Credit risk data warehousing system. The scope of the study is to understand the huge data requirements in IRB approach and to suggest the basic integrated credit risk management model as a long term solution in order to avail the benefits of IRB approach

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Credit Risk Data warehousing system - Basel II compliance in Indian banks

 



  1. Introduction

“Risk - Effect of uncertainty on objectives".  Business grows mainly by taking risk. For banks, Risk is inherent in the nature of the business. Financial institutions are subject to a number of risks such as credit risk, operational risk, and market risk. Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. Credit risk has always been a primary concern for financial services institutions but has not always been very effectively managed. The financial crisis that started in 2007 exposed the weaknesses of existing risk management systems among financial services institutions. During the financial crisis, a number of firms suffered losses because they had their risk systems and data in different silos. Now there is a focus on looking at risk holistically. Additionally, regulators have been encouraging firms to monitor their credit risk very closely. The Basel committee has also released a consultative document on Basel III which is aimed at strengthening the capital levels of banks which again will help control their credit risk. Thus currently credit risk is a primary concern for Banks and they are also looking for new and more innovative ways to manage it and are approaching risk management from a holistic, enterprise-wide view.

Various advanced methods are employed by banks to measure the credit risk in order to make a right decision. Most of the credit risk models also rely hugely upon the robust integrated risk management system. Financial firms worldwide have enterprise risk management on the top of their IT spending priorities. The global financial IT spending on risk and compliance in 2011 is around 9.4 Billion USD. 20 % of it is contributed by Asia Pacific alone. In this context, it is wise for any Indian banks to look seriously into investing on developing and integrating their information system in order to enhance the enterprise wide risk management and to stay competitive in the banking industry.

  1. Objective and Scope

The project aims to identify and understand the business requirements for Credit risk management systems. Initially, the project attempts to identify the motivation behind moving to IRB approach and using any of the advanced alternate credit risk models. The scope of the study is to understand the huge data requirements in IRB approach and to suggest the basic integrated credit risk management model as a long term solution in order to avail the benefits of IRB approach.

In order to develop the holistic risk management system, the project mainly aims to showcase the dimension model - data warehousing system through a prototype implementation. The scope of this implementation follows the complete data warehouse lifecycle – Data collection, Dimensional model designing & implementation, ETL, Cube creation & deployment, Measures calculation and BI report (Dashboard) development.

  1. Project Planning

The following is the project plan developed for the implementation of the data warehousing system. Key milestones of the project are Finalization of requirements/approach, dimensional modeling, and final project submission.

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  1. Business Requirements understanding - Credit Risk Management

The discipline of credit risk management attempts to identify and quantify (ahead in the cycle – much before occurrence of the default) such losses that can be faced by the provider of the credit facility due to potential default by the borrower.

Essential functions of risk management are Identifying, Measuring, Managing and mitigating risk.

Purpose of measuring risk

  • Pricing the risk: Identifying and quantifying credit risk helps the provider to charge interest to borrowers in line with risk associated
  • Capital cushion: Under ...

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