Data Problems, Requirements and Risk Management


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Data Problems, Requirements and Risk Management

  1. 1. Data Problems and Requirements:Transparency Across Products, Markets, and Legal Entities<br />American Association for Budget and Program Analysis<br />Thomas Day<br />Managing Director, Risk and Policy, SunGard Ambit Financial Solutions<br />18-May-2010<br />
  2. 2. Broad Bank and Bank Supervisory Trends<br />Major consolidation over the course of the last twenty years<br />Since 1990, the number of banks have declined by 7,146 institutions<br />Since 2001, the number of banks have declined by 1,735<br />Total assets have increased<br />From approximately ~$4.0 trillion as of FYE-1991 to a FYE-09 level of $13.1 trillion<br />Supervisory staff have declined<br />FDIC staff only: A 1991 level of 22,586 to a 2009 level of 6,558 (~+1,500 from 2008/2009), or approximately $2,000 million per employee versus 1991 level of ~$177 million per employee<br />
  3. 3. Financial Mega-Trends and Issues<br />The 1990’s saw a rapid increase in:<br />Use of Derivatives<br />Structured Products<br />Increased Use of Securitization<br />Disintermediation of deposits (more wholesale $’s)<br />Rapid Increase in Technological Advances<br />Increases in productivity<br />Wider distributions of risk across geographies and investor type<br />Increased use of models in order to “sell” complexity<br />Wider bid/ask spreads<br />Greater faith in financial engineering<br />Stability v. instability<br />Period of relative calm and steady growth<br />Much greater belief in the “fine tuning” of our economy<br />
  4. 4. The Decade of “The” Bubble<br />Beginning in 2000 and continuing through 2004, a rapid decline in O/N funds rate<br />Well communicated increase (and slow) increase in rates.<br />
  5. 5. To Recap<br />We saw a significant increase in the use of technology to increase efficiencies over the last two decades<br />Banks got bigger, risk-taking got more “scientific”<br />Funding liquidity seemed endless<br />Products became more complex<br />Competition, globally, became more intense<br />Economies-of-scale seemed to “rule” and “diseconomies” of scale were “inconceivable” in banking<br />My experience:<br />Multiple source systems<br />Legacy data problems<br />Inability to pull current position balance sheets together<br />Inability to evaluate, plan and budget over such a large book<br />Governance by volume and performance, not by risk <br />
  6. 6. The Crisis: Decision-Makers Were Flying Blind<br /><ul><li>As the 2008 crisis unfolded key government decision makers were in the dark – despite all of the data that is currently collected - as to exactly what was happening.</li></ul>Lehman Bros. was allowed to collapse without data on how the vast counterparty network would be affected <br />Treasury Secretary was unaware of AIG’s CDS book until the Lehman failure<br />Government caught by surprise by a 21st century “bank run”<br /><ul><li>No one had the data to see the interconnectedness between financial firms and how the collapse of Lehman Bros. could bring the world to the brink of a second Great Depression</li></ul>We live in a 21st century world without 21st century data-management expectations<br />This will change. There are already some excellent examples. <br />
  7. 7. Systemic Risk<br />Monitoring one-bank at a time is necessary, but not sufficient<br />Horizontal reviews of risk are necessary<br />Image/idea: <br />The entire country’s financial system as a series of cash flows, some more volatile to macro- and micro-shocks that others<br />The SCAP stress-test was a good, albeit painful, proxy for this “idea”<br /> Comptroller Dugan:<br />“Bank information systems are not designed to aggregate information in this way on a regular basis. Much improvement is needed in these systems…but until strides are made, comprehensive stress-testing will remain very difficult.””…the issues I’ve just mentioned make me reluctant to begin conducting such tests routinely as the cornerstone of our supervision.” (also stressed PFRs shouldn’t disclose the results)<br /> – April 15, 2010 at the Richmond FRB<br />
  8. 8. Stress-Test Result: Similar to Evaluating Loss Coverage in a Securitization<br />
  9. 9. Data Needs<br />Lessons Learned:<br />Data quality at our large, systemically important financial institutions is largely in need of vast improvement<br />The modeling issues confronting the supervisory teams (economists and examiners) during the stress-test should not be “rare” or “unique”<br />Enterprise-wide stress testing should be common and ubiquitous<br />Large firms should be able to defend their stress-tests and the supervisors need adequate tools to assess the inherent quality and robustness of internal tests<br />A “debate and confirm” atmosphere would be healthy<br />FDIC fees should have a relationship to the potential volatility of DI assets<br />We live in a 21st century world without 21st century data-management expectations<br />This has to change. There are already some excellent examples. <br />
  10. 10. Data Requirements<br />Standards<br />Flexibility<br />Scalability<br />Practicality<br />Portability<br />Thanks to Mark Flood,<br />See also: <br /><br />The NIF/OFR needs to proceed to ensure sustained improvement in EWRM at our TBTF institutions<br />You can’t manage what you can’t measure<br />…and you don’t get improved data standards without a standard setter <br />
  11. 11. Regulatory Change: Liquidity and Capital<br />Liquidity Risk Management<br />BCBS, SSG, IIF and Domestic Regulators<br />Key areas of focus will be:<br />The forgotten “dark art”: asset liquidity = “counterbalancing capacity” = liquidity buffer<br />Cash-flow based stress-testing (forward looking)<br />Contingency funding plans<br />Capital Adequacy<br />What is capital? The “definition of capital” work-stream at the international level is a top priority. Are you prepared?<br />Counter-cyclical rather than pro-cyclical capital<br />International convergence on a “leverage” ratio standard<br />
  12. 12. Regulatory Change: Transparency and Disclosure<br />Transparency<br />The Office of Financial Research (OFR)<br />CMSA IRP, ALERT, FpML, Project RESTART as examples<br />The EDM Council and various types of mark-up languages<br />SEC proposed rule AB<br />Covers all private label 144-A transactions<br />Loan-level (collateral) detail <br />Computer code for the waterfall registered and available<br />“No more secrets”<br />The return of the “3-6-3” “2-5-2” rule? <br />
  13. 13. Conclusion<br />Thank You<br /><br />
  14. 14. Data Problems and Requirements:Transparency Across Products, Markets, and Legal Entities<br />For more information:<br /><br />For Analyst Relations:<br /><br />