basel ii implementations: convergence with customer...

Basel II Implementations:

Convergence with Customer

Insights and Risk-Based Financial

Management

Efficient and Innovative Solutions for Basel II, Risk Management, and

Customer Relationship Management

White Paper

Date: April 2008

www.microsoft.com/crm

PERFORMANCE

http://www.microsoft.com/crm

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BASEL II IMPLEMENTATIONS

Contents

Introduction ................................................................................................................... 3

Background .................................................................................................................... 4

Early Years of the Basel II Journey ................................................................................ 6

Basel II in 2005 ................................................................................................................................... 6

Key Drivers ......................................................................................................................................... 7

Key Challenges ................................................................................................................................... 8

Basel II in 2008 ............................................................................................................. 11

Learnings from 2008 Basel II Accreditation ..................................................................................... 12

Convergence of Basel II with Customer Relationship Management ........................ 13

Basel II Successful Implementation: Sasfin Bank ....................................................... 14

Microsoft Dynamics CRM: New Standards in Platform Management ..................... 17

Familiar Look and Feel and 360° Client View .................................................................................. 17

Lower Total Cost of Ownership ........................................................................................................ 18

Conclusion .................................................................................................................... 18

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Introduction

Risk management and compliance initiatives have evolved from the traditional siloed, tactical approach at

the business-division level into sustainable, long-term, organization-wide strategic initiatives that can help

manage overall risk exposures and improve core business processes. Basel II is one such international

initiative almost universally adopted across the world.

Many leading financial institutions are reviewing their current and future risk management capabilities

and methodologies, recognizing the rapidly changing needs of risk management and compliance and the

need to quickly remediate any risk control failures,

Banks are actively seeking an integrated risk management approach to deal with different forms of

financial and operational risks they face every day. Equally importantly, they need operational best

practices and systems to implement new regulatory recommendations from their local banking regulators.

Following these recommendations is important for the stability of local and international financial

systems. .

Depending upon the country and region, key global and local initiatives include: Basel II, Anti-Money

Laundering (AML), IFRS and Markets in Financial Instruments Directive (MiFID), Corporate Governance,

and financial disclosure regulations such as Sarbanes Oxley. Historically, many banks have invested in data

warehouses for market risk, Value at Risk (VAR), risk modeling, and customer analytics, but find them

insufficient to handle data requirements for new regulations such as Basel II. Many have opted either to

overhaul existing data warehouses or roll out powerful SQL-based risk data repositories that surround

existing warehouses, helping them capture new data and unlock existing data.

This white paper explores the new paradigms around leveraging risk management and regulatory

initiatives to enhance customer insights and analytics and improve business and customer relationships.

While the paper does focus on Basel II, it also discusses a holistic approach to managing financial and

operational risk in combination with customer relationship management. We will cover the following

areas:

A situational overview and preparation needs/requirements for Basel II adoption

Key issues in Basel II implementation based on industry learning‘s and research

Convergence of Basel II with customer insights and risk-based pricing

Learnings from a successful Basel II implementation case study

The Microsoft Dynamics™ CRM value proposition for customer insight and risk oversight

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Background

On June 26, 2004, the Basel Committee on Banking Supervision (BCBS) published its revised framework

for "International Convergence of Capital Measurement and Capital Standards" (commonly referred to as

"Basel II"). Basel II is designed as a more risk-sensitive framework for establishing minimum levels of

capital for internationally active banks than the 1988 Basel Capital Accord (commonly referred to as "Basel

I"). Basel II comprises three "pillars": Pillar 1 prescribes the minimum capital requirements to support a

bank's credit, market, and operational risks; Pillar 2 describes the necessary accompanying supervisory

review of a bank's internal capital adequacy assessment; and Pillar 3 prescribes minimum disclosure to

facilitate market discipline.

Basel II is a reworking of the 1988 Basel Accord, developed under the guidance of the Bank of

International Settlement (BIS http://www.bis.org/). The Basel II framework is designed to permit more risk-

sensitive and comprehensive coverage of risks. Basel II offers an improved approach to determining more

risk sensitive capital adequacy requirements. The framework is expected to gives banks the flexibility and

agility they need to adapt quickly to advances in markets and risk management practices.

Basel II pillars are as follows:

Pillar 1: Minimum Capital Requirements – Internal models used to measure credit, operational, and

market risk, as well as calculate minimum required capital to set up protection against those types of

financial and operational risks banks can face

Pillar 2: Supervisory Review – Regulatory oversight to help ensure the validity of models through

increased on-site inspections, and establish standards for minimum required capital based on quality of

risk and capital management

Pillar 3: Market Discipline – Requirements to release more information about Bank‘s risk profile in the

annual financial statements, including transparency and disclosure to markets that disciplines banks to

ensure their best use of capital

http://www.bis.org/

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Figure 1. Scope of Basel II

Different regions and countries have adopted Basel II with local variations. These variations could be

around the implementation timelines, the recommended methodology, approaches, and in some cases,

two-phase Basel II adoption timelines for local financial institutions. For example, some countries have

adopted 2008/2010 as the adoption timeline for the standardized approach and 2010/2012 for advanced

approaches.

The local flavors for approaches to Basel II also vary. As many developed economies achieve the Basel II

accreditation milestones in their respective jurisdictions, developing and emerging economies are

entering different stages of consultation and adoption locally.

Basel II implementation poses significant challenges for banks. Our focus at Microsoft has been to help

create and jump-start simpler, faster, and more cost-effective execution for Basel II projects. We do

believe that adopting a Microsoft-based platform with an underlying service oriented architecture (SOA)

approach can help accelerate Basel II projects.

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Early Years of the Basel II Journey

Based on the research discussed above, this section will trace some of the key milestones of the Basel II

adoption journey around the globe, as well as cover some key insights into Basel II initiatives drawn from

industry studies, research, and Microsoft‘s direct involvement in Basel II projects.

Given that Basel II adoption timelines are staggered around the world, some of the learnings from the

countries that have already adopted Basel II will prove relevant and appropriate for countries that are at

the initial stages of Basel II adoption initiatives. Equally important, Basel II adoption is an evolving journey

and not necessarily an end state, so insights are relevant regardless of the time stamp.

―Our ongoing research on Basel II adoption around the world was initiated in 2004 and continues to date.

We draw on our Basel II project learnings; interactions with Basel II specialists; commissioned studies such

as the Basel II benchmarking study in Asia-Pacific and the forthcoming 2008 Global Enterprise Risk

Management (ERM) study; and collaboration with leading industry analysts, universities, and industry

groups such as the Professional Risk Managers International Association (PRMIA),‖ says Sai Sireesh,

director of Risk Management and Compliance Industry Solutions at Microsoft.

Basel II in 2005

The following discussion draws out the complexities of Basel II adoption and summarizes the Basel II

journey for early adopters‘ economies.

In 2004-2005, most banks were apprehensive of the enormity of Basel II adoption, its complexity, and the

aggressive timelines enforced by the Supervisors. The banking industry did regard Basel II as a best-

practice benchmark for global risk management. The top three drivers for Basel II included:

Reputation/market perception

Enhanced portfolio management capabilities

Risk-based pricing/accurate provisions

To better understand and evaluate the status of Basel II implementations, Microsoft commissioned a 2005

study led by Financial Insights (FI) on Basel II adoption in the Asia-Pacific region. This study also served as

the foundation for Microsoft‘s ongoing research on Basel II projects around the world.

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Key Drivers

The following section highlights some of the broad findings from the Microsoft study that are consistent

with our ongoing global research on Basel II adoption.

In 2004-2005, banks could be broadly classified into one of four overarching categories in their approach

to Basel II:

Figure 2. Readiness of banks with regard to Basel II implementation

Basel II saw a slow start across the world. For example, out of approximately 700 financial institutions

surveyed in the Asia-Pacific region, only 233 banks had commenced their Basel II programs in 2005. The

remaining 466 were still in planning stages, though they have since decided to adopt a Basel II approach.

Only a few banks had more than five years of historical data to work from. Most banks had three to four

years of data, but the majority of banks had less than three years of usable data. In many cases, banks

preferred to take the ―build and buy‖ approach to implementing Basel II programs. A 15-24 month time

frame was considered realistic for more aggressive banks starting to build or enhance their core

capabilities. A few banks with strong existing credit and operational risk capabilities were estimating

between seven to nine months for Basel II implementations. Banks and regulators in most countries were

in proactive and continuous dialogue to help get procedures right the first time.

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The chart below lists the different drivers for adopting a Basel II approach and building robust risk

management. Reputation and market perception was ranked first, followed by enhanced portfolio

management capabilities and risk-based pricing/more accurate provisions.

Figure 3. Top Drivers for Basel II Adoption in 2005

According to this study, European banks were far ahead of other regions. Two-thirds of European banks

were already in the implementation phase or were on the verge of completing the implementation in

preparation for parallel runs. Conversely, with many US banks opposing Basel II, approximately only 10

percent of major US banks that operate globally had moved into process implementation.

Figure 4. Worldwide Adoption of Basel II as of 2005

Key Challenges

Pillar 1 - The initial focus of Basel II adoption for most banks was on Pillar 1, which emphasizes market,

credit, and operational risk.

Market Risk: The new Basel II market risk interpretation for trading instruments was also considered.

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Credit Risk: The majority of banks started with focusing on credit risk within Pillar 1 implementation. In

addition, most banks did require a steep learning curve for their existing credit risk measurement systems,

including required review of their rating model performance and validation. Several banks were looking to

replace or enhance their core in-house credit workflows and processes.

The majority of RFPs for Basel II focused on building the foundation of credit risk capabilities in the

following areas:

Loan Origination

Credit Risk Scoring

Collections

Basel II Risk Calculator

Collateral Management

Credit Analysis

Credit Risk Data Mart

Ratings

Many banks found it difficult to collate data and develop rating tools; indeed, some countries had virtually

no data they could use for internal ratings and model development.

Another challenge included the need to develop tools for internal credit ratings. Some banks conducted

early-stage gap analyses. This was a key issue for banks that were targeting the advanced internal ratings-

based (IRB) approach, which required rigorous guidelines for rating each credit exposure by 2007.

Respondents encountered additional issues with regard to credit risk management, including:

Achieving effective SME risk management

Determining the methodology for internal ratings model development

Integration of credit risk into the business processes

Compliance with regulatory guidance on loan grading and internal ratings

Pillar 2 and Pillar 3 Challenges

The 2005 study showed that many banks had deferred or were in the early stages of Pillar 2 and Pillar 3

implementations. They were still predominantly focused on achieving Pillar 1 compliance. Nearly two out

of every three banks described their enterprise-wide risk management supervisory framework for Pillar 2

as average or below average. One challenge lay in achieving a balance between the market‘s need for

information and issues related to confidentiality, competition, and costs. Another was the potential impact

of the enhanced disclosure requirements of Pillar 3, particularly in jurisdictions in developing countries

unfamiliar with Pillar 3 levels of transparency.

Banks needed to demonstrate management controls, conform to policies, and withstand detailed

supervisory reviews. Banks did begin recognizing that Basel II Pillar 2 and Pillar 3 share remarkable

similarities with other regulations such as Sarbanes-Oxley in areas such as internal controls, disclosures,

and market discipline. Many banks started to evaluate tools based on the Microsoft® Office system to

collect, manage, and support data collection; policy creation and maintenance; approvals; and electronic

form-based processes for risk control self-assessments. Microsoft started working with financial

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institutions to deploy Basel II solutions that took advantage of existing technology and that would

supplement the best-of-breed engines and solutions that they will eventually implement. This included

the adoption of XML/XBRL as de facto, enterprise-wide reporting and disclosure standards.

Implementation Issues

Finding the right solution presented a key challenge, especially since bankers preferred an integrated risk

platform that could be adapted to future needs. The market for Basel II and risk management solutions

was fragmented and offered a ―point solution‖ approach. In most cases, banks needed to look at a

minimum of four to five components for Basel II compliance.

Almost half of the bankers polled remained dissatisfied with the measurement tools at their disposal and

saw the need to improve aggregation of data across business lines. Many banks did not start any software

acquisition initiatives for Pillar 2 and Pillar 3 until later stages of implementation.

Banks recognized that the market for risk management solutions was fragmented. Vendors had

historically occupied niche positions in the marketplace, creating complex products that deliver highly

specific functionality. These niche solution providers tended to tackle only one particular area of risk—

primarily market risk or credit risk—and did not offer an integrated solution.

With regard to risk management infrastructure, banks faced the need to develop new interfaces that

integrated legacy systems and databases. Banks did complain about ―teething problems‖ both during and

after implementation and many did not find solutions that could fit with their existing systems.

Data collection presented yet another challenge, because data typically resided in silos and in forms that

were difficult to consolidate. Banks in developing countries also struggled to consolidate data in cases

where data entry was still manual and customer data was incomplete or decentralized for individual bank

branches.

The majority of banks that we worked with and spoke with in 2005 found their existing data warehouses

could not meet Basel II requirements. They chose either to overhaul the existing data warehouse or roll

out powerful SQL-based risk data marts around existing data warehouses. Approximately 30 percent of

banks polled indicated that their planning for risk data management and technology remained

incomplete. In many cases, large banks had invested in data warehouses over the past few years for

market risk/VAR and customer analytics. Only a few banks thought their existing data warehouse was

sufficient to manage current Basel II data requirements, and they recognized the need for enhancements

down the line. However, some banks that did try to use their existing data warehouse to comply with

Basel II faced compatibility issues with business process management. Some banks described attempts to

implement a solution without performing a deep analysis of infrastructure, resulting in re-implementation

or investment in additional solutions.

Another 30 percent indicated that planning had concluded, but that implementation was not yet

complete. Even then, implementation processes sometimes stopped at Pillar 1—data collection of

customer information, credit exposure and transaction histories, ratings classification, some portfolio

segmentation—and architectural planning issues remained unresolved. Alternatively, banks faced

unexpected risk measurement. Many had to invest internally in new CRM or enhance existing CRM and

personnel training to become compliant.

As we will see later in the Sasfin Bank customer profile, best practices enhance the existing data collation

involved in the execution of a portfolio management information system.

―Best practices offer even more power when combined with a CRM system that extracts risk data from

various locations, collates that data, and stores it as customer information in a central data repository. It

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also enables better business development and cross- and up-selling for improved campaign

management,‖ says Max Fatouretchi, Microsoft Dynamics lead for the Financial Services industry,

Microsoft Business Solution International.

This approach extends business connectivity for risk and compliance functions across all lines of business.

Queries can be entered and credible quantitative analysis, modeling, and validation of capital and

economic capital quickly returned. Business processes can be automated and monitored. Auditing and

business development units can take advantage of a centralized data repository. In addition, sales and

marketing teams can benefit from a combined solution approach that fuels better customer service, up-

selling, and cross-selling.

Basel II in 2008

Many developed countries achieved Basel II accreditation and model validation by Jan 1, 2008. Reviewing

the current state of Basel II initiatives in 2008 provides some interesting insights into the journey

experienced by Basel II early adopters.

Basel II was elected to be implemented as per the 2008 timelines in the 13 financially important countries

represented by the Basel Committee on Banking Supervision (BCBS). They include Belgium, Canada,

France, Germany, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, the UK, and the US.

The majority of the Tier 1 financial institutions in these economies achieved their host country Basel II

accreditation by January 1, 2008.

However, another category of early adopters—including Australia, Singapore, South Korea, South Africa,

and Hong Kong—have been driven to enhance their reputation as major financial centers even further.

The above list cannot be considered exhaustive; every region‘s top financial institutions achieved Basel II

accreditation in some form based on local requirements.

Below, we summarize some of the key points related to post-Basel II accreditation, based on our ongoing

research with Basel II adoptions in a few countries. i

In the UK, Basel II was introduced by The Financial Services Authority (FSA) via the Capital Requirements

Directive (CRD). Leading financial institutions in the UK accredited for Basel II include Alliance & Leicester

(IRB approach), Nationwide, HSBC (IRB approach), and Standard Chartered Bank (IRB approach). Basel II

accreditation proved complex for global banks such as HSBC and Standard Chartered Bank, which deal

respectively with 80 and 50 host country supervisors. Many smaller UK banks chose to adopt the

standardized approach as of January 1, 2008. Out of the 350 banking subsidiaries (not including building

societies and securities firms), 25-30 have adopted the IRB approach. Between now and 2010, billions of

pounds in regulatory capital are expected to free up, giving mortgage lenders more choice on efficient

use of capital.

The capital requirements at IRB institutions will change from their current levels over a two-year period, to

avoid an overnight step change in the industry‘s total capital. Some of the areas expected to be reviewed

by FSA include potential failings in the existing regulatory capital regime—for example, the appropriate

use of ratings. The use of ratings is a central feature of Basel II; recent events show that problems with

ratings are becoming an important issue.

Also expected is a review of the mechanisms used to achieve a uniform and internationally accepted

policy on liquidity. Given the urgency of liquidity issues, local supervisors may initiate measures quickly,

rather than wait for an international consensus.

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In the US, Basel II has been adopted with a local flavor referred to as Notice of Proposed Rulemaking

(NPR). As noted earlier, vastly different local flavors for Basel II approach variations reach across the globe.

As many developed economies approach the final Basel II implementation milestones in their respective

jurisdictions, Basel II & Basel IA initiatives for US banks have entered final stages of comment, review, and

adoption. A key consultation includes Basel II NPR guidance with the formula for LGD computation.

The 2009 roadmap for US Basel II proposes advanced approaches for computing risk-based regulatory

capital for the 10-20 largest US banks, but it permits approximately 9000 smaller and mid size domestic

banks to continue to conform to the flavor of Basel I. The ―Top 10" group of core banks are required to

use advanced approaches for credit and operational risk in 2009. Of course, most global institutions

operating in the US with home Basel II accreditation also plan to conform to US Basel II. The Basel II NPR

proposal includes a formula to relate LGD and the expected LGD (ELGD) in the Basel II Supervisory Review

of Capital Adequacy in Pillar II. Some believe that this is overly conservative, limiting the capital reduction

benefit for US banks.

In the Asia-Pacific region, Australia, Singapore, South Korea, and Hong Kong went live with Basel II

accreditation as of January 1, 2008. Other countries in the region are working towards a phased Basel II

implementation target of 2010/2012. The Australian Basel II effort was characterized by regular guidance

and interaction with the industry via discussions and consultative papers. The Australian Prudential

Regulation Authority (APRA) granted Basel II accreditation to a number of globally operating banks,

including Commonwealth Bank of Australia Ltd (CBA), Australia & New Zealand Banking Group Ltd. (ANZ),

and Westpac Banking Corp, Ltd., effective January 1, 2008. CBA, ANZ, and Westpac were granted

advanced accreditation, allowing them to adopt the IRB approach to credit risk and the advanced

measurement approach to operational risk. Australia's largest investment bank, Macquarie Bank, has also

gained Basel II accreditation at the foundation level.

In Africa, South Africa and Mauritius were the early adopters with a Basel II accreditation target of January

1, 2008. Other countries in the region are working towards a phased implementation target of 2009/2015.

South Africa has been an active participant in the Basel II committee and participated in the Quantitative

Impact Studies (QIS), which examined the differential impact of using the three proposed Basel II

approaches to assess required capital relative to the current standards.

In Latin America, countries including Argentina, Peru, Brazil, and Colombia are working towards 2009 for

Basel II accreditation. The rest of the region is looking at a 2010-2015 timeline.

In the Middle East, Bahrain & Saudi Arabia, United Arab Emirates, are the early adopters with 2008-2009

timelines.

Learnings from 2008 Basel II Accreditation

Our research on Basel II adoption and accreditation continues on in 2008 and reveals some interesting

facts. Data points and insights from our research on the January 1, 2008 Basel II accreditations reveal the

following key observations from countries and financial institutions that have achieved Basel II

accreditation:

Most Tier 1 financial institutions have either adopted or are on a roadmap to adopt advanced

approaches.

Capital Adequacy around Basel II is not the only solution for managing a bank‘s risk and capital.

Banks still need to continuously monitor and enhance their capability to react to market

conditions, in particular liquidity management aspects.

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Basel II impact includes improved risk management practices across the industry, with increased

rigor and oversight for the process, workflows, models, and methodology driven by the advanced

Basel II approaches. Basel II has also forced banks to integrate their systems and processes better.

Financial institutions underestimated the amount and extent of work for accreditation from the

supervisor.

Even for those countries where Basel II accreditation is complete, the Basel II journey continues

on. Banks still need to spend significant effort to make supervisors comfortable with the

robustness of the quantitative estimates of risk that form the foundation for their regulatory

capital calculation. In the interim, supervisors such as Australia‘s APRA are providing guidance in

terms of sufficient regulatory capital.

Banks also do not expect any material change in their capital management approach until the full

implications of the new arrangements are finalized with regulatory authorities. Most supervisors

have introduced, or are looking to introduce, thresholds or floors that ensure capital requirements

do not fall too quickly from Basel I levels in the early years following Basel II implementation. In

general, financial institutions will see a gradual rather than a dramatic reduction in minimum

capital requirements post Basel II. For example, APRA has placed a cap of 10 percent in 2008 on

any reduction in capital from the Basel II changes; the cap will extend into 2009, pending a review

of the Basel II experience. ii

Banks with accreditation do agree that it enhances risk measurement and management

techniques and will significantly increase flexibility in decision making and capital management.

Basel II has served as a catalyst for enhancing the focus on stress testing capabilities.

Basel II has been a challenge for supervisors, especially in the context of groups that operate

internationally.

Many supervisors are embedding and mapping Pillar 2 review to their existing assessment

methodologies—for example, ARROW by FSA in the UK.

As expected, Basel II accreditation did get very complex for banks that operate internationally, as

these banks must coordinate and deal with 80 to 100 host country supervisors.

Innovative banks are leveraging Basel II initiatives and collected data to deliver benefits to

business lines such as customer insights.

Convergence of Basel II with Customer Relationship Management

At all times, Basel II implementation needed data collection for customer information, credit exposure,

transaction histories, and ratings classification. Basel II also has emphasized collateral management,

obligor ratings, and consolidated counterparty exposures. Counterparty risk management has emerged

recently as a key focus area. Counterparty exposures initiatives led to a wider recognition that there was a

gold mine to be discovered around counterparties‘ commercial relationships with different bank silos. For

example, the Treasury division could benefit from knowing that a new counterparty engaged with its

Corporate Desk for a Forex deal was actually a highly sought and valued project financing client. Equipped

with more complete customer insight, banks can price products as well as manage exposures more

effectively.

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A related Basel II implementation challenge involves controlling the costs, tight budgets, and business

justification for business lines to fund Basel II initiatives. This challenge, along with the need for data

collection and a consolidated Data Warehouse, has prompted banks to ensure that Basel II projects

deliver benefits to business lines such as risk-based pricing and customer relationship management.

Strategic benefits include:

Capital-efficient business lines

Informed product pricing

Synergistic customer relationships

Effective new product development

Single 360° client view

Collaborative business efficiency

This rich data collection of customer information, credit exposure and transaction histories, ratings

classification and portfolio segmentation can be easily repurposed to deliver benefit across the entire

business and valuable customer insights.

As we will see in the following section on the Sasfin Bank Basel II initiative, best practices enhance the

existing data collation required to execute a portfolio management information system. As noted earlier,

best practices offer even more power when combined with a customer relationship management system

that extracts risk data from various locations, collates that data, and stores it in a central data repository.

This approach extends business connectivity for risk and compliance functions across all lines of business.

Queries can be entered and credible quantitative analysis, modeling, and validation of capital and

economic capital quickly returned. Business processes can be automated and monitored. Auditing and

business development units can take advantage of a centralized data repository. In addition, sales and

marketing teams can benefit from a combined solution approach that fuels better customer service, up-

selling, and cross-selling.

Basel II Successful Implementation: Sasfin Bank

Established in 1951 and listed on the Johannesburg Securities Exchange in 1987, Sasfin Bank is a

specialized banking and financial services group positioned in the entrepreneurial corporate, commercial,

and private-client markets. Sasfin provides a portfolio of products and services designed primarily for

entrepreneurial customers and focused on facilitating business growth and creating and protecting

wealth. It wanted to create a single view of the customer that would help provide information required

for risk analysis, compliance with Basel II regulations, and insightful business decisions.

To meet their objectives, Sasfin took on a top challenge in the banking industry: connecting disparate

systems across the bank. To better manage customer information and proactively comply with regulation,

Sasfin implemented an enterprise-level content management and business intelligence solution based on

Microsoft Dynamics CRM and the 2007 Microsoft Office system, including XML integration capabilities and

file format. The solution enables Sasfin to increase the amount of customer data available, creating a 360°

client view that enables sales and marketing collaboration based on customer metric values. Sasfin

anticipates an 80 percent increase in the amount of customer data available for required fields for

compliance reports. The solution also eliminates redundant data entry, saving time and improving

customer satisfaction. In October 2007, Sasfin Bank passed all regulatory tests, making it the first bank in

South Africa to comply with Basel II.

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Business Priorities and Standards of Excellence

Regardless of size, all banks in South Africa must comply with South African banking regulations,

including Basel II supervisory review of risk and market discipline—all of which measure the adequacy of a

bank‘s capital and assess the bank‘s credit risk management. Basel II also requires banks to minimize the

amount of manual intervention needed to produce compliance reports, which involve the reporting and

analysis of complex risk calculations. Banks must provide reports by asset class; that is, by customer type

(as opposed to product types as previously required under the Basel I accord). All regulations speak to the

Basel II risk-based approach. To prepare these reports, Sasfin needed advanced data collection and

sophisticated risk management techniques.

Sasfin needed to develop a solution that streamlined reporting to comply with the Basel II accord, which

includes recommendations for the manner in which banks worldwide manage and report on risk to

promote greater stability in the financial system. Sasfin took this opportunity to develop a system that not

only achieves Basel II compliance but that also promotes standards of excellence across all internal and

market-related activities. Their solution enables advisors to develop a deep understanding of the

individual needs of each client.

Sasfin has identified specific business priorities that include:

Retooling the information systems for risk and compliance reporting by customer

Maintaining the highest level of compliance with regulatory bodies, including Basel II

recommendations

Achieving the effective monitoring and reporting of all risks across business units to optimize

business decisions

Increasing gross revenue by selectively identifying high-value services and products to create a

product portfolio that meets new and existing customers‘ banking needs (up-selling and cross-

selling)

Leveraging a new platform for cross- and up-selling campaigns

Challenges: Silos of Customer Information

To achieve these business priorities, Sasfin re-evaluated their current IT architecture. Sasfin identified

areas of its current IT structure that made it difficult to effectively monitor and calculate risk and comply

with regulatory bodies.

Each business unit used separate applications and database systems. Working with silos of information

made it difficult to create a consolidated, updated view of customer information and balances, relevant

credit exposures, and risk analysis in all areas of the bank‘s business. This limited view created a host of

difficulties, including manual capture of information, slower credit processing, delays in lead generation,

and limited cross-selling opportunities. The manual capture of information wasted valuable time and

increased the potential for errors. Without a unified customer view, business units struggled to analyze

customer interaction across different business units and identify customer profiles and business

opportunities. Ultimately, existing system constraints limited Sasfin‘s ability to make effective business

decisions. Customer information on balances, financial reports, and activity was stored in disparate

databases. Without a single, unified view of the customer, risk analysis and compliance reporting proved

a hard task.

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Lizande Vermeulen, manager of Basel II Implementation at Sasfin, spoke about the need for a single view

of the customer: ―Before the new accord, most banks had a silo approach for their customer information.

With the new Basel II accord being implemented, this shifts the focus from reports by product type to a

consolidated view of the customer that cuts across systems. We had to redesign the way we look at

customer information, and needed a mechanism to consolidate information and create an overall view of

the client to build reports for the South African central bank.‖

By taking an approach that implements combined CRM and regulatory compliance, Sasfin can comply not

only with Basel II and new banking regulations, but also with increased data management requirements

and future regulations.

Another consideration for Sasfin was the need to protect customer data and credit information according

to consumer privacy laws. Under these laws and regulations, Sasfin is responsible for safeguarding highly

sensitive data and restricting access solely to banking staff with appropriate permissions. This is achieved

as part of well defined CRM tactic & implementation of regulatory compliance and reporting

Figure 5. Combined CRM and Regulatory Compliance

Additional benefits of implementing a Basel II and CRM strategy include:

Eliminating most paperwork by capturing core data and customer visit information at the front

office and directly through the CRM system

Improving efficiency and quality for customer advisory sessions at both the preparation stage and

the financial advisory visits

Eliminating, improving, and automating key business processes through the integration of the

CRM system with the back-office and front-office systems

Access to high-quality management information to provide accurate and timely reports as a

value-added product

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Facilitating cohesive and consistent customer service by managing customer contacts and

correspondence through a centralized database

Improving the efficiency and quality of communication with customers through easily accessible,

computer-based customer information

Microsoft Dynamics CRM: New Standards in Platform Management

Business decision makers at financial institutions want a single platform that integrates services and

information across multiple applications, core banking legacy systems, and the Internet. The single 360°

client view can provide all business groups with a consolidated, common view of customer history to help

the organization provide high-quality, more personalized service.

Microsoft Dynamics CRM is a scalable solution based on SOA and Web services that gives financial

institutions the flexibility to customize processes and workflows to meet precise organizational needs.

Microsoft Dynamics CRM provides:

An enterprise repository for common components, functions, and data elements used across

channels and applications

A process-oriented management system that provides the ability to create, extend, reuse, and

deploy workflows across channels and applications

Business Intelligence features such as data marts, reports, benchmarks, alerts, and auto-

enrollment

Centralized event logs and auditing systems for effective management of security and privacy

compliance and internal risk management activities

Interoperability with the Microsoft Office System and Web services for faster development

schedules and improved integration of legacy applications

In addition, Microsoft Dynamics CRM extends .NET technology to provide real-time connectivity and a

multitude of offline capabilities that enable staff to conduct business when host communications are not

available or when traveling. This means that the bank also benefits from lower cost of ownership,

competitive agility, and rapid deployment of changes and enhancements.

Familiar Look and Feel and 360° Client View

Microsoft Dynamics CRM delivers a complete set of tools and functions in a single user interface that

works as a natural extension of Microsoft Office Outlook®, without sacrificing the requirements for

financial transaction entry that users need in a banking application. Features that include a 360° customer

view, campaign management, and integration with Microsoft Office system applications help improve

service delivery capabilities. By combining a familiar user experience with built-in tools that are easy to

learn and use, banks can increase user adoption, reduce training costs, and empower employees to work

the way they want. In addition, Microsoft Dynamics CRM provides a single solution to help agents provide

improve customer service, generate new business, and work more efficiently.

Microsoft Dynamics CRM enables banks to:

Manage customers‘ financial profiles

18


Establish service level agreements based on customer profiles

Establish a financial sales and service culture

Develop an investment and profitability plan

Develop a revenue plan based on market dynamics and competition

Integrate thoroughly with core banking applications

Lower Total Cost of Ownership

Implementing Microsoft-based solutions can provide lower total cost of ownership (TCO) for cost

effective Basel II projects. Microsoft offers a holistic, enterprise-wide compliance and risk approach that

pools and optimizes the common elements across silos of other compliance and risk projects such as IAS,

KYC, AML, MiFID, and Sarbanes Oxley.

Conclusion

A Basel II solution needs an underlying collaborative infrastructure such as SOA, along (with plug-in

engines and processes for collecting and measuring risk and capital allocation.

In addition, financial institutions seek to create transparent operations that will allow internal divisions to

reduce complexities and help customers feel that they are dealing with a single organization. The road to

transparency begins with data infrastructure—the rationalization and centralization of customer

information for use throughout the organization—and continues through integrated customer and

business processes.

A SOA platform approach can provide exceptional benefits to financial institutions, including:

Putting in place an enterprise risk and compliance architecture strategy

Sustaining the IT cost economics of risk and compliance projects

Improving the time to market of new risk-based priced products

Extending ‗business connectivity‘ of risk and compliance functions with the business lines

Microsoft is working with global thought leaders and leading financial services firms to develop and

evangelize holistic best practices for enterprise-wide compliance, Basel II, and risk management projects.

Microsoft has also commissioned compliance and Basel II research studies to address industry issues and

requirements.

By adopting Microsoft technologies as an end-to-end Basel II anchor platform, financial institutions can

help accelerate Basel II projects. We also advocate adopting a holistic approach to enterprise risk and

compliance architectures. Microsoft is helping financial services firms increase their competitive advantage

by deploying innovative solutions that help speed up time to market, improve business agility, and reduce

Total Cost of Ownership (TCO).

The Microsoft Dynamics CRM platform enables banks and wealth management firms to increase

employee productivity, while saving time and reducing costs. Equipped with a familiar user interface,

financial advisors and relationship managers can take advantage of Microsoft Dynamics CRM with a

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minimal amount of training time. Banks can also use Microsoft Dynamics CRM to create specified user

roles based on an individual‘s job function in the bank. Just as important, Microsoft Dynamics CRM

empowers banks to customize and automate processes according to preference and business styles. That

can mean an accelerated return on investment—and a bank that is managed more smoothly, effectively,

and profitably.

To take advantage of the Microsoft technology-based approach to compliance, Basel II, and risk

management projects, contact your local Microsoft office or your local Microsoft Dynamics Partner.

20


i References & Sources: Basel II NPR & Proposed Supervisory Guidance documents from US Agencies:

Board (Fed Reserve System), OCC, FDIC, OTS, Treasury, APRA publication, Feb 2008, Basel II update-

Katrina Squares, Thomson News Report.

ii Source: APRA Basel II update, Feb 2008,

Microsoft Dynamics is a line of integrated, adaptable business management solutions that enables you and your people to make business decisions with greater confidence. Microsoft Dynamics works like and with familiar Microsoft software, automating and streamlining financial, customer relationship and supply chain processes in a way that helps you drive business success.

U.S. and Canada Toll Free 1-888-477-7989

Worldwide +1-701-281-6500

www.microsoft.com/dynamics

The information contained in this document represents the current view of Microsoft Corporation on the issues discussed as of the date of publication. Because Microsoft must respond to changing market conditions, this document should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information presented after the date of publication.

This White Paper is for informational purposes only. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, AS TO THE INFORMATION IN THIS DOCUMENT.

Complying with all applicable copyright laws is the responsibility of the user. Without limiting the rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), or for any purpose, without the express written permission of Microsoft Corporation.

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© 2008 Microsoft Corporation. All rights reserved.

Microsoft, Microsoft Dynamics, the Microsoft Dynamics Logo, Outlook, and SQL Server are registered trademarks or trademarks of Microsoft Corporation in the United States and/or other countries.

The names of actual companies and products mentioned herein may be the trademarks of their respective owners.

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