Risk Management Transformation and Basel III Implementation

Risk Management Transformation& Basel III ImplementationOverview of practices and trends

Presented by Pierre GaudinDirector – Enterprise Risk Solutions, Moody’s Analytics

May 2014

Agenda

Basel guidelines have consistently promoted risk transformations across the financial industry. Bringing Implementations challenges in terms of data management, risk models and infrastructure.

1- How Basel requirements affects typical data flow infrastructures

2- How BIII liquidity monitoring and FTP practice affect cash flow modeling

Enterprise Risk Solutions

2- How BIII liquidity monitoring and FTP practice affect cash flow modeling

3- How stress testing and forecasts practices initiated in US and EU can leverage an integrated infrastructure in a cost efficient way

2

How do Basel requirements affect risk management data flows & infrastructures ?


data flows & infrastructures ?

3

Credit Risk Silo

Data and processes are commonly organized in silo

Risk Management Data flows using front office transactions for Risk Management purpose typically fall into 3 silos

Using different data to deliver various Measurements

Using different Models in

Market Risk Silo Finance/ALCO Silo

Ratings Models

Asset Classes

Cash Flow Projections

Behavioral ModelsPricing

Stochastic Models

RWA / ECProvisioning

Interest Rate RiskLiquidity Risk

Profitability & FTP

MR Capital - VaRExposure Profile

Sensitivities

Risk Management

Governance & Compliance


nature

With different frequency and data availability

At different aggregation level

Asset Classes

Retail Scoring

CRM Allocation

Behavioral Models

Budgets assumptions

Hedging & Pricing

Stochastic Models

Position Keeping

4

Deposits / CasaLoans

CommitmentsSecurities

CounterpartiesGuaranteesCollaterals

OTC Netting

Wholesales – RetailTrading

SecuritiesDerivatives

Hedges&

Funding

Treasury – Capital MarketFront Office

Daily or WeeklyIntraday Monthly or Quarterly

Detailed Assets & CounterpartiesHigh Data Volumes

Semi Detailed Assets & LiabilitiesMedium Data Volumes

Detailed Trading PortfolioLow Data Volumes

Basel 2 initiated a first rationalization: Data Warehouse

Credit Risk SiloMarket Risk Silo Finance/ALCO SiloRisk Management


Data Warehouse initiatives have been promoted by Basel II requirements » Centralization of detailed data

» Data Quality Management & GL reconciliation


Data WarehouseData Warehouse

5




OTC Netting



Hedges&

Funding


Daily or WeeklyIntraday Monthly or Quarterly



Detailed Trading PortfolioLow Data Volumes

Data Warehouse

However, different dataflow frequency prevent this model to apply across all silos, especially for intraday Market

Risk.

Also, daily T+1 ALM time window were often incompatible with data

warehouse loading delays .Typically demanding a direct feed for

a portion of the portfolio

Basel 3 LCR/NSFR merges Credit & Cashflow dataflowsRisk Management


Credit Risk Silo

Ratings Models

Asset Classes

Retail Scoring


Finance/ALCO Silo

Cash Flow Projections

Behavioral Models

Budgets assumptions

Interest Rate RiskLiquidity Risk

Profitability & FTP

Liquidity Contingency Planning

LCR / NSFRLiquidity Contingency

Monitoring

Cash Flows Projections

Behavioral Models

Ratings Models

Basel III requirements yet again provides challenges to dataflow structures

Creating a new liquidity data flow merging cash flow projections and credit risk asset classes and risk weight

Cash flow projections now need to apply on detailed

contract and issuer





OTC Netting



Hedges&

Funding


CRM Allocation

Monthly or Quarterly


Budgets assumptions

Hedging & Pricing

Daily or Weekly


Data Warehouse

Asset Classes

Up to Daily

Detailed Assets, Liabilities, Commitments and issuers

6

contract and issuer segmentation, up to daily

Behavioral models for Liquidity Monitoring need to account for

asset classes and credit ratings

How do liquidity monitoring and FTP practiceaffect cash flow modeling ?

Enterprise Risk Solutions 7

Europe publishes Monitoring Reporting Requirements

EBA has recently published Additional Liquidity Monitoring Metrics requirements

Providing a view of Institutions internal liquidity behaviors model, projected on to LCR regulatory classifications

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Contingent Liquidity Behavioral ModelingLiquidity Reserve and Inflows rely on counterparty and credit lines characteristics, especially Performing statuses and ratings. Monitoring demands a clear understanding of the effect of these drivers on internal cash flow models.

This way, liquidity managers can provide the institution with a framework for:- Contingent Liquidity Monitoring & Ratios Anticipations

- Fund Transfer Pricing accounting for Contingent liquidity on both assets and liabilities


FTP and Profitability Analysis then leverage detailed data

Managing profitability then demands the attribution of the liquidity & contingent liquidity spreads into FTP policy.

FTP therefore relies on data and models coming from the liquidity contingency planning dataflow

Risk Management


Credit Risk Silo

Ratings Models

Asset Classes

Retail Scoring


Finance/ALCO Silo

Budgets assumptions

Profitability AnalysisPro forma FTP


LCR / NSFRLiquidity Contingency

Monitoring


Behavioral Models

Ratings Models

Asset Classes


LCR / NSFRHQLA Selection

Monitoring


Behavioral Models

Ratings Models

Asset Classes

ALM

Budgets assumptions

Hedging & Pricing

FTP Spreads

IRRBBProfitability Analysis

Pro forma FTP


In turn, ALM managers then need to leverage the same data and models within the balance sheet forecasts, pro forma FTP models and forecast profitability analysis.

10




OTC Netting



Hedges&

Funding


CRM Allocation

Monthly or Quarterly


Hedging & Pricing

Daily or Weekly


Data Warehouse

Asset Classes

FTP Models

Up to Daily


Asset Classes

FTP Models

Up to Daily


How stress testing and forecasts practices can leverage an integrated infrastructure in a cost efficient way


cost efficient way

11

Stress Testing Regulatory Framework in EU & USinsist on an automated bottom up governance process

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1.European Banking Authority (EBA), European Central Bank (ECB), National Competent Authorities (NCA), Bank of England (BoE), Prudential Regulation Authority (PRA)2.Asset Quality Review (AQR)3.Advanced data collection (ADC), Transparency (TR) and Calculation, Validation & Support (CSV) Templates4.Firm Data Submission Framework (FDSF)5.Financial Policy Committee (FPC); Capital Requirements Directive IV (CRD IV)6. Bank Holding Companies (BHC), Foreign Banking Organizations (FBO)

12

The Industry is shaping stress testing task forces , focusing on processes automation, leveraging enterprise wide infrastructures

• Data quality and integrity• Harmonized NPLs and RWAs definitions

• Regulatory and internal driven scenarios• Strategic planning• What-if analysis• Inclusion on the living wills • Quantify contingency planning metrics

• Forecasting dividend policies• Reverse Stress Testing• RoE/RoA analysis/projections

under scenarios/strategies• Budgeting planning

AQR & Balance Sheet

Reviews

Strategic Planning & Forecasting

Dividend Planning & Budgeting


• Quantify contingency planning metrics

• CCAR, PRA, EBA, ECB• Linkage stress testing to capital plan• Dynamic balance sheet forecasting• Pre-provision net revenue forecasting • Margins & Volumes• M&A activity

• Growth strategy, M&As, deleverage• Setting risk limits & RAROC pricing• Capital allocation

• ILAAP• LCR forecasting• Funding projections• Liquidity stress testing• HQLA optimization strategies

Stress Testing

Capital Planning &

ICAAP

Risk Appetite

Liquidity Planning &

Management

The most important challenge for the next 3-5 years is process & workflow efficiency

13

Overall: Now interconnected practices can leverage the integration incepted by Basel III requirements

Deploying Stress Testing tools as an autonomous computation, leveraging risk results and data coming from different silos, actionable in enterprise wide stress tests as consistent stress assumptions are synchronized on macro-economic factors

Risks and Performance Governance then leverage

» Data Integration


» Data Integration

» Consistent models

» Common Stress Assumptions

The resulting decision can then applying back to Origination point, through

» FTP / Risk Based Pricing

» Credit Approval and Concentration Limits

14

Pierre [email protected] Shenton Way #14-08Singapore 068809www.moodys.com

moodys.com

15

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» Top Vendor in Liquidity Risk

Ranked 40th Overall

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» Top Vendor in Regulatory Compliance and Reporting and

Voted #5 in Overall Rankings – up from #7 (out of 100)

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Risk Management Transformation and Basel III Implementation

Economy & Finance

Transcript of Risk Management Transformation and Basel III Implementation