The main requirement of Basel II is compliance with; the Three Pillars of Basel II and time management. This makes implementation and compliance with Basel II a challenge for banks and other financial institutions. This is because identifying risk and risk management requires a frame work and efficiency. Therefore, there is need for a multi-dimensional approach to handle these challenges and establish a solution frame work.
1. Reorganize with a set time frame: Implementing Basel II compliance is a big challenge and involves a lot of changes. Ensuring risk management while reorganizing the business setup within the least possible time is an important best practice. It also involves Credit Risk and Operational Risk management. This is a difficult challenge to achieve within the targeted time frame.
Banks implementing Basel II compliance will require data integration, financial management, operational management and risk management. Therefore, they will need a new strategy in order to support Basel II. This will require establishment of a responsive and professional team to ensure risk management, performance management and capital investment decisions.
2. Reform Business Processes: There is the need for a review and improvement of supervision and control in order to ensure risk management as a best practice. Supervisors will need to review risks and validate the efficiency of the reforms in business processes.
3. Data Management: Maintaining data management during implementation of Basel II is a big challenge. The process of compliance or implementation of Basel II within a time frame is a very sensitive and difficult task. Banks and financial institutions must keep track of their credits and losses for decision making. There is the need to ensure best practices in credit data management and operational risk reporting.
4. Effective Bookkeeping: Basel II aims at eliminating the need for financial institutions to keep two sets of books. This means that there is the need to ensure best practices with capital and account management by unification of records for management and regulation compliance.
The Basel II Cognizant Solution Frame Work comprises of the following:
Establishing a Systematic Data Model: This means ensuring a system with flexibility for data management of a variety of products. The system should contain historic information and collateral information about the products.
Introduce Risk Management Tools: There must be flexible and effective tools which can evaluate and analyze risk; as well as handle several scenarios.
Use a Risk Mitigation Engine: The solution must provide guarantee of information and reports.
Ensure Transparency in the System: In order to have an authentic and effective audit, and detailed reports the system must be transparent. The system must be supported by computer tools for the ease of access by the end users.
Knowledge about the Basel II Challenges and solution frame work aims at ensuring risk management, compliance and best practices. Therefore, it is an important requirement for success in both businesses and financial institutions.