Bank Management Using Basel II–Data: Is the Collection, Storage and Evaluation of Data Calculated with Internal Approaches Dispensable?

Banks all over the world are still concerned with the implementation of the new Basel Accord for Capital Adequacy which refines – among others – the minimum capital requirements. In the last years huge silo?like structures for data acquisition, data management, and data processing have been created to comply with these new standards. In addition to the compulsory regulatory practices, banks run cost?intensive internal management systems for risk/return management as the existing regulatory systems underlie a number of limitations, which avoid an adequate measurement of the risk exposure. However, a precise measurement of the risk exposure is crucial for the optimal allocation of the scarce resource “economic capital”. In this paper it is questioned whether in addition to the regulatory requirements, the differing data acquisition and processing for the internal management systems is really needed with respect to a bank?wide portfolio optimization.

It is shown that under specific conditions, an optimization approach utilizing the compulsory data output of the Basel Accord for Capital Adequacy can lead even to a better bank performance compared to using data generated with typical internal risk models based on VaR or CVaR – despite of the theoretical deficiencies of the Basel framework with respect to the measurement of credit exposure. This effect may not only enable better data integration but also allows for cost savings on internal risk management systems.

A case study is presented that shows that a German commercial bank is already applying the proposed approach.