able to accept and record external and internal ratings data; they must keep risk evaluation data for the required period (which at the time of writing is a rolling five years), and provide access to historical data on command from any relevant area of the business; the systems must be able to support a suitable number of users, allowing for future growth; transactions must be tested end-to-end to check the different levels of hardware and software involved; a risk-based testing approach should be employed to ensure the most critical areas of the systems receive the lion’s share of the testing; the new hardware/software (and all business critical processes) must be recoverable in the event of a disaster situation causing systems outage. Not only should the full business critical list of systems and processes be tested, but also individual sub-systems should be tested; a regression test suite must be constructed for use when testing that existing functionality remains intact when system enhancements are added; and finally, the new systems must be integrated smoothly into the banks’ processes and systems;

Apart from the present Basel II Accord, the further amendments will surely be needed upon completion of the review period adding to its complexity and ultimate implementation throughout the industry. The next few years will hence be strenuous for finance organizations who, as well as implementing changes for the BASEL II Accord, will also potentially be faced with large-scale programs such as the Euro, Straight Through Processing / T+1 and other regulatory changes.

For the compliance of the same, the organizations should look at ways in which testing can become more standardized and more cost effective. AppLabs’ advice to organizations is to ensure appropriate testing strategies and plans are in place to mitigate the inherent risk of changes to IT systems. Organizations must also ensure that their testing programs provide sufficient coverage and appropriate prioritization of tests and testing.

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Category: BASEL II, Compliance Testing