News Article -- March 15, 2004

Banque Populaire Steps Up to Basel II

By Thierry Croiset and Jean-Louis Gross

Banks around the world are dealing with the most sweeping changes in 15 years to the way they measure risk and calculate capital solvency.

New rules handed down by the Basel Committee on Bank Supervision include increased requirements for data collection and analysis, which make IT systems the most challenging part of becoming compliant. This challenge is especially great for decentralised organisations like the Banque Populaire Group, the sixth largest bank in France.

The Basel Accords

In 1988, the Basel Committee issued a set of rules on capital solvency that became known as the Basel Accord (see Editor’s Notes). Although the Committee, which was created by the central banks of the G10 countries, has no international legislative or regulatory authority, more than 100 countries adopted the rules.

Those countries adopted the new rules because they saw them as a way to prevent banks from taking the excessive credit risks that had created financial crises in the 1980s. In the 1990s, there was another string of financial crises and scandals - such as the Bank of Credit and Commerce International scandal, the Asian currency crisis, and the bankruptcy of Baring Brothers - and many of these could not be attributed to credit risk.

In response to the crises of the 1990s, the Basel committee began working on a second capital accord. This accord, called Basel II, is intended to do a better job of aligning risk and capital requirements. Basel II is also more complex than any other set of regulations banks have had to deal with.

The race to stay even

The complexity of the new rules is altering the competitive landscape for most, if not all, banks. There is a great deal of speculation about how the relative positions of banks will be affected when Basel II goes into effect in 2006.

In the short run, the main goal for many banks is simply not to fall behind while they are making substantial changes to their business processes and IT systems. Although the new rules will not formally go into effect until 2006, to be compliant on that date banks must already be analysing and storing three to five years worth of historical data. To maintain their current competitive position under these circumstances, banks must do something else they are not accustomed to doing: mount large systems integration and development projects.

The Banque Fédérale des Banques Populaires, the central body of the Banque Populaire Group (see Editor’s Notes) is working with CSC to build a new IT architecture and develop new applications to meet the requirements of Basel II. The size of this effort is indicated by the fact that the joint project team, which includes the bank’s internal IT and banking experts, takes up one and a half floors in the Banque Fédérale building in Paris.

Two different challenges

To be successful, the team will have to overcome two hurdles: the technical challenges faced by any large integration and development effort; and figuring out what those technical challenges are. That is, the project team has to figure out what kind of architecture and applications are needed to comply with rules that keep changing.

The first challenge is made more difficult by the bank’s decentralised structure. The Banque Populaire Group’s 23 retail banks and their 2,500 branches run on six different IT platforms. Because these banks have always been locally owned and operated - a business plan that has worked well for almost 90 years - these diverse systems will not be migrated to a common platform.

The Basel II architecture, however, will be centralised, which means it will have to organise the dialogue among the disparate local systems and the system at Banque Fédérale. Member banks will continue to run their daily operations on their own systems, but when new customers walk in, bank officers will log into the central system to enter the risk data required by Basel II.

The new rules also require entirely new applications. There are already some commercial packages on the market for Basel II, but none of them cover more than a very small part of the new requirements. Although the new formula for calculating capital needs will be almost the same for every bank, and so can be automated, no two banks will use their capital in the same way. That means that Banque Populaire, like every other bank, must develop new applications around its own business strategy.

Before Basel II Banque Populaire had as many different methods for measuring risk as there were member banks. Using a single method, as Basel II requires, will improve the way the bank does business. For example, it will allow officers for the first time to compare risk evaluations between banks. But getting all the banks to agree on a single method - on a single interpretation of changing rules - was itself a challenge.

What has been most frustrating is trying to assemble the pieces of a puzzle that the Basel Committee itself has not yet completed. Since the first draft of the rules was published there have been changes every month, sometimes every day, especially to the IT side. It’s stop and go for the project team, depending on what comes down from the Basel Committee. When a change comes, it means the project team has to revise the development plan. Sometimes it means the team has to undo what it has done and start over again. No-one knows yet what kind of architecture or applications will be needed.

Balancing the present and the future

Managing such a large and complex initiative was especially difficult for Banque Populaire because it is so decentralised. Before CSC’s involvement, the bank was dealing with things from day to day without much planning. The IT part of the initiative was well beyond the capacity of the internal IT team. Even the business side required more co-ordination and planning than was necessary for conducting normal business.

It would have been very difficult for the bank to plan and co-ordinate a compliance project using only its own internal resources. By joining its banking expertise with CSC’s IT and project management expertise, Banque Populaire is building a new system for the Basel II future while ensuring that the current system keeps working for the bank officers who are dealing with clients every day.

Ends

Editor’s Notes

Thierry Croiset

Thierry Croiset is the risk manager for Banque Fédérale des Banques Populaires.

Jean-Louis Gross

Jean-Louis Gross is vice president of e-technology operations for CSC’s French/Benelux Division.

Banque Fédérale des Banques Populaires

The banks in the Banque Populaire Group were formed as member-owned co-operatives in 1917 to finance small and medium-sized businesses. The Group consists of 23 local retail banks and Natexis Banques Populaires, and their operations are co-ordinated by a central body, the Banque Fédérale des Banques Populaires.

The retail banks have more than 2,500 branches throughout France, and are wholly owned by their more than 2 million member-stakeholders. In 1921 they created the central body that is now called Banque Fédérale des Banques Populaires to centralise, manage, and invest their cash surpluses. The retail banks are the sole shareowners of the Banque Fédérale des Banques Populaires.

The Banque Fédérale des Banques Populaires is in turn the owner of Natexis Banques Populaires. That bank, which is listed on Euronext, is the Group’s investment banking and service bank, and was acquired in a friendly takeover in 1998. The Banque Populaire Group is the sixth largest bank in France in terms of total assets, but it has one-third of the market for small and medium-sized businesses.

The Basel Accords

In 1988, the Basel Committee on Bank Supervision - which was formed by the governors of the central banks of the G10 countries - established a framework for measuring risk that became known as the Basel Accord. Under that framework, banks adopted a minimum capital standard of 8 percent.

Fifteen years ago, the riskiest part of a bank’s business was making loans. However, the development of new financial instruments has now exposed banks to more kinds of risk. Significant changes in the banking business and financial markets generally prompted the Basel Committee to develop a new framework. The New Capital Adequacy Framework, commonly known as Basel II, makes substantial changes in the way banks are capitalised and in the way they measure risk.

The original accord covered credit and market risk, and Basel II makes substantive changes to the treatment of credit risk (the committee amended the treatment of market risk in 1996). The new accord also adds operational risk, which it defines as “the risk of losses resulting from inadequate or failed internal processes, people and systems, or external events.”

Banks must now measure their operational risk, and use it to calculate their capital ratio. That ratio is still calculated by dividing the amount of capital a bank has available by a measure of the risks the bank faces. What has changed is that Basel II now requires that operational risk be added to this measure and that other risks be measured more accurately.