SAP Solution Brief
SAP for Banking
If your bank is planning to
adopt the new Basel II frame-
work, whether by mandate or
voluntarily, improvements in
risk management and regula-
tory capital allocation will be
the end result. As chief risk
officer, you need to be sure
that your IT infrastructure sup-
ports integrated processing
of data. The SAP® Basel II
application provides a standard
platform for open reporting
functions, handling a broad
range of asset types and
supporting all credit-risk cal-
culation methods permitted
under Basel II.
IMPROVING BANK
CREDIT-RISK MANAGEMENT
WITH SAP® BASEL II
The capital adequacy framework within the new Basel Capital
Accord (Basel II) will promote improvements in risk manage-
ment and regulatory capital allocation for the estimated 5,000
banks in more than 100 countries that are likely to fall under
the regulations. To be competitive, many other banks will
voluntarily adopt the framework.
As chief risk officer, you may be planning to use Basel II to
enhance risk management within your organization and
allocate capital more effectively. As you most likely realize,
this will require changes in your organization, business
processes, and technology.
The following institutions are successfully using
the SAP® Basel II application:
• Bank of Ireland Group, Ireland
• Caixa Catalunya, Spain
• Deutsche Postbank AG, Germany
• Nordea, Sweden
• Westdeutsche ImmobilienBank, Germany
The ideal IT solution for Basel II uses a standard platform to
integrate the processing of data for calculations of credit risk and
related capital adequacy. That solution will support a wide array
of asset types and calculation methods and provide a framework
for performing stress tests that address potential changes in
credit-risk parameters. The solution should also fully support
the supervisory review process with standard reports and give
your bank the flexibility it needs for both effective internal
reporting and external disclosure.
Modern Risk Management and Basel II
To examine further, Basel II is a revision of the capital adequacy
framework established under the 1988 Basel Accord (Basel I) that
expands the guidelines that international banks must follow for
managing risk and disclosing key risk calculations. The capital
requirements are intended to help improve banks’ capabilities
for managing and measuring risk. Supervisory review rules
under Basel II encourage best practices in managing risk and
reducing risk related to a bank’s business strategy and reputa-
tion. Market-discipline rules require detailed public disclosure of
banks’ capital structures, risk exposures, ratings models, and
capital adequacies.
Banks that want to be successful under Basel II will feel pressure
to adapt their organizations, business processes, and technology
for enhanced processing and disclosure of portfolio information.
To accomplish this, they must improve data collection, manage-
ment, quality, and analysis with the goal of encouraging greater
accuracy, consistency, and transparency across all risk types and
business divisions. They must align their corporate governance
with the new requirements. They must be able to integrate
information within their IT systems to address new documenta-
tion and reporting rules.
The SAP® Basel II application supports centralized processes for
credit-risk governance, as well as the granularity and infor-
mation consistency that Basel II requires. The application incor-
porates such Basel II best practices as the determination of mini-
mum capital requirements for credit risk via calculations for
risk-weighted assets, supervisory review via auditability and stress
tests, and market discipline via a flexible reporting structure.
A Platform for Basel II Credit Risk and More
Building on the proven functionality of the SAP for Banking set
of solutions, SAP Basel II can help banks like yours meet new
requirements for calculating credit-risk exposure and related
capital adequacy. It can also help you implement new processes
for supervisory review, internal reporting, and external dis-
closure. SAP Basel II can complement other SAP solutions for
managing market, interest rate, and liquidity risk.
Robust Calculations for Credit Risk
and Capital Adequacy
The SAP Basel II credit-risk framework provides robust support
for calculating default, dilution, settlement, and residual-value
risk. The application supports the standard, comprehensive
standard, foundation internal ratings–based (IRB), and advanced
IRB calculation approaches that provide values for risk-weighted
assets and expected loss. Calculations based on individual finan-
cial transactions and positions offer drill-down potential for
detailed risk analysis to the transaction level.
The application meets the Basel II requirements for portfolios
with loans to corporations, other banks, states, and consumers –
as well as portfolios that involve equities, specialized lending, or
asset-backed securities. SAP Basel II can handle calculations for
transactions related to different types of risk (such as default and
settlement risk). It can also assign loans from retail portfolios to
individual subportfolios or segments. It can handle the partial
use of approaches, in the case of subportfolios, for example. The
application can determine credit-conversion factors for free
credit lines as well as haircuts for collateral. It supports different
types of netting – including on-balance-sheet, derivative, and
repurchase netting – and can incorporate optional exposure-
at-default components, such as accrued interest.
The application’s flexibility and ability to define parameters
according to specific requirements support discretionary choices
by both regulatory supervisors and your bank. In addition to
credit calculations based on current real data, SAP Basel II can
determine potential capital requirements based on stress tests
that explore changes in market data, business-partner ratings,
transactions, positions, and other parameters of the calculation
framework. Stress tests help you monitor and report on Basel II
credit-risk parameters and exposure, as well as the effects of
changes in your credit-risk profiles on capital adequacy. Besides
disclosure and external reporting, you can use data from SAP
Basel II for internal credit-risk reporting and management.
Strong Support for Supervisory Review
SAP Basel II supports the reporting transparency and traceability
necessary for the supervisory review required under Basel II –
through which bank managers assess capital adequacy and ana-
lyze potential responses, such as strengthening the processes
for credit-risk management and improving internal controls.
For this purpose, SAP Basel II offers drill-down functions –
including those for individual transactions – as well as drill-
through functions.
Flexible Functions for Disclosure and Reporting
External recipients of Basel II credit-risk information can include
customers and shareholders, as well as external stakeholders
and supervisory authorities. Supervisory authorities can request
information in reports for publication. The ability to provide
additional information is also a prerequisite for using the more
advanced credit-risk calculations.
SAP Basel II provides significant flexibility in designing, creating,
and expanding credit-risk reports. It lets you access this infor-
mation at regular time intervals according to your particular
needs. The application provides standard reports that support
Basel II requirements for general credit-risk reporting; risks from
corporate holdings in the banking book, securitizations, and
commercial real estate loans; and migrations in credit ratings.
It also gives you the flexibility to create reports that address your
specific policies for credit-risk management.
Integrated Data Management
SAP Basel II integrates data management by incorporating both
historical and financial databases, each of which serves a distinct
function.
Historical Database
SAP Basel II includes a historical database for collecting and
storing data for Basel II credit-risk parameters, creating a history
of risk parameters and credit ratings for audits and regulatory
reviews, managing historical time series, and meeting regulatory
requirements for reporting and plausibility. The application
supports various processes for creating internal credit-risk
models – including calibration of the model, the estimation of
credit parameters, and validation of the parameters. The
database is optimized for time-series analysis of large volumes of
data over long periods. It can store data from various source
systems, as well as the results of credit-risk calculations.
The system saves output from the historical database in an audit-
proof area that is safe from changes or deletions. This output can
include all the information for auditing and reproducing cus-
tomer credit ratings. You can define the granularity of infor-
mation for a certain model, as well as the granularity of output
information.
The generic architecture within SAP Basel II ensures future
usability, makes the software useful for many different types of
institutions, and provides adaptability for changing business
conditions. For the historical database, a bank can decide what
specific information to collect and how to configure the data for
its specific needs.
 www.sap.com /contactsap

Financial Database Powered by SAP NetWeaver®

The financial database within SAP Basel II assures accuracy and SAP Basel II is powered by the SAP NetWeaver® platform.
consistency in the information available for calculations and SAP NetWeaver unifies technology components into a single
reporting. The financial database can support SAP for Banking platform, allowing organizations to reduce IT complexity and
analyzers for both Basel II and the new International Financial obtain more business value from their IT investments. It provides
Reporting Standards, which can reduce data reconciliation. You the best way to integrate all systems running SAP or non-SAP
can enhance and customize information within the database to software.
meet your particular requirements. The database supports ver-
sioning of settings, data, and results to ensure auditability. You SAP NetWeaver also helps organizations align IT with their
can load information into the database using standard inbound business. With SAP NetWeaver, organizations can compose and
and outbound interfaces and access information via shared com- enhance business solutions rapidly using enterprise services.
munication services. As the foundation for enterprise services architecture (ESA),
SAP NetWeaver allows organizations to evolve their current
Many Business Benefits IT landscapes into a strategic environment that drives business
By properly addressing the Basel II credit-risk guidelines, your change.
bank can reduce regulatory capital and improve capital alloca-
tion. With more effective risk management, you can improve For More Information
risk-based pricing and accept greater risk for potentially higher For more information, please visit the SAP Web site at
returns. These changes can improve the market’s perception of www.sap.com/banking.
your enterprise.

SAP Basel II can be an integral part of a larger credit-risk strategy

that includes limit and credit portfolio management related to
regulatory and economic-capital requirements. Incorporating
regulatory requirements into your bank’s internal credit-risk
strategies can provide a sound basis for managing all areas of
credit risk.

Handle Regulatory Change More Effectively

In addition to improving the efficiency of risk and data manage-
ment, SAP Basel II can help you reduce the complexity of your
IT systems, trim software maintenance and development costs,
and resolve the many integration challenges of a new regulatory
environment.

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