Beyond Compliance:Extending the Value of Risk Insights
Jin Oh, Moody’s Analytics
Roshni Patel, Moody’s Analytics
Mehna Raissi, Moody’s Analytics
Agenda Highlights
‣ Current Risk & Finance Trends and Role of Technology
‣ Interconnectedness of Risk and Finance
‣ Beyond Compliance, Thinking Strategically
Current Risk & Finance Trends and Role of Technology
What are some of today’s risk management concerns?
Data Quality &
Availability
Internal
Expertise
Complexity of
ModelsStandardized
Process
Different Modeling
Approaches
Balancing old and
new technologiesUnforeseen
Market Changes
Ongoing
Monitoring/Validation
Lack of Integrated
Frameworks
Internal
Priorities
ComplianceSystematic
Qualitative
Information
Risk Management Professionals
Our model risk management relies on multiple systems, separate excel, SAS or R / Python codes, and model documentation spread out
across many different teams.
Traceability is a problem as systems for handling datasets and modelling decisions are often missing or spread
across multiple divisions.
Many of our processes are labor intensive and rely on knowledge of the specific
individuals.
”
New developments or changes to existing models require a long project execution
timeline and considerable effort for implementation/testing.
Creating a governance structure and maintaining validation requirements in a streamlined and timely fashion is a challenge.
Considerations for Risk Management Ownership and/or Partnership
‣ Balancing the cost to build vs. buy based on organizational strengths and goals
Personnel Costs
Data Maintenance
Validation TechnologyOne-Time vs.
Recurring
Enabling Optimized Risk Management with Technology
Ideal State Example: Connected risk management across the credit life cycle
Market AnalysisPre-
Qualification
Origination &
Risk Rating
Portfolio
MonitoringCompliance
Assess,
compare, and
understand
market dynamics
for your
portfolios
Pre-qualify by
running potential
deals before
accruing
business costs
Scale with
consistent
origination
practices & risk
rating using best-
in-class
methodologies
Monitor all your
exposures for
deterioration and
empower your
team take to
action
Manage the
complete IFRS9,
CECL, and
stress testing
workflow, with
consistent
modeling
expertise across
all asset classes
Rest of World Country specific Central bank / Regulator view
vary Huge investments in local country
clouds
Europe ECB and PRA comments and
guidance around use of cloud Innovation and investment on
“Technology Innovation” Automation of processes via
Machine Learning and AI
Americas More competitive marketplace
with the emergence of FinTech More complex accounting
standards Automation of processes via
Machine Learning and AI
Technology Evolution…
…and Why Is It a Priority!
› Connect an organisation› Sound model life cycle – scalability › Balancing current state with the future
state 2025 view…set the foundation!› Growth
Operational Efficiency Cost
› Expenditure› Economies of scale › Competitive market
Resources
› Scalability› Flexibility of understanding
different elements› Streamlining and adaptability
Regulation and Accounting Standards
› IFRS9 and CECL – day 1 profitability impacts
› Focus on data and model accuracy (ICFR in US and TRIM in Europe)
Local vs International
› Scope variations› Greater complexities› Various different drivers and
stakeholders› Country nuisances
Market
› Greater competition: SME and Fintech
› Demand – more speed, ease of use, transparency for volume based world, accuracy
Technology
Interconnectedness of Risk and FinanceRegulatory and Accounting Rules Driving Convergence with Enterprise Risk
Challenges today…
Business
• Shifting from short-term to 10 year long term views
• Transformation and Innovation teams
• Skillsets• Portfolio Strategies, investment
and management
EMEA
• Reactive state thus far• No linkages amongst functions• Divergence in strategies and
independent goals • Interconnectedness increasing• Accountability and ownership
from top-down
Continued focus from Regulators on
ICAAP, Stress Testing, Reviews of Internal
Models, ILAAP
How to link the Risk and Finance requirements to
Business and Economists
Americas
Increased Requirements including CECL in a
limited time
• Still in a reactive stage to each required mandate
• Silo operations to meet the deadline – not enough time to execute a strategic interconnected view
• CECL bringing different functions together
• Accountability from top-down
Having the Right People at the Table is Critical for Risk Management
Connect Stakeholders Via a Common Language & Technology
Underwriting
Risk Management
Line of Business
Finance
Accounting
Portfolio Management
Technology
Tax/Procurement
Risk and Financial Management Target Capabilities
Underwriting
Forward looking view of credit
Enhanced assessment taking into account obligor/facility characteristics and the macro economic outlook
Pricing
Measuring the impact of Expected Credit Loss on credit earnings
Consideration of impact of scenarios on credit quality and staging
Risk Measurement and Provisioning
Scenario driven assessment of default and severity
Formalisation of the idiosyncratic and systemic effects on risk assessment
Stress Testing and Strategic Planning
Consistency in methodology and scenarios for alignment between BAU risk management and stress testing
Ability to quickly assess impact of an evolving world on existing and emerging risks
Embedding scenario based analysis and stress testing into strategy and decision making
Portfolio Management
Ability to identify and explain impact of IFRS9 on deal and portfolio risk and earnings
Understanding of portfolio risk profile and concentrations to detect sources of earnings volatility
Definition of appropriate actions to improve portfolio’s risk and return
Governance
Breaking of business and function silos through rationalisation of operations and decision making
Extended scope of Risk Management’s role in managing the firm’s financial resources
Strategic and Operational Implications
Measure, Assess and digest impact
of changes in operating model and
infrastructure
Business decision making, taking
into account forward looking
macroeconomic outlook
Integrated Risk management
framework
Key components
2019 sees a change in
dynamics for banks, with
introduction impairments and
changing business dynamics.
Manage capital, address direct effect
on Tier 1
Improve profitability, incorporate
Lifetime ECL and address volatility impact
on growth strategies
Diversification to foreign operations
Acquisitions in foreign banks
Jurisdiction specific strategies
Risk Appetite impact and monitoring
Resource Mix is changing, to reflect Risk and Finance data and processes
Global vs Local exptertise to address Group vs. Sub requirements
Consistency of skillset across requirements (ST, ICAAP, IFRS9/CECL)
Operational cost - to support multiple
processes within limited budget
Infrastrucure requirements - Tactical vs.
Automated solution
Business costs to adopt new regulation,
validation efforts, model maintanance,
enhancing business requirement (e.g.
Origination, RAROC)
IFRS9/CECL forecasting to provide
multiyear view of ECL under stress
scenarios and manage volatility
linkage to ICAAP, Regulatory Stress
Testing
Pre and post deal pricing as a business
impact, forecast RAROC for new deal
Limits setting and deal structuring
PeopleBusiness
StrategiesST/ ICAAP/
RAROC Operations
Future Changes
Rapid technology
innovation
Management of this
progression
Global consistencies
Benchmark models
Adapting quickly to requirements
such as Regulatory Stress Testing,
ICAAP, and Accounting Standards
Key skills set and capability
development
Beyond Compliance, Thinking StrategicallyUnification and Efficiency
Embedding into Business
The Strategy Behind Risk Management Governance
Should be about long-term business goals not the short-term fixes
Regulatory Aligned Model Development & Implementation
Modeling in a Systematic & Transparent Environment
Producing repeatable and
understood monitoring,
validation and applicability
reports
Determine organizational model tailoring and thresholds
based on business practices
Implementing Model Lifecycle Best Practices
Integration
Development
Implementation
Deployment Development
API
Best Practices
Define structured models by
asset class and purpose
Utilize comprehensive
development and validation
datasets
Leverage expert modeling
frameworks & processes
Link models with the
associated business process
Automate traceability and
documentation
Establish ongoing monitoring,
testing and validation
frameworks
Data
Models
Expertise
Integrated Systems
System Record
Controlled Process
Linking the Model Lifecycle to the Business of Lending
CFO and ControllerRisk and FinanceCredit On-Boarding
CECL/IFRS9 cornerstone
Capital PlanningEPS forecast
Peers analysisROE
decomposition
Profitability analysis
Portfolio Acquisition and
M&A
Pricing
Origination process
Structuring
Origination activities under the new CECL/IFRS9 regime requires new rigor in terms of data capture at origination and better alignment of risk right at the point of on-boarding Portfolio
Management
Reserving at time of origination changes the profitability equation requiring active management of portfolios and understanding options to manage returns. The more prepared institutions will lead to better performing banks
Understanding where one stands with respect to peers, and have the ability to evaluate portfolios or bank acquisitions within the capital planning and EPS forecasting framework will be a key capability all institutions should have
Seamless Integration of Lending with Management of Credit Lifecycle
In Summary: Keys to Addressing the Challenges
» Ensure traceability by allowing users to chosefactors and store data. Make modelling decisionsfrom data quality andmodel capabilities
» Combine internal and external data in aseamlessway
» Allow the users to see results in real time withthe option of writing automatic reports in yourchosen format
» Run extensive modelling jobs with increasedefficiency by using cloud based computingpower
» Publish final models via API’s and place intomodel inventory tomake it “production ready”
» Auditability and validation framework formodels and regulatory requirements
The Challenge: Effectively Conducting Model Risk Management
Best Practices: A workflow and mass scale approach to Model Risk Management
» Banks and non-banking financial institutionsmodel risk management often rely on multiplesystems and model documentation spread outacrossmany different teams
» Many of these processes are labor intensiveand rely on knowledge of the specificindividuals
» Traceability often becomes a problem assystems for handling datasets and modellingdecisions are often missing or spread acrossmultiple divisions
» New developments or changes to existingmodels require a long project executiontimeline and considerable effort forimplementation/testing
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