With the introduction of recent Basel Regulation, the calculation of risk-weighted assets (RWA) will go through a rigorous asset estimation process involving exposures and collateral so that they reflect the intrinsic value of the risk exposures and ensure the general stability of the assessment criteria. Within this context, many banking institutions, in part due to the recent financial health Comprehensive Assessment (Asset Quality Review) and recent regulatory changes under consultation (first and foremost the recent Basel regulatory standards), have initiated programs to guarantee correct and optimum, and therefore improved, assessment of risk-weighted assets, hence RWA Optimization. A fundamental element of any RWA Optimization process is the implementation of processes and instruments aimed at protecting the quality of processes and data.
Get perspectives on this from CRIF's Management Consultants: Marco Macellari, Management Consulting Manager of CRIF – Head of Practice Risk & Regulatory of CRIF Management Consulting, and Giorgio Costantino, Management Consulting Director of CRIF.
Mr Macellari, in your opinion how does data quality enable the inherent risk exposures to be best reflected in the capital requirements?
Data are the vehicle for communicating management and business events within information systems.
Slow updating of the database and poor data quality lead to the partial, or even total, unavailability of information for the purposes of prudential supervision, which can result in penalization of weightings that translates into greater capital absorption.
Improvements in data quality mean increased correspondence between the assumed credit risk and how the portfolio is measured following regulatory requirements regarding credit exposure and guarantee and collateral eligibility criteria, leading to improved credit risk mitigation and enabling a more accurate composition of credit exposure on the portfolio.
Mr Macellari, can you give us an example of an area where, in your opinion, data quality is critical?
Within the area of credit risk mitigation, fundamental for asset optimization, the current standard Basel approach for the calculation of capital requirements requires that the composition of portfolios for “exposures guaranteed by property” can only be performed if the mortgage respects eligibility criteria, the cash flows generated by the property used as collateral (rented or sold) are not the primary source of repayment, otherwise the presumption of project financing is triggered and the exposure is entirely assigned to the corporate portfolio, and in any case only within the limit of 80% of the property value compared to the exposure (Loan To Value criterion).
