Credit Process Workshop Day 1 - abj.org.jo process wor… · Credit Scoring 11:00 – 11:15 AM...

Credit Process Workshop

Day 1

April 2008

Agenda

9:00 – 11:00

Credit Scoring

11:00 – 11:15 AM

Break

11:15 – 1:00 PM

Integrated Rating System Design

1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM

Credit Risk Infrastructure and Risk Rating Automation

3:00 – 3:15 PM

Break

3:15 – 4:00 PM

Recap and Q & A

9:00 – 9:30

Information, Welcome and Review of Objectives

9:30 – 11:00 AM

Credit Process: Challenges and Leading Practices

11:00 – 11:15 AM

Break

11:15 – 1:00 PM

Technology/Data Considerations and Challenges

1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM

Sample Solution and Demo

3:00 – 3:15 PM

Break

3:15 – 4:00 PM

Case for Change and Program Approach

Day 2Day 1

Introduction, Welcome

And Reviewof Objectives

CREDIT PROCESS WORKSHOP

• Introduction by: Dr. Adili Kandah, Director General, Association of Banks in Jordan

• Comments by: Glenn Tasky, Component Leader for SABEQ

• SABEQ Program

• BearingPoint, Inc.

CREDIT PROCESS WORKSHOP

• BearingPoint– Global $3.1 B Management Consulting and Technology Firm

– Over 17,000 Employees in 4 Global Industries

– Leader in Private & Public Sector Consulting Services

• BearingPoint’s Emerging Markets Unit– Over 600 professionals working in 65 Emerging Market Countries

– Highly experienced in the design, sequencing and implementation of broad-based economic and financial solutions

CREDIT PROCESS WORKSHOP• Norwin Estrada - is a Manager in the Financial Services practice of BearingPoint

based in New York City. He is a skilled consultant with significant experience leading a wide range of assignments covering commercial credit, risk management, business requirements analysis, and regulatory and compliance based initiatives. Mr. Estrada specializes in credit processes and customer management, along with operational efficiency and control. Norwin has extensive hands-on experience with all types of business lending products and credit qualities. He has also participated in the development of commercial lending solutions within BearingPoint’s North American practice. [email protected] cell phone: +1-917-907-2635

• Kevin O’Brien - is a Manager in the Emerging Markets practice of BearingPoint with deep experience in trade financing, commercial banking and financial consulting. He holds an Undergraduate Degree in Business from the State University of New York; a Masters in Business from American University in Washington DC; and a Jurist Doctorate from George Mason University School of Law in Virginia where he served as Adjunct Professor. Mr. O’Brien is a member of the Virginia and District of Columbia Bar Associations. As a banker, Mr. O’Brien was responsible for $500 million in retail and SME loans and managed the transformation of SME lending to an automated process that included implementation of credit [email protected] telephone: +1-703-747-8507

Presenters

• SME Credit Process and Products

• Risk Management

• Credit Risk Models

• Credit Management

• Data and technology for risk and capital-based management

• Risk Governance and reporting Risk

• Governance and Organization

• Credit Scoring

• Underwriting SME Loans

• Moody’s Credit Analysis

Kevin OBrienManager, Emerging Markets, BearingPoint

Fadi ArrarCredit Risk Manager, Housing Bank for Trade and Finance

• Capital strategy and calculation

• Credit Risk Management

• Basel II Implementation

• Risk Quantification and Measurement Systems

Norwin EstradaManager, Financial Services, BearingPoint

Focus Areas/ExperienceName/Title

The Credit Process is Comprised of Many Activities…

… More than can be covered

in 2 days therefore,

Prospect & Sell

Credit Assessment &

ApprovalService

Collect & Recover

Monitor

� Target market – risk appetite

� Opportunity identification and structuring

� Customer information gathering

� Application form population and sorting

� Task Allocation

� Statement preparation & distribution

� Product adjustment updates

� Handling customer inquiries

� Billing

� Payment collection and processing

� Limits

� Ticklers and Credit Reviews

� EL and ALLL

� Total Borrower Exposure

� Concentration/ Diversification

� UL and RWC

� Charge-offs

� Recoveries

� Assets sale

� Restructuring

Pricing, Close & Fund

� Preparation and assembly of documentation

Post-sale servicesLoan origination and assessment

Deal Proposal

� Pricing

� Closing/ Booking

� Drawings

Credit Package Assembly

� Credit analysis

� Compliance checks

� Ratings assignment

� Limit control

� Credit risk mitigation mechanisms

� Approval

Our Session Objectives are To:

� Provide insights into leading practices, considerations and challenges of the credit process, specifically around loan origination and assessment from both practical and theoretical perspectives.

� Leverage our experiences to illustrate what might be expected for certain related topics that are not found in most textbooks covering the subject matter.

� Have a collaborative process where we can share ideas over the next two days and also facilitate a forum for take-away items.

� We have assembled a group of practitioners with varying degrees of experiences within the credit risk, strategy and technology arenas.

� Collectively our presenters have been through various selected areas and/or full credit process assessment and redesign implementations.

Agenda

9:00 – 11:00

Credit Scoring

11:00 – 11:15 AM

Break

11:15 – 1:00 PM


1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM


3:00 – 3:15 PM

Break

3:15 – 4:00 PM

Recap and Q & A

9:00 – 9:30 AM

Introduction, Welcome and Review of Objectives

9:30 – 11:00 AM

�Credit Process: Challenges and Leading Practices

11:00 – 11:15 AM

Break

11:15 – 1:00 PM


1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM


3:00 – 3:15 PM

Break

3:15 – 4:00 PM


Day 2Day 1

Credit Process:

Challenges and LeadingPractices

Contents

� Lending Process Overview

� Challenges

� Leading Practices� Enterprise Credit Risk Management

� Risk Rating

� Counterparty Management

� Facility Management

� Portfolio Monitoring

Credit Process Overview

Prospect & Sell

Credit Assessment &

ApprovalService

Collect & Recover

Monitor

� Target market –

risk appetite

� Opportunity

identification and

structuring

� Customer

information

gathering

� Application form

population and

sorting

� Task Allocation

� Statement

preparation &

distribution

� Product adjustment

updates

� Handling customer

inquiries

� Billing

� Payment collection

and processing

� Limits

� Ticklers and Credit

Reviews

� EL and ALLL

� Total Borrower

Exposure

� Concentration/

Diversification

� UL and RWC

� Charge-offs

� Recoveries

� Assets sale

� Restructuring

The scope of our session will mainly focus on the loan origination and assessment phases of the credit lifecycle

We will also incorporate elements of the post-sales process as needed

Pricing, Close & Fund

� Preparation and

assembly of

documentation

Post-sale servicesLoan origination and assessment

Deal Proposal

� Pricing


� Drawings

Credit Package Assembly

� Credit analysis

� Compliance checks


� Limit control

� Credit risk

mitigation

mechanisms

� Approval

Challenges

– Financial Institutions typically extend a wide variety of credit to customers including Lines of Credit, Revolvers, Term Loans, ACH lines, Daylight Overdraft accounts etc.

– These credits are often extended by different groups within the organization, each typically operating with their own set of business processes and enabling technologies

– Credit packages put together by different lending groups are often inconsistent and no pre-validation is done to ensure that all required elements are present, compliance guidelines have been met etc.

– While the credit review process is underway, origination cannot tell where in the credit process their deals lie and loan administration groups have no way to anticipate volume/nature of deals that will soon need to be booked

– Groups within the organization that are tasked with managing credit risk and exposure across the entire enterprise are faced with the daunting task of assembling and aggregating obligor and facility data from across lending programs in a manual way

This current process is inefficient, costly and often leads to an incomplete or erroneous picture of exposure

Sample Illustration

The data fields needed to track a loan pipeline are relatively consistent across lending programs: Broker Name, Borrower Name, Address, Loan Amount, Index Rate etc.

Loan Accounting systems have developed sophisticated account level capability that can support multiple combinations of product types

Challenge

The SILO’s come back in the Credit Management Process -Standardizing a Credit Management workflow continues to be a challenge to the very disparate nature of collateral data and differences in Risk Models across product types

SMEUpper Middle

Market

Large

CorporateSyndications

Dealer

Finance

Vendor

Fin. Services

Real

Estate

Equipment

Finance

Pipeline Management – Siebel, SalesForce.com, SalesLogix

Loan and Lease Accounting SubledgersACBS, AFS, LoanIQ, OLM

Approval &Closing

Approval &Closing

Approval &Closing

Approval &Closing

Approval &Closing

Approval &Closing

Approval &Closing

Approval &Closing

Small

Medium

Enterprise UpperMidMktOffering

LargeCorp Deal

Package

SyndicateOfferingPackage

DealerCredit Story

Vendor FinServices Writeup

Real EstateTransactionSummary

EquipFinanceNarrative

Small Medium

Enterprise

Upper MidMkt

Underwriting Model

Large Corp Underwriting

Model

Syndications Underwriting

Model

Real Estate Underwriting

Model

Equipment Finance

Underwriting Model

Dealer Finance

Underwriting Model

Vendor Fin Services

Underwriting Model

Assemble Credit Package








Deficiencies of Current State

P&L Issues – Without a view into the credit pipeline, Operations group unable to plan ahead for periods of high activity and may not be able to complete loan bookings on time

Loan operations groups unable to see level of activity they should be expecting in the near term

5

Exposure Risk – Inability to view credit relationship with obligor across all lending programs may allow credit risk to approve deal even though total exposure triggers should have kicked in

Full view of other credits to same borrower /relationship across the institution is often not available

6

Inefficient Process – Origination needs to proactively ‘ping’ credit management group to ascertain deal status and to be able to report back to borrower

Origination/UW unable to see where in the credit process the deal is, who has approved, who still needs to approve etc.

3

Regulatory Non-Compliance – Organization cannot demonstrate to auditors/regulators what the history of the credit approval was – cannot be Basel II compliant without this

No audit trail to track history of the credit process and modifications that may have been made to deal terms due to credit input

4

Concentration Risk – Portfolio may become over-concentrated in certain Geography, Industry etc. based on deals currently in Pipeline but no way for credit group to become aware of this until after approval when it is too late

� No holistic view of all credit offerings being worked on prior to credit approval

� Concentration indicators cannot be viewed in aggregate of overall existing portfolio until after approval

7

� Workload balancing within credit group is difficult

� Slower Review Process - Different file types and a non standardized credit package makes it difficult for credit group to speedily review offerings from different lending programs

� Incomplete Credit Packages - Credit packages may be received that are incomplete and credit group must iterate with origination until all required data has been submitted

� Credit Management has limited view of what offerings are close to being submitted for credit review

� Credit package consists of a compilation of files of different types

� Completeness of credit package cannot be verified before submission

2

Increased cycle time - New offerings start from scratch and components of earlier deals are not retrievable in a standardized, repeatable fashion

Reuse of credit package components on a future deal is difficult1

Cost/Efficiency ImplicationsProcess Management Deficiencies

� Abstract out common credit criteria elements (e.g. Obligor risk rating, Target approval date, KMV rating etc.)

� Generate one standard credit offering template, with business specific sections as necessary

� Automatic routing to appropriate approval level based on modifiable, company specific approval matrix

� Interfaces files with fields needed for booking generated and sent to booking systems

Future State — An Enterprise Credit Management Solution

Vendor

Fin. Services

Pipeline Management – Siebel, SalesForce.com, SalesLogix

Loan and Lease Accounting SubledgersACBS, AFS, LoanIQ, OLM

Enter Common Credit Criteria

XYZ Commercial Credit Package

Section I. Borrower Profile

Section II. Master Exposure

Section III. Collateral Summary

Section IV. Business Specific

� Required Fields Filled In?

� Conforms to Credit Policy?

� Any Compliance Exceptions?

Create interfacefeed into Booking Systems

Build Electronic Credit FileElectronic Credit File has Placeholders for Biz Specific Models

Enterprise Credit Management Solution

Submit Deal for Credit Approval

Validate Deal Generate Offering Doc’s

Route for Approval

Book the Deal

S.M.EUpper Middle

Market

Large

CorporateSyndications

Dealer

Finance

Real

Estate

Equipment

Finance

Advantages of Future State

Electronic Routing and Approval – Credit approval matrix is built into application which can route offering to appropriate approver(s) based on deal parameters such as Line of Business, Deal Size, Facility Type, Region, Industry etc.

7

Full Exposure Understood – System shows all current credit facilities for obligor and all related obligors, allowing current credit decision to be made with knowledge of full exposure to this customer relationship

3

Auto-Generated Documents – Documents are automatically generated by the system based on data entry. Eliminates duplicative data entry, and allows company standard text to be utilized with data points filled in dynamically as needed

4

Electronic Credit File – All documents related to a credit offering, whether generated automatically by the system or manually uploaded, are stored together with the offering for easy viewing and retrieval

5

Auto-Validation of Credit Offering – system validations determine if all required fields have been filled in, all required documents have been uploaded etc. and offering is rejected if incomplete. Auto-validation ensures that once Credit Management gets the deal, they will have all the information necessary to make a decision

6

BackOffice Integration – Facility type or other deal parameters are used to automatically generate booking forms for appropriate backoffice processing group(s). Backoffice has all the deal terms necessary and can book the deal or an automatic booking routine can be written for even further efficiency gains

8

Deal Archiving – all data points and documents (even multiple versions of the same document if desired) are retained and accessible for use in future deals or for satisfying audit and regulatory requirements

9

Decreased cycle time - Reuse of credit package components on a future deal is now possible. New offerings need not start from scratch and components of earlier deals are retrievable in a standardized, repeatable fashion

2

� Dashboards allow view of credits in progress:

� Originators – can see the status of deals they have submitted for review

� Credit Risk – can see what deals are waiting on their approval, what deals are coming down the pipe and can research deals decisioned in the past

� Loan Administrators – receive all information needed to book the deal and can also see what deals are almost ready to be booked to be able to proactively plan for periods of high and low activity

1

Efficiencies Gained

Enterprise Credit Risk Management

Credit Risk Defined

� Definition:

– Credit risk arises due to uncertainty in a counterparty’s ability to meet obligations.

– Every risk is comprised of two elements: exposure and uncertainty.

– There are different types of credit risk, corresponding to the various types of counterparties and types of obligations.

� Issues to be Considered While Assessing Credit Risk:

– Probability of Default.

– Credit exposure

– Recovery rate

– Credit scoring

* Use ‘credit score’ for individuals and SME.

* Use ‘credit rating’ for large businesses

Source: Risk Glossary, Encyclopedia and Resource

Credit Risk Issues

� Credit Risk Modeling:

– Includes algorithm-based methods of assessing credit risk

– Asset Value Models vs. Intensity Models

– Need to use ‘potential credit exposure’ to analyze credit risk for derivatives

� Managing Credit Risk:

– Credit scores/Credit analysis

– Credit risk limits using credit risk modeling

– Collateralization/Credit enhancements

– Credit derivatives

– Holding capital

Source: Risk Glossary, Encyclopedia and Resource

Common Credit Risk Definitions

� Loss Given Default (LGD) – Measures the proportion of the exposure that will be lost if a default occurs.

� Exposure At Default (EAD) – Estimated amount owed to the institution at the time of default.

� Probability of Default (PD) – Measures the likelihood that a borrower will default over a given time horizon.

� Maturity (M) – Remaining maturity of the exposure.

� Advanced Internal Ratings-Based (A-IRB) – Based on the ANPR this is applies to the advanced approaches of measuring credit risk.

� Allowance for Loan and Lease Losses (ALLL) - The allowance for loan and lease losses that is adequate to absorb estimated credit losses associated with the loan and lease portfolio as filed with the Supervisory Body.

Credit Risk Management can Result in Value atHigher Maturity Levels

• Enterprise Credit Risk Management program and responsibilities

defined.

• Many Credit Risk activities are business as usual.

• Controls in finance and operational systems are automatically

monitored and made accessible to Credit Risk reporting system.

• Real-time controls monitoring triggers process workflows.

• Credit data stored in Excel, Word, etc.• Minimal visibility into status and processes.• Inconsistent/manual approaches.

• Custom systems to address credit risk.

• Role-based functionality to provide data security.

• Minimal functionality to support credit data repositories.

• Document management, version control, audit trail, archiving of

supporting documentation, collaboration.

• Business process definition, workflows, automation.

• Security, authentication, digital signatures, etc.

• Seamless integration of credit processes and operational

systems at the enterprise level.

• Credit Risk management, Compliance and Reporting functions

optimized and integrated.

1. Ad Hoc Controls Monitoring Tools

2. Credit Risk Function Governance and Data Repository

3. Integration of Infrastructure Based Enabling Technologies

4. Integration with Finance/Operational Systems to Provide Automated Controls Monitoring

5. Enterprise Credit Risk Management and Automated Compliance Processes

Maturity Level Characteristics of Credit Risk Management

Credit Risk Management Roadmap – Maturity Levels

Value

Enterprise Credit Risk Management

– Integrated Enterprise Credit Risk Management program balanced with business structure

– Total Borrower Exposure visible “quasi-real-time”

– Key business efficiency metrics visible

– Harmonized core technologies

– Enterprise wide Credit Risk Management tool deployed –supports multiple modalities of credit from single instance

ResultInfrastructure

– Chief Credit Risk Officer role established, roles and responsibilities optimized with Chief Risk Officer and the business

– Re-useable libraries of credit policies, models, procedures and validation

– Enterprise credit risk training program

– Credit framework integrated into business operations, responsibilities and design

– On-going credit risk assessment and management –Credit Review, Rating, Limit Setting, Reserving and Pricing.

– Electronic risk rating process, review, and approvalsusing configurable workflow

– Results presentation linked with credit activities – risk adjusted return on capital (RAROC)

– Core design configuration for changes in regulations, & business events

– Minimal manual control documentation

– Enterprise Credit Risk view of Compliance

OrganizationDomain

INTEGRATE BUSINESS INTELLIGENCE

Repositories

Legacy Aps

Repositories

Legacy Aps

Repositories

Legacy Aps

Repositories

Legacy Aps

Enterprise Applications Package Applications Legacy Applications Data Warehouse

INFORMATION SERVICES

APPLICATION INTEGRATIONActivity

CollaborationTransactionManagement

CommonBusiness Objects

ObjectTransformation Meta-Models

Publish-Subscribe

5

Benefits Of The Enterprise Credit Risk Management Framework

� A common process and technology platform supports an entire commercial product suite across the credit lifecycle.

� Collection and retention of integrated data on borrowers and exposures through lifecycle of credits.

� Credit risk measurement integrated through lifecycle of loans.

� Extends concept of common platforms from just Pipeline Management and Loan Accounting to the entire commercial loan lifecycle.

� Leverages common credit data across LOB’s so no need to reinvent the wheel on common elements (e.g. borrower profile, market summaries etc.).

� Credit decision based on review against institutional portfolio rather than solely against other intra-LOB activity.

� By crossing lending programs a view is provided of:

– Total Exposure to a Master Relationship across lending programs.

– Expected risk concentrations based on the flow of deals still in the creation phase.

– Distribution of workload which allows a corporate banking leader to see what his/her officers are working on well in advance of submissions.

Risk Rating - Environment

� For most banks, the efforts to date regarding the development of the commercial risk ratings have been primarily focused on compliance with Basel II.

� While the continuation of these efforts is essential in order to meet the regulatory requirements, they are also important in the context of strategic business objectives such as ensuring a controlled and risk based execution and growth of the commercial lending lines of business.

� Current regulations provide guidance and frameworks for migration to leading practices.

Overall Ratings System – Commercial ExposuresBorrower Rating

(PD)Facility Rating

(LGD)

Loan Loss Data Capture

� Recognition of Defaulted Assets

� Type of Default

� Amount of Loss

� Amount Recovered

� Source of recovery, Ex: Collateral, Liquidation proceeds, Guarantees

� Administrative costs

Adherence

� Measures conformity to Borrower Ratings and Benchmark Ratings

� Highlight Rating Outliers

R atings M odels/B enchm ark Ratingand F inancial D ata

Adjustm ents(Expert Judgm ent)

R ationale

O ffsets

O verrides

FinalRating

Exposure Dataand History

FacilityType

Structure/Debt

PositionCollateral

Adjustments (Expert Judgment)

AVD

Final Rating

Risk Rating System & Grades Basel II Requirements

Differentiation of Risk

Rating Grade Structure

Independent Review

and Assignment

System must be oriented to risk of borrower default.

Take into account transaction factors (i.e. collateral).

Minimum 7 grades for performing loans & 2 grades for non-performing loans.

Meaningful distribution of exposure across grades.No more than 30% of exposures within one grade.

Borrower ratings must be reviewed by group that will not benefit from grade assignment.

Financial condition monitored continuously.Credit re-rated or reviewed at least annually.

Sample Ratings System Design to Estimate Probability of Default (PD)

Sample Ratings System Design to Estimate LGD

Ratings Based on External Benchmarks

� Problem: Scarcity of defaults on investment grade issuers– Few, if any issuers with investment grade ratings default in any given year.

� Solution: External benchmarks with an expert judgment overlay– Allows banks to incorporate external default data directly into the internal

ratings process.

– Key premises

• External benchmarks are statistically valid as populations.

• Individual estimates are not necessarily accurate.

– The Model

• An external benchmark provides an implied rating.

• Bank’s credit expert makes reasonable adjustments.

• Adjustments should cancel out on a portfolio level.

Credit Risk Model Design

� In no particular order, the following principles reflect critical aspects of a leading model development platform:

– Theoretical Integrity – Model development should be based on established literature/evidence

– Model Transparency – Easily understandable to non-technical audiences.

– Model Documentation & Validation – Financial institutions should establish a model validation policy. All models should comply with company standards and regulatory standards.

– Model Consistency – A corporate-wide model development program should attempt to ensure consistency of measuring credit risk exposures. A consistent view of models and measuring exposures will enable the company to more easily measure economic capital and expected loss at a portfolio level.

– Operational Feasibility and Effectiveness – Models should generate accurate results in a timely manner. The latest computational approaches towards ensuring model performance should be utilized.

– Model Sustainability & Business Continuity – Infrastructure should be consistent with accepted industry standard applications when possible. Additionally, utilizing common econometric and programming languages should be done when possible. Doing so ensures that applications can be more easily maintained and mitigates against key-person dependency risks.

– Model Flexibility – Models should be flexible in handling enhancements. Examples are new product segments and features such as credit structures/enhancement applications.

Model Validation

� Developmental Evidence – The review of developmental evidence focuses on the reasonableness of the conceptual approach and quantification techniques of the model itself. This review typically considers the following:

– Documentation and support for the logic and risk quantification techniques used.

– Testing of model sensitivity to key assumptions and data inputs.

– Support for the reasonableness and validity of results.

– Support for the robustness of scenarios used for stress testing.

� Process verification – Process verification considers data inputs, the workings of the model itself, a model output reporting. It includes an evaluation of controls, the reconciliation of source data systems with model inputs, accuracy of program coding, and the usefulness and accuracy of model outputs and reporting. Verification also may include benchmarking of model processes against industry practices for similar models.

� Outcome analysis – Outcome analysis focuses on model output and reporting to assess the model’s predictiveness. It may include both qualitative and quantitative techniques:

– Qualitative reasonableness checks consider whether the model generally produces expected results.

– Back testing compares predicted results to observed actual results.

– Benchmarking of model output compares predicted results generated by the model being validated with

predicted results from other models or sources.

Model Governance

� Defined Responsibility: Formalizes and defines the responsibilities of senior management, model developers, independent reviewers, end-users and internal audit with regards to model development, validation, approval and usage.

� Model Documentation: Establishes model documentation requirements sufficient for the purposes of facilitating independent reviews and effective communication between model developers, senior management and end-users.

� Independent Review and Validation: Requires all models, and all changes to models, to undergo an initial independent review and validation prior to usage in production processes.

� Assumption and Performance Reviews: Requires all models to undergo periodic assumption and performance reviews to gauge a models ongoing applicability.

� Formal Approval: Requires all models, and all changes to models, to be formally approved by senior management prior to usage in production processes.

� Controls: Subjects all models to version and change controls, as well as business continuity and disaster recovery plans.

� Audit Oversight: Assigns responsibility to the firm’s internal audit department to periodically review the various groups impacted by this policy and verify compliance.

To ensure sound and effective model governance policy must contain the following key elements:

Counterparty/Relationship Management

Relevant Terminology

General Definitions:

•Legal Entity - Corporation, institution, organization, individual or similar body that can legally commit / contract itself.

•Counterparty - Legal Entity, not being the Bank.

•Obligor - Counterparty with whom the Bank has a business relationship and granted usage of a credit facility that leads to a (potential) claim on that Obligor.

•Guarantor - Counterparty that issued a guarantee or indemnity.

•Issuer - Counterparty that issued a financial instrument.

Typical Issue

Customer data and hierarchies have been defined and implemented in different product systems resulting in duplicate records and poor data quality

Major Customer Data Stores

EDW

Product System

Product System

Product System

Product System

Product System

Cognos Siebel

Customer

SystemSDS

DB@

DB#/

SiebelDB

salesforce CRM4 CRM5

Product

System

Product

System

Product

System

Other

Systems

Unique Entity IdentifierA key first step in this process is to establish a bank-wide unique entity

identifier for all Counterparties

a. Establish a unique identifier for all Counterparties

b. Focus on organizations (i.e., wholesale) in the short term – tackle individuals (i.e, retail) in the mid term

c. Link all other relevant internal and external identifiers regarding the same entity

d. Ensure all types of Counterparty (I;e., entity) relationships bearing credit risk are supported

Unique Counterparty

Identifier

Other Internal Customer Identifiers

External Legal Entity

Identifiers

• System a

• System b

• System c

• System d

• Dunn & Bradstreet

• Ticker symbol

• Etc.

AllApplicant

As applicableCustomer

Potentially any of the aboveGuarantor

Conduits and retail poolsAsset Pool

Purchased receivablesPayor

Securitization, sale-and-lease back, other fixed income

Issuer*

CRE, project finance, and private equityBusiness Developer or Sponsor

OTC derivatives, repo-style transactions

Counterparty*

Loans, Leases, LCs, and overdraftsBorrower or Obligor

Products SupportedCounterparty Relationship/Roles

(*) Not all arrangements carry credit risk

Entity Hierarchy

Capture and maintain up-to-date entity hierarchy for connected borrowers

a. Connect related organizations (i.e. legal entities) in the short term – link related individuals in the mid term.

b. Identify and establish a policy regarding all financially connected legal entities that may affect the bank’s exposure, including: non-borrowing subsidiaries, non-consolidating subsidiaries, joint ventures, franchisees, and other defined groupings

c. Establish rigorous procedures with clear data governance to identify and update entities in a connected group, all the way to the ultimate parent. Automate these procedures wherever possible and support secure manual entry for exception handling

i. Leverage recognized external databases (e.g., Dunn & Bradstreet).

ii. Reconcile and link connected entities information against other internal customer directories

Legal Entity A

Legal Entity B

Legal Entity C

Legal Entity D

Legal Entity E

Legal Entity F

Legal Entity G

Borrower

Guarantor

Borrower

• Risk rate each separate legal entity to which the bank is exposed, at least once a year

• Establish and follow sound policies regarding the treatment (e.g., credit rating) of individual entities in a connected group (e.g., PD substitution for guarantees)

Related Basel II Guidelines

Product Linkage

Maintain for each Counterparty up-to-date linkages of all their product arrangements

with credit exposure

a. Establish procedures and clear data governance to identify and maintain customer-product linkages. Automate these procedures wherever possible and support secure manual entry for exception handling

i. Reconcile product arrangements with other internal customer directories

ii. Identify and link product arrangements across all relevant product processor systems

Customer System

• Unique Entity ID:1233456

• Role: Customer

– Product Sys ID: AA001

• Product: Loans

• Arrangement

– System: Booking system

– Customer ID: 0020000825

– Account No: 0091

• Arrangement

• Role

• Product

Product System

• Unique Customer ID: AA001

• Customer Name: Aaron Rents Inc

• Product System: System A

• Obligor ID: 0020000825

• Product: Syndicated Line

• Obligor ID: 0020000833

• Product: Binding Revolving

• Obligor ID: 0020000817

• Product: Binding Revolving

• Product System:

Booking System

•Obligor ID: 0020000825

•Facility: 0091

•Limit

•Future

–Current

•Obligation: 0117

•Obligation: 0125

•Obligation: 0109

ILLU

STR

ATI

VE

Additional Considerations

• DO NOT put in place a system that overrides the bank’s KYC or Golden Source initiatives

• Initially leverage the existing counterparty management functionality within current systems until a global solution canbe developed

• Implement a solution that creates services to bridge the gap between today’s implementation and tomorrow’s vision of a single bank-wide golden source

• Facilitate counterparty management across the identified golden sources for associated BU’s (onboard other sources incrementally)

Potential Evolution

Year 1:

� Fix major product system interfaces and clean up data on Customer Systems

� Design and implement centralised customer and hierarchy solution with new governance and controls

� Design and build a dedicated data warehouse to enable risk management and analytics

Year 2:

� Fix interfaces to other systems and clean up data on Customer System

� Extend centralised customer hierarchy to support access control

Year 3:

� Make interfaces ‘two way’ to make the solution the source of core customer information for product systems

Counter-party

Agent

Legal Entity

Customer Data Model

Customer Hierarchy

Products Services

Facility Management

Classification of Exposure

Facility management must support Basel II classification of credit exposures:

Exposure Types

• Wholesale

– Corporate

– Financial Institution

– Sovereign

• Securitization

• Purchased Receivables

• Equity

• Mortgage Retail

– Residential Mortgages

– Home Equity Lines

• Non-Mortgage Retail (QRE)

– Credit Cards

– Overdraft Lines

• Other Non-Mortgage Retail

– Personal Loans

– Car Loans

– Student Loans

– Small Business Loans

Traded Products

• OTC Derivatives

– Interest Rate

– FX

– Equity

– Credit

• Repo-Style Transactions

– Repos and Reverse Repos

– Customer Margin Lending

– Securities Lending and Borrowing

Corporates by Size

• Corporate (>$50M sales)

• SME (<=$50M sales)

• Small Business (<$1M Exposure)

Wholesale Lending

• Core lending

– Term Loans

– Revolving Lines

– Syndicated Loans

– Letters of Credit

– Overdrafts Lines

• Specialized lending

– Project Finance

– Object Finance/ Leasing

– Commodities Finance

– Commercial RE

– High Volatility Commercial RE

Cradle to Grave Linkage

Ensure that facilities and their underlying product arrangements can be tracked

throughout their lifecycle.

a. Establish rigorous origination procedures and data governance policies to ensure new customers and/or facilities are properly identified and linked in CIS and related systems

Credit Lifecycle

Prospect & Sell

UnderwriteDocument,

Close & FundService

Collect & Recover

Monitor

� Target market – risk

appetite

� Opportunity

identification and

structuring

� Application

� Credit analysis


� Limit control

� Credit risk mitigation

mechanisms

� Pricing

� Documentation


� Drawings

� Statements

� Billing

� Payments

� Limits

� Ticklers and Credit

Reviews

� EL and ALLL

� Total Borrower

Exposure

� Concentration/

Diversification

� UL and RWC

� Charge-offs

� Recoveries

� Assets sale

� Restructuring

b. Establish tight procedures and electronic linkages to ensure that facilities can be tracked if they migrate into special recovery efforts and/or restructuring – especially when this migration involves different systems


Establish a facility template that can be modified to accommodate:

• complex facility structures (allocation, syndication)

• diverse commercial products– This includes ability to onboard new products or evolve existing ones with

minimal customization or programming intervention

• Extensive reference data with pre-loaded industry standard facility, collateral, covenants, guarantee types, etc

Portfolio Monitoring

Monitoring Total Borrower Exposure

Total Borrower Exposure (TBE) should be calculated and monitored to prevent exceeding limits

TBE can defined as the aggregate of credit commitment extended by the bank to a Legal Entity, its subsidiaries, and its affiliates: whether internally committed or legally binding, whether funded or un-funded, whether obligated directly or indirectly as co-maker, endorser, or guarantor

a. Aggregate exposure balances across all product arrangements and connected borrowers

b. Support calculation of different measures of exposure to support management and Basel II reporting

i. Gross Outstandings (after accounting offsets)

ii. Outstandings plus Accrued Interest and Uncollected Fees

iii. Gross Exposure (i.e., outstanding plus EAD of undrawn commitments)

iv. Net Exposure (after risk mitigation)

v. EAD of all Non-Defaulted exposures including traded products

vi. EAD of Defaulted Exposures including life-to-date accounting offsets

c. Ensure that reported exposure amounts (or their drivers) are reconciled against reported general ledger balances to comply with Basel II

Company Operated StoresCompany

Operated Stores

Company Operated StoresCompany

Operated Stores

Company Operated Stores

Company Operated

Stores


Franchised Stores

Company Operated

Stores

Franchised Stores

Company Operated Stores Franchised

Stores


Franchised Stores

Total Borrower Exposure - Example

Calculating TBE for Aaron Rents highlights some of the complexities regarding connected borrowers with diverse exposure types.

Aaron Rents, Inc.

Aaron Investment Company

Aaron Rents, Inc.

Puerto Rico

616 stores in 27 states and Puerto Rico

Rent-to-Rent Division

Sales & Lease Ownership

Division Mac Tavish IndustriesDivision


Franchised Stores

357 stores in 43 states and Canada.

Company Operated StoresCompany Operated Stores


Rent-to-Rent Stores

58 company operated

• Revenue: $950M

– 52% electronics & appliances

– 35% furniture

– 12% computers

• Net Earnings:$53M

• $25M construction and lease facility

• $150 operating leases

Franchised Stores

Franchised Stores

Franchised Stores

LLCs for capital Leases

Controlling stockholders

• $18M capital leases

• $100M franchise guaranty

• Interest rate swaps ($32M notional)

• Co-borrower

• Borrowers

• Guarantor

• Co-borrower

• Borrower

• Counterparty

TBE > $300M*

Legal Entity

Organization Entity

Legend:

• Role

• Exposure

Comment(*) Exposures balances are based on total balance sheet exposure. Aaron Rents commitments in Compass amount to approximately $73M

ILLU

STR

ATI

VE

Reporting Risk across Management Hierarchy Structure

– Credit Risk Reporting needs to,• support extensive and sophisticated portfolio risk monitoring and

analysis capabilities across credit risk management functions to meet A-IRB standards.

• enable accuracy and integrity in risk measurement, improved effectiveness in risk management, use of the new risk measures in managing the business, and disclosure and transparency to the market.

– Sample Reports should focus on,• Total outstandings and credit risk exposure by Basel Asset Class over

the Lines of Business, Geography and Industry• Credit exposure across PD grades (obligor risk rating grades) by Basel

Asset Class• Analysis of Probability of Default, Loss Given Default and Exposure at

Default actual outcomes against estimates.• Percentages of number of exposures migrating from a Probability of

Default Grade to other PD Grades for each Basel asset class (andmajor sub-types)

• Comparison between realized default rates and the expected estimated PDs for each grade (across Basel asset classes and sub-types)

Monitoring Concentrations

Should focus on reporting of risk exposure and concentration for management and

Basel II purposes

a. Enable consistent risk exposure and concentration (vs. limits) reporting across key business dimensions

i. Business Unit

ii. Exposure Type

iii. Geography

iv. Industry

v. PD and LGD Ratings

vi. Residual Maturity Intervals

b. Standardize reference data across these key reporting dimensions

c. Establish optimal (i.e., effective yet cost efficient) data management mechanisms to ensure data integrity and consistency

d. Support periodic standard reporting as well as ad-hoc queries (e.g., TBE on an specific group)

e. Enable retrieval (or generation) of historic exposure and concentration reports (i.e., monthly reports for the last 7 years)

f. Support comparison of entity hierarchies for the last 12 months


Portfolio Monitoring should aim at improving credit risk management practices along several key dimensions

• Advanced Mitigation Analysis• Derivative strategies• Secondary Market strategies• Capital allocation strategies• Exposure concentration views• Alignment of RAROC with Basel II calculations• Fraud Management

Agenda

9:00 – 11:00

Credit Scoring

11:00 – 11:15 AM

Break

11:15 – 1:00 PM


1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM


3:00 – 3:15 PM

Break

3:15 – 4:00 PM

Recap and Q & A

9:00 – 9:30 AM


9:30 – 11:00 AM


11:00 – 11:15 AM

Break

11:15 – 1:00 PM

� Technology/Data Considerations and Challenges

1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM


3:00 – 3:15 PM

Break

3:15 – 4:00 PM


Day 2Day 1

Technology/Data Considerations

and Challenges

Contents

� Overview

� Example Architecture

� Straight Through Process

� Vendor Comparison

Overview

� CEOs and CFOs of major financial services organizations share two perpetual priorities:

– The ongoing challenge to continually meet the minimum compliance requirements of lawmakers, regulatory agencies and shareholders.

– Leverage those requirements efficiently to achieve effective overall performance and risk measurement processes that add immediate business value.

� In order to meet the above mentioned priorities, organizations must leverage technology and data creating performance and risk measurement solutions that provide:

– One enterprise process – providing all levels of management with the financial and risk information needed to align decision making with organizational and line of business strategies.

– One version of the truth – a common definition and source of information that reduces the need for reconciliation and redundant data collection.

– One-step access – the delivery of information tailored to the individual user, supporting drill-down from strategic to operational data for business analysis and modeling.

– One integrated architecture – a flexible and scaleable architecture that efficiently facilitates the capture, transformation, enrichment and distribution of financial and risk data across the enterprise while protecting your technology investments.

Risk Architecture Components

Risk Architecture Components (cont)

Relevant Peripheral Applications and Ecosystem Linkages

Example Architecture

Enterprise Data Storage

Source Transaction Systems

Financial Processing Systems

Data Management Infrastructure

Decision Support & Analysis

OLAP

Other Reporting

Risk Reporting Processing

Financial Reporting Processing

Recon & Suspense

Control

Financial Mgt Control System

Revenue & Cost

Allocation

Economic & Regulatory Capital Allocation

Funds Transfer Pricing

Consolidation

Sub-Ledge

r

Journal

Entry

Trans Detail

Gen Ledge

r

Other Reporting Warehouses (Eg CRM)

Mkt Risk Data Mart

Op Risk Data Mart

Credit Risk Data Mart

Accounting Rules EnginesAggregation Rules Engine

Posting Rules Engine

Business Event Transformation

Financial/Risk Reporting

Data Warehouse(s

)

Common Reference Data

Financial Reporting Data Mart

Reserving

Credit Risk

Reporting (Limits Mgt, Portfolio

Monitoring, Problem Acct Reporting)

Market Risk Reporting (Limits Mgt, VaR Reporting, ALCO Reptg)

Operational Risk Reporting (Limits Mgt, Loss Reptg, Risk

Dashboards)

GAAP Reporting

Product/ Customer

Profitability Reporting

Budgeting And

Forecasting

Operations Reporting

Marketing & Sales

Other Reporting

OLAP Applicatio

ns Layer

Product &

Customer

Profitability

Budgeting &

Forecasting

Treasury/ALC

O Reporting

Other Mgt

Reporting and

Analysis

Web Browser Access Layer

Financial Transaction

Systems

Deposits /Checking/ Cash Mgt Systems

Loan Acct

Systems

Credit Approval Systems

Capital Mkts Product Systems

Document Mgt Systems

Collection

Systems

Risk Rating and Pricing Tools

External Data Services

CRM/ Sales

Force Mgt Systems

Collater

al Mgt Systems

Desktop Platforms & Browser Access Layer

MESSAGING INFRASTRUCTURE

• File to message conversion• Rules based data standardization

• Business event transformation

• Message queues and management

Web Services

Data Routers/ Controlle

rs

Extract/ Transform/ Load

Risk Modeling

& Portfolio

Analytics

Systems and Processes significantly impacted

Enterprise Data Storage

Source Transaction Systems Financial P rocessing System s

Data M anagemen t In frastructure

Decis ion

Support &

Analysis

OLAP

Other Reporting

Risk Reporting Processing

Financial Reporting Processing

Recon &

Suspense

C on tro l

F inancia l Mgt

C on tro l

S ystem

Revenue & Cost

A llocation

Econom ic &

Regulatory Capita l

A llocation

Funds T ransfer

Pric ing

Conso lida tion

Sub-Ledger

Journal Entry

Trans Detail

Gen Ledger

Other Reporting

Warehouses (Eg CRM)

Mkt Risk Data Mart

Op Risk Data Mart

Credit Risk Data

Mart

Accounting Rules Engines

Aggrega tion

Ru les Eng ine

Posting R u les

Eng ine

Bus iness Event

T ransform ation

Financial/Risk Reporting Data Warehouse(s)

Common Reference

Data

Financial Reporting Data Mart

Reserv ing

C red it R isk Repo rtin g

(L im its Mg t, Portfo lio

M on itor ing , P rob lem

Acct Repo rting )

Market R isk Reporting (L im its M gt, VaR

Reporting, ALCO Reptg)

O pe ra tiona l R isk

Repo rting (L im its

M gt, Loss Rep tg ,

R isk Dashboards )

GAAP Reporting Produc t/ Cus tome r

P rofita b ility

R eportin g

Budge ting And

Forecasting

O pe ra tions

Repo rting

M arketing &

Sales

O the r Reporting

OL

AP

Ap

plic

atio

ns

La

ye

r

Product &

Customer

Profita

bility

Budgeting &

Forecasting

Treasury/ALC

O Reportin

g

Other M

gt

Reportin

g and

Analysis

Web Browser A

ccess Layer

F inancia l

T ransaction

System s

Deposits

/Checking /

Cash M gt

System s

Loan Acc t

S ystem s

Credit

Approva l

System s

Cap ita l

M kts

P roduc t

System s

Document Mgt Systems

Co llec tion

System s

Risk Rating and Pricing Tools

E x te rna l

D a ta

Se rv ices

CRM / Sales

Fo rce M g t

Sys tems

Colla te ra l

Mg t

System s

Desktop Platforms & Browser Access Layer

MESSAG ING INFRASTRUCTURE

• F ile to message conversion

• Ru les based data

s tanda rd iza tion

• Bus iness event transform ation

• M essage queues and

m anagem en t

Web Services

Data Routers/

Controllers

Extract/ Transform/

Load

Risk Modeling

& Portfo

lio

Analytics

Example of Organization and Technology

Challenges

Limited operational risk data often on

spreadsheets and Access Databases

Credit risk data in multiple repositories and forms, often in

Access

Ad hoc and paper-based risk reporting processes not linked or using inconsistent data

Multiple, siloed risk analysis and modeling tools not using

consistent data. Limited analytical Capability

Ad hoc and manual regulatory reporting

processes, not transparent or readily auditable

Mixture of 2 tier & 3 tier application access layers, limit inter-operability

Ad hoc linkages between financial and risk data

Legacy applications not taking advantage of

middleware and hence not inter-operable

Multiple credit servicing

systems with inconsistent data of variable integrity and many manual processes

Informal & paper-based risk rating and credit

processes

Ad hoc and paper-based

loan documentati

on

Stand Alone Product Pricing Tools

Stand alone Recoveries systems and processes

Manual and ad hoc data loads, instead of programmed

ETL

Where We See the Industry Going: An Integrated Risk Architecture

WorkflowData Quality, ETL, Exception and Error Management, Reconciliation

Transaction

Systems

Collateral

Managment

Financial Products

System

External Data

Portfolio Mgt Loan

Servicing

PB&F

Variance

Reconciliation

Tax

Reserve

Management

Exception

GAAP

Corporate

Variance

Management

Reserve

Tax

Statutory

Excel

Help

Coll

Integration Bus

Performance Monitoring and Recovery

Security (One Identity)Authentication / Authorization / Audit Logging

Accounting Engines / Services

Future State Application Architecture

SOURCE SYSTEMS

Adjustment Entry

ADJUSTMENT ENTRY VEHICLE

Notifications SchedulerException Management

Transformation, Validation, Accounting Rule

REPORTING

ENGINE*

ENTERPRISE SERVICES LAYER

Accounting

Engine

Allocation

Engine

Accounting

Basis

Translation

Currency

Conversion

Metadata

Mgm't

Reference

Data

Mgm't

Data

Support

Services

Reconci-

liation

General

Ledger

* *

Recv & Credit

Exp Mgm't

Sensitivity

Analysis

Scenarios

Limits and Exp

ROE / SVA

RORAC

Other

Ratings LGD EADCredit

VARVAR Sensitivities ValuationRisk

Engines

Capital

ManagementNetting

Limit

Management

Loss

Tracking

Exposure

Management

Custody

Settlements

Corporate

Systems

Applications

Where We See the Industry Going: Where the Impact Will Be Felt

Moving towards an integrated risk and finance architecture that better supports the business means targeted investments that…

• Investments in better data and analytic engines have not made their way to the front office

• Front office relationship managers can make better decisions when they understand the risk implications of competing deals on an ex ante basis

• Extending analytic capability to the front office gives risk theability to better manage and advise the business prospectively

Data Transformation Layer*

Data Abstra

ction and Integration*

Canned Reports

Custom Reports D

ashboard / P

ortal (X

L Net)

Risk Analytics

• Alerts and triggers that automatically kick off once thresholds and limits have been breeched

• Automated workflow that kicks off approvals process based on established roles and responsibilities

• Scheduled tasks, reviews, and monitoring processes coupled with robust exception reporting that enhances risk management discipline

Push Risk Tools and Technology to the Front Office

Enhance Workflow, Exception Reporting and Automated Alerts



• Streamlined risk reporting that draws a comprehensive risk profile in a timely and accurate fashion

• Standard portfolio scenarios and volatilities run daily to support robust “what if” capability

• Shift in risk role from “compiler of information” to value added provider of analytics to the business

Data Transformation Layer*

Data Abstra

ction and Integration*

Canned Reports

Custom Reports D

ashboard / P

ortal (X

L Net)

Risk Analytics

• Transparent data management and integration rules that support one version of the truth

• Cost take out opportunities such as redundant data marts and ETL processes are streamlined and consolidated

• More timely access to information and analytics supporting the business

Enhanced Risk Reporting and Analytics

Data Management and Transport Layer



• Tighter integration between risk engines (Ratings, LGD, EAD, Var, etc.) and Finance Applications supporting enhanced performance measurement and management

• Linkage to financial planning applications supporting enhanced risk and finance planning and forecasting capability

• Better tools supporting ad hoc risk adjusted performance measurement and management analytics on demand

Integrated Risk Engines and Finance Applications

Straight Through Process

Straight Through Process (STP)A key strategic initiative is to “Develop an End-to End Credit Process”. The desired result is the implementation of a cost efficient, standardized, secure, reliable and integrated sales-to-operations workflow solution. The end-state will unify disparate processes and systems to leverage existing data, minimize risk, improve compliance & control and

eliminate unnecessary steps for a more responsive client experience.

�Eliminate redundancies and variability. Consistent execution across geographies and lines of business.� Improved management of risk exposure and adherence to credit policy. Preservation of

credit quality.� Full automation – automated access to client information, total exposure, risk ratings, credit

history, asset, appraisal, balance, transaction and other information regardless of source.

� Utilization of centralized underwriting capabilities across all lines of business and geographies.

� Rapid processing of credit from sales through documentation and booking.� Transferability – key components can be applied across multiple lines of business.� Enhanced productivity and cost reduction. Optimal use of people and resources.� Metrics and measurements allowing for inspection and coaching.

A “Best-in-Class” recommendation would have the following characteristics:

Impact and Benefits of an STP

�Pricing discipline. Integration of pricing model; ability to track actuals against baseline.�Financial statement analysis tools�Automated credit policy cross-reference�Utilization of the Banks Product Divisions (Real Estate, Trade & Energy)�Utilization of Regions’ business partners �Multiple credit decision-making routes�Client contact management system�Client relationship reporting and metrics�Loan documentation and booking�Enhance all Construction Lending capabilities via web-based solution�Enhanced exception tracking & control

The end-state will integrate and improve the components of the credit process, including:

Sample Illustration of a STP Supported by Integrated Solution

Origination/Information Gathering

Underwriting

Approval

DocumentPreparation

Loan Closing

Funding

Loan Servicing

The underwriting process Integrates risk models, pricing models, and statement spreading system to integrate information into the Credit Memo.Policy and compliance will be enforced and tracked.

Loan documents arestandardized. An interface to the document preparation system reduces turnaround times and errors. Boarding of the loan

and paper tickets are eliminated through automated electronic funding, allowing for same-day booking.

Multiple systems and databases are eliminated. Loan and collateral information is stored together including real estate. Ongoing servicing tasks are streamlined to improve customer service.

RM & Customer

Deal Team

Underwriting

Credit Analyst

Portfolio Manager

Document Preparer

RM & Customer

Funding Analyst

AccountingSystem

Processor

Information gathered from the customer is entered to the system one time and retained through the entire process. Relationship data are pulled from CIF and the loan system.

The Credit Memo is populated and electronically routed for approval, reducing the turnaround times from weeks to days.

Loan is closed, funded and booked the same day. Faxing loan documents is eliminated. Completion of Loan Boarding sheets are eliminated. Status of loan can be tracked.

Few

ven

do

rs h

ave b

uilt a

co

mp

lete

en

d to

en

d s

olu

tion

Credit RiskModels Engine

ExternalLoss Data & Ratings

Integratio

nMonito

ring

Supportin

g

Technology

Loan Orig

inatio

n and Assessment

Sales

Solutio

n Domains

ACBS

SOA, Open Source

FileNet

Doc Mgt

Documentum

CapStream

Customer Relationship Management

Customer Information System

Workflow (BPM)

Document & Content Mgt

Pricing

Loan Accounting

AFS

(Deal) Pipeline Mgt

Credit Decisioning

Siebel

Salesforce.com

CRM

LoanIQ

OriginationRisk

Cognos

Experian

Oracle

Data Mgt & Reporting

D&B

External Data & Credit Models

Reporting

Capital Calculation

Terradata

Moody's/KMV

SAS

Algorithmics

Reveleus

OtherPortfolio

Risk, RAROC, and EVA

Enterprise Architecture & Data Model

Solution

Vendors

Credit RiskModels Engine

ExternalLoss Data & Ratings

Integratio

nMonito

ring

Supportin

g

Technology

Loan Orig

inatio

n and Assessment

Sales

Solutio

n Domains

ACBS

SOA, Open Source

FileNet

Doc Mgt

Documentum

CapStream

Customer Relationship Management

Customer Information System

Workflow (BPM)

Document & Content Mgt

Pricing

Loan Accounting

AFS

(Deal) Pipeline Mgt

Credit Decisioning

Siebel

Salesforce.com

CRM

LoanIQ

OriginationRisk

Cognos

Experian

Oracle

Data Mgt & Reporting

D&B

External Data & Credit Models

Reporting

Capital Calculation

Terradata

Moody's/KMV

SAS

Algorithmics

Reveleus

OtherPortfolio

Risk, RAROC, and EVA

Enterprise Architecture & Data Model

Solution

Vendors

Agenda

9:00 – 11:00

Credit Scoring

11:00 – 11:15 AM

Break

11:15 – 1:00 PM


1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM


3:00 – 3:15 PM

Break

3:15 – 4:00 PM

Recap and Q & A

9:00 – 9:30 AM


9:30 – 11:00 AM


11:00 – 11:15 AM

Break

11:15 – 1:00 PM


1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM

� Sample Solution and Demo

3:00 – 3:15 PM

Break

3:15 – 4:00 PM


Day 2Day 1

The commercial lending industry faces many challenges

• Typical Process Issues

– Processes and systems inconsistently applied

– Paper intensive

– No tracking of progress

• Quality Management

– Challenged with compliance tracking

– Imperfect documentation creating delays

– Customer frustration

• Risk Management Issues

– Inconsistent application of credit policies

– Lack of visibility into risk exposures of all types

– Inadequate portfolio management

Typical Current StateProspect & Sell

Credit Assessment& Approval

ServiceCollect & Recover

MonitorPricing, Close& Fund

DealProposal

CreditPackageAssembly

CreditPackage

Reading forBooking

Are All

Deal Terms Present?

Obligor DataPresent?

Deal isApproved

Credit Decision

Accepted?

CreditApproval

ExternalSystem

External System

ExternalSystem

ExternalSystem

Inter-office Mail

Inter-officeMail

Inter-office Mail

Inter-office Mail

Gather andAssembleFinancials

AttachCompanyFinancials

GatherExternal RiskRatings

GatherThird-Party

Market Reports

WriteCreditNarrative

AssembleFinal PackageCredit Unit

Credit UnitReceivesCredit

Package Are RequiredElements

Present?

Complies with

Credit Policy?

Deal TermsAcceptable?

Risk Ratings

Acceptable

CounterpartyExposure

Level?

Routeto

Appro-vers

Originator BeginsPackage Assembly

Fragmented Organizations, Processes and Systems

Large Dependencyon Paper

Poor Visibility intoRisk Exposures

Inconsistent Applicationof Credit Policies

Poor Compliance Tracking

Manual Processes

ImperfectDocumentation

Long Cycle Times

Costs Too Much

Quality Suffers

Difficult to Manage Risk

Prospect & Sell




DealProposal


A solution that " Bridges the Gap"

• There is a common belief that:

– This space is typically custom processes and architectures

– Existing vendors do not provide a real "bridge" solution

•As a result, this offering is unique…

– It bridges the gap of sales/origination to financial booking

– The solution framework provides best of breed architecture

– The solution provides highly value-added, flexible workflow that models the complexities of the lending process and credit approval

– The tools and templates accelerate your implementation

– It leverage current functional application and systems investments where appropriate, to minimize investments in new systems and tools

ALPS: Role Based, Origination Solution

Prospect & Sell




DealProposal


On Line

Architecture based on Service Oriented Architecture (SOA), Bus. Process Management (BPM) & Doc.

Management tools

Tight integration between credit policy & approval

Better visibility intoRisk during approval

Improves Quality of Documentation

Streamlined Processes across LOBs, systems

Cost Reduction

Quality Improvement

Risk Management

Solution Elements

Solution Accelerators

� Business Strategy & Plans

� Business Case & Financial Models

� Technology Strategy


� Project Plans

� Staffing Models

� Estimation Models


� Process Flows

� Use Cases

� Data Models

� Application and Integration Architectures


� Complete Automated Lending Portal

� Complete flexibility and source code

� Test Plans & Scripts

Align with corporate business and technology

strategy

Manage the project effectively, based on actual

implementations

Jump-start implementation with pre-designed components

Leverage source code for easier customization and

maintenance

16 Process Flows • 68 Use Cases • 60 Screens • 33 Test Cases • 10 Reports 140000+ Lines of Code • 3000+ Class Objects • 175+ DB Tables

Strategy DesignPlanning Build

Benefits

•Risk Management and Operations Improvement– Automation of the entire commercial lending process

– Gained visibility into risk exposure across the institutional portfolio and customer relationships

– Provided transparency to regulators on pricing and credit policyadherence

– Improved data integrity by automating the credit approval process

– Significantly increased credit policy compliance

•Rapid Results– Months and weeks to implement because of Architecture and

completeness of ALPS

– Client owns code when complete – best of both worlds: Build versus Buy

Demonstration

Agenda

9:00 – 11:00

Credit Scoring

11:00 – 11:15 AM

Break

11:15 – 1:00 PM


1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM


3:00 – 3:15 PM

Break

3:15 – 4:00 PM

Recap and Q & A

9:00 – 9:30 AM


9:30 – 11:00 AM


11:00 – 11:15 AM

Break

11:15 – 1:00 PM


1:00 – 2:00 PM

Lunch

2:00 – 3:00 PM


3:00 – 3:15 PM

Break

3:15 – 4:00 PM

� Case for Change and Program Approach

Day 2Day 1

Case for Change and

Program Approach

Contents

� Case for Change

–Business Case Development

–Roadmap

–Executive Sponsorship

� Implementation Approach

– Program Approach

–Methodology

–Team Composition

Information Required to Calculate Business Case

1. Cycle Time: How long does it take to approve a loan in your current environment?

2. Workflow Steps: How many approvals do you currently require?

3. Volume: How many loans are approved monthly or annually?

4. Deal Loss: Do you have transparency to deals won, deals lost, reason for losing the deal and yield loss for the ratio of wins to losses?

5. Staff Costs: What is the average fully loaded expense of the individuals and in the origination, administration and underwriting process?

6. Full View of Staff Costs: What are the staff levels in the origination, administration and underwriting process? What other areas are involved operations, Systems Resources (Hardware /Software / Staff)?

Business Case Questions

• What could your bank accomplish when your Relationship Management Team has more time for selling and relationship building?

• What is the value of improved quality and consistent application of Credit Policies?

• How will you redeploy resources freed up by the reduction of data entry and reduced paperwork/handling ?

• Will you expand your solution to straight through processing to the Loan Accounting system?

• How will you use the information regarding the reason(s) for losing a deal?

• Will having pipeline information by region, district and industry improve you approval and risk analysis?

Business Case Opportunities

• Staff Redeployment as a result of improved efficiencies:

• Relationship managers are able to spend more time selling or cover an expanded customer base as a result of reduced processing times.

• Credit Administration / Credit Underwriting are available to spend more time with complex approvals and renewals.

• Electronic application of Credit Policies improves compliance while reducing internal review and audit review.

• Provides a foundation for an electronic Credit File and a “single view of the truth”.

A Typical Business Case

$3,000,000/-

5 days25 days

Results of using ALPS

This is what we typically see

today

….resulting in savings of $2,400,000/- each year.

Assumes fully loaded costs of an FTE is $150,000/-

Average time it takes to do a deal reduces

So, the FTE effort required is less

And the cost/year reduces

20 FTEs 4 FTEs

$600,000/-

Sample Roadmap

Phase IIPhase I

� Core functionality

� Retirement of Current applications

� Integrated portal for Commercial lending

� Seamless integration to key systems

� Data Migration from prior systems

� Transactional and Operational Reports

� Add’l functionality

� Data Migration

� Ad-hoc Reporting

� Seamless integration

to:

�Booking

�Rating / Spreading

�Critical Enterprise

Systems

�Moodys MRA, MFA

Release I (6 Months)Release I (6 Months)Release II (3 Months)Release II (3 Months)

Migrate additional LOBs to new Platform

Complete Integration Rollout New Commercial Lending Platform to Core LOB’s

Release III (3 Months)Release III (3 Months)

• BearingPoint proposes a phased deployment with the following objectives:– Deliver value rapidly through manageable releases where the initial

release focuses on overall value to the business

– Reduce overall risk through a proven product solution

Ongoing maintenance, support

Implementing a Commercial Lending Platform

� Involve Stakeholders: Key stakeholders must drive Program decisions and champion the new system -conduct regular, scheduled checkpoints to ensure participation.

� Establish User Group: Foster collaboration by establishing a user group and involving them in key stages – Scope Review, Screen Design, User Acceptance Testing & Change Management

� Align Business Processes: Use the project to align cross-functional business processes across Business Units early on.

� Establish Technology Foundation: Establish the technology foundation and underlying framework initially and add more application components in later releases

� Architect Holistically: Approach the entire Commercial Lending landscape (not only Origination), when creating the Information & Technology architectures.

� Set Manageable Releases: Structure the program as a set of manageable production releases to mitigate risk and to be able to get to deliver business value rapidly

� Start Change Management Early: Plan for aspects of Change Management early on by availing of formal & informal communication, documentation & training

� Manage One Program Plan: Manage all aspects of the program (business, technology, offshore, vendors) through a common Program Plan, Status Review and Issues.

� Create Transparency: Ensure red flags are raised and addressed as they occur.

Our success in implementing commercial lending platforms is based upon a set of best practices based on extensive experience.

Program Approach

1. Fully leverage an market tested solution – re-use business process, delivery artifacts and code to shrink the timeline

2. Deliver business value rapidly through manageable releases – break the program into manageable pieces where the initial release focuses on value to the business

3. Focus initially on the “knowns” – areas of scope requiring more analysis and design are handled in follow up releases

4. Keep the cost reasonable – promote the use of offshore development and testing resources with deep experience

5. Leverage partnerships – ability to provision hardware and test environments rapidly

6. Reduce project overhead – utilizing methodology, run concurrent workstreams where feasible and practical

7. Develop a complete solution – in addition to the software, provide documentation, training, change management support, product maintenance and support

Based on 7 key drivers, BearingPoint recommends a two-phase approach with three production releases over a twelve month period.

Methodology Selection

• Adopt a global methodology that

� provides the framework that enables solution delivery

consistently across a global footprint.

� supports the following elements

� Project Management

� Packaged Application

� Software Development

� Systems Integration

� Testing

� Production Services

� further ensure repeatable quality and mitigate risk

Program Lifecycle Overview A Sample Methodology

Activities:

• Formulate the scope of the project.

• Formulate a plan.

• Prepare the Application Use Cases.

• Synthesize candidate architecture.

• Prepare the project environment.

• Define project stakeholders and change control committee.

Artifacts:

• Defined project scope

• Test Strategy

• Preliminary Project Plan

• AUC Matrix

• Initial AUC Models

• UI Style Guide

• Risk list.

Exit Criteria:

• Approved project scope and acceptance criteria.

• Approved AUC Matrix.

• Approved candidate architecture.

• Approved Test Strategy.

Activities:

• Validate business use cases.

• Define, validate, and baseline the application architecture.

• Unit testing

• Establish the testing environment and execution plan.

• Establish the database environment.

Artifacts:

• Final Application Use Cases.

• Sub-System architecture definition.

• Final System Test Use Cases.

• Logical Data Model.

• Refined construction phase project plan.

Exit Criteria:

• Approved AUCs.

• Approved STUCs.

• Approved LDM.

• Approved sub-system architecture.

Construction

Activities:

• Manage resources and control processes.

• Develop and test components.

Artifacts:

• Final application source code.

• Final Physical Data Model.

• Refined transition phase project plan.

• Deployment Plan.

Exit Criteria:

• Achievement of System Test objectives.

• Agreed upon project scope delivered in source code.

Activities:

• Finalize support and end-user training materials.

• Test the system in a “production-like”environment.

• Refine/Plan system updates based on UAT feedback

• Deploy the major release.

Artifacts:

• Training material and documentation.

• Minor release deployment plan (High-Level).

• Updated technical design artifacts.

• Release the ECM system.

Exit Criteria:

• User Acceptance Test passed.

• End-user training sessions have been completed for initial “pilot” group of users.

• Deployment plan approved.

Inception Elaboration Transition

Strategy Design Build Deploy Operate

Lifecycle Acceleration

Strategy Design Build Deploy Operate

Inception

Elaboration

Construction

Transition

28 Weeks

10 Wks

8 Wks

6 Wks

4 Wks

2 Wks

2 Wks

Sample Team Structure

Commercial LendingLead

Commercial LendingSME

Credit RiskBasel II Advisor

Credit RiskBasel II SME

Business Analyst User ExperienceLead

Business Lead

Junior Developer

Developer

Senior Developer

Technical Lead

DBA StandardsGroup

Database Architect

Environment &Configuration SME

Configuration Lead

Development Manager

Test Analyst User AcceptanceTest Group

Testing Lead

Engagement Manger

EngagementManaging Director

Executive Steering/Change Control

Committee

EngagementExecutive Sponsor

External Resource

Internal Resource

Roles & Responsibilities

Staffing Plan

Role Responsibilities

Engagement Managing Director

• Provide leadership to the project teams• Build and sustain executive commitment and support for the project• Monitor project progress• Escalate issues and decisions to the Steering Committee and assist in resolution• Solution and Industry solution experience

Engagement Manager

• Provide day-to-day program management and leadership• The engagement manager will be responsible for project planning, staffing, work assignments, status meetings, status reports, and client billing. • Maintain overall responsibility for project delivery• Redirect course of action based on changing business context• Measure and monitor progress to validate that high quality project deliverables are completed on time and within budget and meet requirements• Provide process and systems advice to project team• Coordinate BearingPoint team resources and focus, and timely feedback• Manage issue identification and resolution• Support the identification of project risks and create mitigation/resolution strategies• Credit risk and Basel II and lending automation subject matter input

Business Lead • Manage business team activities and report status to PMO.• Facilitates management workshops for each line of business.• Liaison to the testing and business teams.• Participate in quality assurance reviews.• Participates in bi-monthly steering committee meetings.

Roles & Responsibilities


Commercial Lending Lead

• Commercial lending and processes subject matter advisor• Provide input to creation of requirements, designs, testing strategies, and training documentation• Participate in quality assurance reviews• Serves in a QA capacity on business side, reviewing business deliverables and providing insight based on industry and technical experience• Participates in bi-monthly steering committee meetings

Credit Risk/Basel II Advisor

• Credit Risk and Basel II subject matter expert.• Provide input to creation of requirements, designs, testing strategies, and training documentation• Participate in quality assurance reviews• Provide input and review on leading industry practices and approaches to Basel II implementation.

Business Analyst • Document processes, workflows, and requirements in the form of application use cases to facilitate understanding of the intended business functionality of the system.• Create detailed use cases and process flows.• Transmit business requirements to technical team. Work with the Technical Architect to provide overall guidance on an integrated design from a functional perspective, leveraging the capabilities of the application• QA of technical output for consistency with requirements• Provide standards for collecting, analyzing, and documenting business requirements• Coordinate with client training resource on knowledge sharing and Train-the-Trainer

Roles and ResponsibilitiesRole Responsibilities

Development Manager

• Manage the development team through all phases of delivery.• Work closely with project management on integration design items and verify overall design• Conduct quality assurance reviews of team deliverables• Liaison to the testing and business teams.• Participate in quality assurance reviews• Manage technology team activities and report status to PMO• Coordinate knowledge sharing

Technical Lead • Lead application, integration and data design and development efforts.• Own the overall application and subsystem architecture.• Lead technical design and development efforts.• Conduct quality assurance reviews of team deliverables• Identify and resolve issues that impact the integrity of the end-to-end application design.

Senior Developer • Responsible for application design and development deliverables for a set of application use cases within a component stack.• Participate in application use case and test script review sessions.• Perform application configuration and customization using system tools and standard coding languages to support the functional business requirements of interfaces and conversion components• Perform unit testing of configurations and customizations to the system• Support testing activities and correct identified defects

Developer • Perform application configuration and customization using system tools and standard coding languages to support the functional business requirements of interfaces and conversion components• Perform unit testing of configurations and customizations to the system• Support testing activities and correct identified defects

Junior Developer • Perform unit testing of configurations and customizations to the system• Support testing activities and correct identified defects

Roles and Responsibilities


User Experience Designer

• Create the application style guide, defining the overall look and feel of the system.• Lead the wireframe development effort.• Responsible for all UI deliverables.

Database Architect • Participate in integration and data conversion design and development efforts• Identify and resolve issues that impact the integrity of application the end-to-end application design• Support design of integration with existing data sources, migration and cleansing of existing data, and interaction between reporting capability and existing data stores• Build and unit test interface and data conversion applications based on requirements and design• Support testing and correct identified defects

Configuration Manager

• Provide oversight related to version control, development environment setup and maintenance, check-in/check-out procedures, data backup, and verification• Document naming convention standards and change control procedures• Provide documentation for, and oversight of, code migration procedures• Setup code migration tool• Perform code migrations as determined by strategy during development and testing. • Manage system security and entitlements

Testing Lead • Responsible for the Test Strategy• Develop Master Test Plan• Develop System Integration Test (SIT) Plan• Coordinate creation of test scripts and data• Coordinate defect management

Tester • Perform SIT Testing• Maintain testing tools• Work closely with other team members to identify and resolve test defects• Track and manage defects• Assist client in UAT test planning and execution

Day 1 Recap and

Q & A

Credit Process Workshop Day 1 - abj.org.jo process wor… · Credit Scoring 11:00 – 11:15 AM...

Documents

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