Cross organizational standardized business process integration and its application in Saudi Arabian banking system regulation: A case study of advanced IRB regulation
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Mar 15, 2016
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Abstract
The idea for this paper came after the recent financial crisis, its global consequences and specifically how it affected the banking sector. Financial institutions and regulators are – from a technical point of view - not fully integrated and automated yet. The inaccuracy in banks’ data and the long set interval period, quarterly, to send the information to the regulators leads to delays interventions by local supervisory regulators. Most of the banks are using an Internal Ratings Based (IRB) approach that allows them to use their own methods to calculate the credit risks, which makes it difficult for the regulators to verify and validate the banks’ data without adopting fully automated connectivity for the regulatory reporting system through sophisticated tools. The importance of this issue, for the central banks as well as the global economy, encourages us to investigate and to find solutions for the problem at hand. This paper is focused on the Advanced Internal Ratings Based (A-IRB) approach to evaluate credit risk due to the importance and the sensitivity of this approach on the banking sector. The flexibility of the A-IRB approach allow banks to use their own method to calculate the credit risk without regulators having the right tools to validate the data is a major issue . The second issue with the A-IRB approach is that the report is only delivered quarterly to the regulator (SAMA). This period is too long as decisions can be taken based on data that is almost a quarter old. Therefore, evaluating the existing framework and solving the issues concurrently is essential to improve the regulatory reporting system. To examine the situation of the regulatory reporting system, first, we reviewed literature on the Basel II&III regulations and the financial crisis, including impacts and responses. The second, we reviewed factors impeding the implementation of Basel II&III, including solutions to increase coordination and integration and a holistic approach that can mitigate the outstanding issues for the Regulatory Reporting System for the local banks in Saudi Arabia. We also evaluated the current system and the proposed system in two workshops and found that the proposed system showed considerable improvements of more than 100% in some areas and hence should be implemented. Our result is a framework solution that integrates a private cloud computing network with automated and integrated features such as a Business Process Manager, a Knowledge Management Engine, a SLA Lifecycle Manager, a Business Rules Engine and a Data Quality Regulator and the Enterprise Service Bus for communication and integration between the banks and SAMA.
Keywords: Business Process, Business Rules, Bank Management
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[3] Akhtar, S. (2006, September 12). BASEL II IMPLEMENTATION ISSUES, CHALLENGES AND IMPLICATIONS. Retrieved March 27, 2011, from Bank For International Settlements: www.bis.org/review/r070116e.pdf
[4] Basel Committee. (2010). Basel III: A global regulatory framework for more resilient banks and banking systems. Basel Committee on Banking Supervision, Basel.
[5] BCBS. (1999). Sound Practices for Loan Accounting, Credit Risk Disclosure and Related Matters. Basel: Consultative paper issued by the Basle Committee on Banking Supervision.
[6] BCBS, B. C. (2001, January). Consultative Document-The Internal Ratings-Based Approach. Retrieved March 27, 2011, from Banks for International Settlements: http://www.bis.org/bcbs/bcbscp2.htm
[7] Behara, G. K. (2006, May). BPM and SOA: A Strategic Alliance. Retrieved April 16, 2011, from Bptrends:
www.bptrends.com/publicationfiles/05-06-WP-BPM-SOA-Behara.pdf
[8] Chorafas, D. N. (2011). Basel III, the Devil and global banking. Palgrave Macmillan.
[9] Christophe Cadiou and Monika Mars. (n.d.). Basel II Pillar 3: Challenges for banks. The Journal, Global perspectives on challenges and opportunities, 30-35.
[10] Edwards, H. (November, 2004). BASEL II AND ITS IMPLICATIONS. International convergence of capital measurement and capital standards. Bahamas: Group: Bahamas Institute of Chartered Accountants November 2004.
[11] Gareth Murphy and Robert Westwood. (2010). Data gaps in the UK financial sector: some lessons learned from the recent crisis. Retrieved March 17, 2011, from BIS: http://www.bis.org/ifc/events/5ifcconf/murphy.pdf
[12] Gregory, J. (2005). Solving the Data Challenge for Developing and Validating IRB Systems. Retrieved March 27, 2011, from www.moodyskmv.com: http://www.moodyskmv.com/cpc05/.../SolvingtheDataChallenge_JackGregory.pdf
[13] Hildebrand, M. P. (2008, December 15). Hildebrand (2008) Philipp M: Is Basel II enough? The benefits of a leverage ratio Speech. London: The Financial Markets Group Lecture, London School of Economics.
[14] IMF. (2009). The Financial Crisis and Information Gaps. The IMF Staff and the FSB Secretariat.
[15] KPMG. (2004). Basel II: A Worldwide Challenge for the Banking Business. Retrieved March 26, 2011, from KPMG: us.kpmg.com/microsite/.../Basel_AWorldwide%20Challenge_web%20(2).pdf
[16] Kubat, M. (2014). Does Basel III bring anything new? A comparison between capital accords Basel II and Basel III. In Proceedings of Economics and Finance Conferences (No. 0401713). International Institute of Social and Economic Sciences.
[17] Luftman, J. (2000, December). Assessing Business-It Alignment Maturity. Strategy.
[18] Marc Saidenberg and Til Schuermann. (2003). The New Basel Capital Accord and Questions for Research. New York: Federal Reserve Bank of New York.
[19] Maria DIMITRIU and Ioana-Aurelia OPREA. (2009, 2). CREDIT RISK MANAGEMENT IN FINANCIAL CRISIS. Review of International Comparative Management, pp. 987-994.
[20] Micheal Rosemann, Tonia de Bruin. (2010). Towards a business process management maturity model.
[21] Mohammad, A. (2007). GDP Estimates: Timeliness and Acceptability Considerations. Retrieved March 18, 2011, from: http://www.statistics.gov.my/portal/images/stories/files/journal/gdp.pdf?
[22] Ozun, A. (2007). Effects Of The Basel Ii Accord On The Integration Process Of The Emerging Markets Into The Eu Markets. Banks and Bank Systems, 2(3).
[23] Susheel Chhabra and Muneesh Kumar. (2009). Integrating E-Business Models for Government Solutions: Citizen-Centric Service Oriented Methodologies and Processes. India: Hershey, New York.
[24] The Bank of Spain developed a Master Plan for the adoption of eXtensible Business Reporting Language. (n.d.). Retrieved March 21, 2011, from Fujitsu: http://www.fujitsu.com/downloads/.../Fujitsu-Interstage-Bank-of-Spain-CS.pdf
[25] Victoria Ivashina and David Scharfstein. (2008, April). Bank Lending During the Financial Crisis of 2008. Retrieved March 24, 2011, from http://www.people.hbs.edu/dscharfstein/Lending_During_the_Crisis.pdf
[26] Wharmby, S. (2001, August). Monetary & Financial Statistics. Retrieved March 24, 2011, from Recent developments in statistical requirements for financial stability, and in their use - the perspective of a central bank of a developed country:
http://www.bankofengland.co.uk/statistics/ms/articles/Artag101.doc
[27] Levine, R. (2012). The governance of financial regulation: reform lessons from the recent crisis. International Review of Finance, 12(1), 39-56.
[28] Naudé, W. (2009). The Global Economic Crisis after One Year: Is a New Paradigm for Recovery in Developing Countries Emerging?. United Nations University Press.
[29] Frankel, J. A., & Saravelos, G. (2010). Are leading indicators of financial crises useful for assessing country vulnerability? Evidence from the 2008-09 global crisis (No. w16047). National bureau of economic research.