Risk Management Transformation and Basel III Implementation

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Basel III compliance implementation has significant implications for risk management practices across the banking industry. The presentation, given by Pierre Gaudin Director - Enterprise Risk Solutions at Moody's Analytics, is from a conference organized by The Asian Banker in Kuala Lumpur on risk management.

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Risk Management Transformation and Basel III Implementation

  1. 1. Risk Management Transformation & Basel III Implementation Overview of practices and trends Presented by Pierre Gaudin Director – Enterprise Risk Solutions, Moody’s Analytics May 2014
  2. 2. 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
  3. 3. How do Basel requirements affect risk management data flows & infrastructures ? Enterprise Risk Solutions data flows & infrastructures ? 3
  4. 4. 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 Models Pricing Stochastic Models RWA / EC Provisioning Interest Rate Risk Liquidity Risk Profitability & FTP MR Capital - VaR Exposure Profile Sensitivities Risk Management Governance & Compliance Enterprise Risk Solutions 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 / Casa Loans Commitments Securities Counterparties Guarantees Collaterals OTC Netting Wholesales – Retail Trading Securities Derivatives Hedges & Funding Treasury – Capital Market Front Office Daily or WeeklyIntraday Monthly or Quarterly Detailed Assets & Counterparties High Data Volumes Semi Detailed Assets & Liabilities Medium Data Volumes Detailed Trading Portfolio Low Data Volumes
  5. 5. Basel 2 initiated a first rationalization: Data Warehouse Credit Risk SiloMarket Risk Silo Finance/ALCO Silo Risk Management Governance & Compliance Data Warehouse initiatives have been promoted by Basel II requirements » Centralization of detailed data » Data Quality Management & GL reconciliation Enterprise Risk Solutions Data WarehouseData Warehouse 5 Deposits / Casa Loans Commitments Securities Counterparties Guarantees Collaterals OTC Netting Wholesales – Retail Trading Securities Derivatives Hedges & Funding Treasury – Capital Market Front Office Daily or WeeklyIntraday Monthly or Quarterly Detailed Assets & Counterparties High Data Volumes Semi Detailed Assets & Liabilities Medium Data Volumes Detailed Trading Portfolio Low 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
  6. 6. Basel 3 LCR/NSFR merges Credit & Cashflow dataflows Risk Management Governance & Compliance Credit Risk Silo Ratings Models Asset Classes Retail Scoring RWA / EC Provisioning Finance/ALCO Silo Cash Flow Projections Behavioral Models Budgets assumptions Interest Rate Risk Liquidity Risk Profitability & FTP Liquidity Contingency Planning LCR / NSFR Liquidity 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 Enterprise Risk Solutions Deposits / Casa Loans Commitments Securities Counterparties Guarantees Collaterals OTC Netting Wholesales – Retail Trading Securities Derivatives Hedges & Funding Treasury – Capital Market Front Office CRM Allocation Monthly or Quarterly Detailed Assets & Counterparties High Data Volumes Budgets assumptions Hedging & Pricing Daily or Weekly Semi Detailed Assets & Liabilities Medium Data Volumes 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
  7. 7. How do liquidity monitoring and FTP practice affect cash flow modeling ? Enterprise Risk Solutions 7
  8. 8. 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 ! "# # $ % ! " ## $% $& ' & '( ' & % # # ) '* ! Enterprise Risk Solutions 8 ! " ## $% $& ' % ' ' ( ) ' * ) "# $ % # % # % $ + %# ,- $&../ % ## # " 0 + ) #, -) ) #, -) . ' '* ! ) $ % # % # % $ + %# ,11 $&../ % ## # " 0 - ) #, -) ) #, -) . ' . ' . ' & * 2.3+ +*&'* &+4+&'5 & 26 % #" % " &3 # "# % ## # ) #, -) ' " " ' - ' ' / ) 0
  9. 9. Contingent Liquidity Behavioral Modeling Liquidity 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 Enterprise Risk Solutions 9
  10. 10. 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 Governance & Compliance Credit Risk Silo Ratings Models Asset Classes Retail Scoring RWA / EC Provisioning Finance/ALCO Silo Budgets assumptions Profitability Analysis Pro forma FTP Liquidity Contingency Planning LCR / NSFR Liquidity Contingency Monitoring Cash Flows Projections Behavioral Models Ratings Models Asset Classes Liquidity Contingency Planning LCR / NSFR HQLA Selection Monitoring Cash Flows Projections Behavioral Models Ratings Models Asset Classes ALM Budgets assumptions Hedging & Pricing FTP Spreads IRRBB Profitability Analysis Pro forma FTP Enterprise Risk Solutions 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 Deposits / Casa Loans Commitments Securities Counterparties Guarantees Collaterals OTC Netting Wholesales – Retail Trading Securities Derivatives Hedges & Funding Treasury – Capital Market Front Office CRM Allocation Monthly or Quarterly Detailed Assets & Counterparties High Data Volumes Hedging & Pricing Daily or Weekly Semi Detailed Assets & Liabilities Medium Data Volumes Data Warehouse Asset Classes FTP Models Up to Daily Detailed Assets, Liabilities, Commitments and issuers Asset Classes FTP Models Up to Daily Detailed Assets, Liabilities, Commitments and issuers
  11. 11. How stress testing and forecasts practices can leverage an integrated infrastructure in a cost efficient way Enterprise Risk Solutions cost efficient way 11
  12. 12. Stress Testing Regulatory Framework in EU & US insist on an automated bottom up governance process ! " # $ % ! !& ' ( % )* + $ " , % ! * ' - . / " , % ( % - ' 0 ) 1 ) 23$ 0 23 1 4)5 " 6% # 0 78 49 : # 3 ( $ ! ; </ = > ? @: 0 ! 13)?A@: 0 3 Enterprise Risk Solutions % . %> ! % % . 6; % 0 + 3/ 0: #+ 3 04@@B+4@ 3/4@ & 0 3 Source – Moody’s Analytics : % % 6 : % % 6 : % % 6 0 + 3 + $ > 1 + C / ! D; C . + E /! D; C . F % F2 $ 6 D : 66 /! 1 A ) # ! ) + /! D; C . / % , % ) ) / ! D % F ) : ! / )G ) %8 ) % % 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) Templates 4.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
  13. 13. 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 Enterprise Risk Solutions • 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
  14. 14. 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 Enterprise Risk Solutions » 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
  15. 15. Pierre Gaudin pierre.gaudin@moodys.com 6 Shenton Way #14-08 Singapore 068809 www.moodys.com moodys.com 15
  16. 16. Moody’s Analytics is recognized as a leader in risk and regulatory solutions. Voted #1 in Economic Capital Calculation Management – third consecutive year » #2 in Regulatory Capital Calculation and Management » Top Vendor in Liquidity Risk Ranked 40th Overall » Moody’s Analytics has been voted as a Preferred Vendor Voted #8 Top Vendor Overall – up significantly » #1 in Economic & Regulatory Capital Calculation Solutions » Top Vendor in Regulatory Compliance and Reporting and Voted #5 in Overall Rankings – up from #7 (out of 100) » #1 in Organizational Strength for second consecutive year Enterprise Risk Solutions 16 » Top Vendor in Liquidity Risk Management » Best Regulatory Reporting Software » Best Data Management Service Provider Pricing, Valuation & Risk Management Award 2012 » Moody’s Analytics #1 in customer service by Structured Credit Investor Recognized for Risk Management Technology » Risk Magazine predicts Moody’s Analytics will be one of the most influential Technology Vendors over the next five years Compliance and Reporting and Credit Risk Management Ranked in Top Five for Two Risk Management Areas » #3 Regulatory/Economic Capital Calculation » #5 Credit
  17. 17. Moody’s Analytics Risk Practitioner Conference 2014 The Moody's Analytics Risk Practitioner Conference (RPC) explores state-of-the-art risk management theory and its application given practical challenges facing risk practitioners today. RPC, now in its 9th year, brings together more than 250 risk professionals from 5 continents to share insights, experiences, ideas and approaches. Throughout the conference, you'll hear from industry experts, have opportunities to network with like-minded people who share similar interests and challenges, and learn how to maximize the value of your investment in the latest risk management and regulatory compliance solutions. Enterprise Risk Solutions Scottsdale, AZ, October 26-28, 2014 Click on the following link to learn more: http://www.moodysanalytics.com/Microsites/RPC/2014/Risk-Practitioner-Conference Click on the following link to register: https://www.cvent.com/events/moody-s-analytics-risk-practitioner-conference-2014/registration- 40d896b988684552a2a6830d4cd43dd9.aspx?refid=RPC2014Site&Refid=RPC2014Site
  18. 18. @MoodysAnalytics Stay current with the latest risk management and assessment news, insights, events, and more. @dismalscientist View global economic data, analysis and commentary by Mark Zandi and the Moody's Analytics’ economics team. 7 World Trade Center 250 Greenwich Street New York, NY 10007 +1 212 553 1653 One Canada Square Canary Wharf London, UK E14 5FA Moody's Analytics Follow our company page to view risk management content, such as white papers, articles, webinars, and other insightful content and news. The Economic Outlook This group features insightful discussions and knowledge sharing among business, economics, and policy professionals regarding the Enterprise Risk Solutions @CSIGlobalEd Read the latest financial services education information @MA_CapitalMkts Keep up to date on credit and equity market signals reflecting investment risk and opportunities for issuers and sectors. London, UK E14 5FA + 44 207 772 1000 6 Shenton Way #14-08 Singapore, 068809 +65 6511 4460 www.moodysanalytics.com policy professionals regarding the economic outlook. Risk Practitioner Community This group brings together risk management practitioners from around the world to discuss best practices, share ideas and insights, and gain networking opportunities.
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