The German banking group cut its outgoings on application development from about £400m a year to £200m over 30 months from mid-2004, when it used the requirements of Basel 2 as a springboard to move developers from its different business units into a central tools and frameworks division.
Basel 2 sets out how much capital banks must set aside to cover potential losses and introduces risk monitoring standards. Compliance has the potential to save banks money by giving them the risk controls to invest more of their capital. However, Commerzbank has primarily benefited from Basel 2 by treating compliance as an IT consolidation and rationalisation exercise.
Bob McDowall, senior analyst at TowerGroup, said, "I am sure that through this exercise they will make more efficient use of their capital, but it seems to me more of a housekeeping exercise, albeit a very large one."
Commerzbank tackled its obligations under Basel 2, which applies to all European financial services companies, by setting the central IT unit to work standardising the ratings engines it uses to manage risk on a standard set of applications.
Over 2005 and 2006, some 20 ratings engines that had been developed in isolation by the different parts of the business were replaced by the team with 10 engines for Commerzbank's corporate and pension fund customers, plus a further engine for its retail customers.
Every financial transaction that Commerzbank makes is processed by a ratings engine to give the bank an overview of the risk it is taking.
The ratings engines were developed using 10 instances of a business rules management system (BRMS) from software supplier Ilog, with each one being integrated with three Java applications developed by Commerzbank's tools and frameworks division.
Commerzbank said it could not create fewer than 10 ratings engines because the business processes used in the different parts of the business were too varied.
A front-end connector was developed to manage the interfaces between each ratings system and the front-end applications used throughout the business. A business controller application was used to control the workflow, and a data connector was devised to populate the BRMS.
Using the engine, once the Ilog BRMS is populated with the details of a financial transaction, the risk calculation takes place instantly.
Commerzbank senior vice-president Andreas Rose, who runs the tools and frameworks division, said, "With this approach, we have been able to fulfil the Basel 2 requirements for transparency. We have also cut our operations costs by more than half."
Related article: Basel 2 changes face of financial IT
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This was first published in February 2007