Amjad Zaim discusses Data Mining in Banking in the May Issue of the "Banking Executive" magazine

1. G20
G20’s Quest for Strong,
Sustainable and Balanced Growth
The International Monetary and Financial Committee gathers for their semi-annual meeting at
the IMF's Headquarters April 24, 2010 in Washington, DC. Finance Ministers and
Bank Governors around the world will be attending the IMF/World Bank Spring Meetings this
weekend in Washington, DC.
April G20 meeting of Finance Ministers and Central Bank Governors was held in
Washington D.C. on a quest to enhance the momentum of global economic recovery
and to maintain an adequate transition to a strong, sustainable and balanced growth.
The G 20’s agenda included another important file, financial regulatory reform to
keep international financial institutions on the right track.
Participants were anxious that recov- In cooperation with the IMF and Participants reaffirmed their support
ery the running in deferent speeds World Bank, the participants set an for the FSB to develop prudential
across regions, and unemployment is initial package of policies options to standards, market infrastructures to
still high in many economies. Partic- be considered by participating lead- contain the propagation of shocks
ipants indicated that since some ers at the June 2010 G 20 Summit in and resolution tools and frameworks
economies are still dependent on Toronto - Canada. for systemically important financial
policy support and public finances, institutions.
the policy support should be main- A reaffirmation to stronger capital
tained until the recovery is firmly standards was indicated, comple- Participants stressed the importance
driven by the private sector when it mented by clear incentives to miti- of achieving a single set of high qual-
becomes ready and more en- gate excessive risk-taking practices. ity, global accounting standards and
trenched. implementing international standards
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2. G20
United States Secretary of the Treasury Timothy Members of the International Monetary and Financial
Geithner walks to his position during a group photo Committee pose for a group photograph prior to
of the International Monetary and Financial Commit- holding their semi-annual meeting at the IMF's Head-
tee members prior to their meeting at the 2010 quarters April 24, 2010 in Washington, DC. Finance
IMF/World Bank Spring Meetings at International Ministers and Bank Governors around the world will
Monetary Fund Headquarters (IMF) April 24, 2010 in be attending the IMF/World Bank Spring Meetings
Washington, D.C. this weekend in Washington, DC.
US Secretary of Treasury Tim Geithner (L) talks with Members of the G-20 Finance Ministers and Central
IInternational Monetary Fund's Managing Director Bank Governors pose for a group photograph after
Dominique Strauss-Kahn (R) as they walk to their holding their meeting at the IMF's Headquarters April
semi-annual meeting at the IMF's Headquarters April 23, 2010 in Washington, DC. Finance Ministers and
24, 2010 in Washington, DC. Finance Ministers and Bank Governors around the world will be attending
Bank Governors around the world will be attending the IMF/World Bank Spring Meetings this weekend in
the IMF/World Bank Spring Meetings this weekend in Washington, DC.
Washington, DC.
with regard to compensation prac- mutual beneficial growth paths and b. Converge to the growth rate of
tices. avoid future crises, each framework potential output over the medium
tailored according to every country’s term, and
special features. c. Be enhanced over the long term
THE G-20 FRAMEWORK FOR by increasing potential output
STRONG, SUSTAINABLE AND growth, primarily by efficiently
BALANCED GROWTH: STRONG GROWTH SHOULD: utilizing available resources
The primary goal of the Framework a. Close current output and employ- through the implementation of
is to encourage G20 countries to im- ment gaps in G20 countries as more effective structural policies.
plement coherent policies that attain soon as possible,
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3. G20
US Federal Reserve Chairman Ben Bernanke (L) talks International Monetary Fund's Managing Director
shakes hands with Mexico's Bank Governor Agustin Dominique Strauss-Kahn (2nd L) talks with US Treas-
Carstens (C) as US Secretary of Treasury Tim Geithner ury Secretary Tim Geithner (C) and France Finance
(R) sits at the G-20 Meeting of the Finance Ministers Minister Christine Lagarde (2nd R) after members of
and Central Bank Governors at the IMF's Headquar- the G-20 Finance Ministers and Central Bank Gover-
ters April 23, 2010 in Washington, DC. Finance Min- nors pose for a group photograph at the IMF's Head-
isters and Bank Governors around the world will be quarters April 23, 2010 in Washington, DC. Finance
attending the IMF/World Bank Spring Meetings this Ministers and Bank Governors around the world will
weekend in Washington, DC be attending the IMF/World Bank Spring Meetings
this weekend in Washington, DC.
SUSTAINABLE GROWTH
SHOULD BE:
a. In line with underlying potential
growth over the medium term,
thereby providing a firm basis for
long term growth,
b. Based on sustainable public fi-
nances and price and financial
stability,
c. Resilient to economic and finan-
cial shocks,
d. Determined primarily by compet-
itive market forces, and
e. Consistent with social and envi-
ronmental policy goals.
BALANCED GROWTH SHOULD:
a. Be broadly based across all G20
countries and regions of the International Monetary Fund's Managing Director
world, Dominique Strauss-Kahn (R) talks with World Bank
b. Not generate persistent and desta- President Robert Zoellick prior to the start of the
bilizing internal or external im- Group of 24 Minister's meeting at the IMF's Head-
balances, and quarters April 22, 2010 in Washington, DC. Finance
c. Consistent with broad develop- Ministers and Bank Governors around the world will
ment goals, in particular, conver- be attending the IMF/World Bank Spring Meetings
gence to high standards of living this weekend in Washington, DC.
across countries in the long run.
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4. Goldman Scha’s
Goldman Sachs’ Fraud
fund manager) created an investment a firm, and its executive Fabrice
vehicle called Abacus 2007-AC1, Tourre for being responsible of creat-
which was one of 25 such vehicles ing the previously mentioned ques-
in which its clients could bet against
tionable package. John A. Paulson
the housing market (profit if value de-
creases). At that time Paulson made was not accused. “Paulson was not
an estimate of 3.7 billion dollars -NY charged because it was Goldman
Times-. Nothing suspicious till now. that made misrepresentations to in-
But the other flip of the coin is that vestors, not Paulson” said Robert
Goldman Sachs then sold Abacus to Khuzamy –Reuters-.
investors (banks pension funds and
insurance companies) who profited if
the bonds increase in value. Those
investors lost more than 1 million EFFECTS ON GOLDMAN AND
dollars in the deal. THE STOCK MARKET
This turmoil had its effects on the
stock market in general and Gold-
SEC ACCUSATIONS man Sachs shares. The firm’s shares
According to the SEC, Goldman did
slid 12.8% on the day the suit was is-
not tell investors "vital information"
about ABACUS, including that Paul- sued, wiping out more than 12 bil-
son & Co was involved in choosing lion dollars of the company’s market
which securities would be part of the share. The news dragged down
portfolio -Reuters-. broad U.S. equity indexes, which fell
"Goldman wrongly permitted a client more than 1 percent. "The greatest
that was betting against the mortgage
penalty for Goldman is not the finan-
SANCTION market to heavily influence which
Goldman Sachs, one of Wall Street’s cial damages -- Goldman is enor-
mortgage securities to include in an
most powerful firms and one of the investment portfolio, while telling mously wealthy -- but the
few firms who made it out of the other investors that the securities reputational damage…" said John
2008 financial crisis approximately were selected by an independent, Coffee, a securities law professor at
without a scratch, was charged of se- objective third party," SEC Enforce- Columbia Law School in New York
curities fraud in a civil lawsuit by the ment Director Robert Khuzami said. The perceived risk of owning Gold-
Securities and Exchange Commis-
man debt, as measured by credit de-
sion. The suit states that Goldman
Sachs produced and sold a mortgage GOLDMAN STATEMENT fault swaps, increased. Treasury
investment that was secretly in- On the other hand, the firm replied prices rose as investors sought safe-
tended to fail. In other words, the by explaining that it never mischar- haven government debt –Reuters-.
Wall Street powerhouse company acterized Paulson’s strategy. More-
sold mortgage investments without over, the firm is not obliged to
informing the purchasers that the se- disclose the identity of a buyer to
CONCLUSION
curities were designed with input seller and vice versa. Goldman Sachs
from an important client who was also added that the commission’s ac- At the end of the day, these charges
betting on them to fail. But as the cusations are completely unfounded are a result of the new vision law-
Economist stated in one of its articles, in law and fact and the losses the makers are seeking which aim to
Goldman Sachs remain “Greedy later firms incurred came from the control some of Wall Street’s prac-
until Proven Guilty” overall collapse of the mortgage mar- tices which led to the 2008 financial
ket, not from the way the deal was crisis. Moreover, they are also con-
structured.
sidering tougher rules for complex
WHAT WENT WRONG?
The story started back in 2007 when investments like those involved in
Goldman Sachs at the request of WHO WAS CHARGED the alleged Goldman fraud.
John A. Paulson (a prominent hedge The suit accused Goldman Sachs as
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5. G24
Intergovernmental Group of
Twenty-Four on International
Monetary Affairs and Development
Communiqué
Ministers of the Intergovernmental Group of Twenty-Four on International Monetary Affairs
and Development held their eighty-third meeting in Washington, D.C. on April 22, 2010. Mr.
Guido Mantega, Minister of Finance of Brazil was in the Chair, with Mr. Pravin Gordhan,
Minister of Finance of South Africa as First Vice-Chairman, and Mr. Arvind Virmani, IMF Ex-
ecutive Director for India as Second Vice-Chairman.
The Ministers welcomed the im- concerted and cooperative actions. donors, including a growing number
provement in global economic Ministers reaffirmed their continued of developing countries.
prospects since they last met, led by commitment to sound policies to
the developing world. While the achieve high and sustainable growth The Ministers urged developed coun-
pace of recovery is uneven, it is en- and to reduce poverty. They called tries to avoid protectionist measures
couraging that all developing regions on the advanced countries to main- and other restrictions in trade, fi-
have experienced a significant im- tain policies to support the economic
nance, investment, and labor serv-
provement in growth performance recovery while building confidence
ices so as to not jeopardize global
since the trough of last year, reflect- in the sustainability of their public fi-
growth and stability. They reiterated
ing strong fundamentals. Ministers nances by announcing credible con-
the importance of an early conclu-
noted, however, that many chal- solidation plans, to be implemented
lenges remain. Credit constraints as soon as the recovery takes hold. sion of the Doha Development
continue to pose a risk to self sus- Ministers considered that any delay Round that addresses the needs of
tained recovery. Household and in reforming financial regulation to developing countries, in particular
commercial sector indebtedness in address the weaknesses that have led improved market access and elimi-
advanced countries continues to to the crisis could jeopardize the re- nation of agricultural subsidies by
pose risks, and sovereign balance covery, and urged vigorous imple- advanced countries.
sheets in several advanced countries mentation of the reform agenda.
are a new and significant threat to In addition to other resolutions the
stability. More generally, the crisis Moreover, the Ministers noted that Ministers noted that the crisis has
has left the fiscal positions of many the effects of the crisis are likely to be given new impetus to the reform of
advanced countries under strain, cir- long-lasting. Many developing coun- the international financial institu-
cumscribing their ability to deal tries continue to face constraints in tions. Both the IMF and the World
forcefully with the legacy of job external financing, which may be ex-
Bank have taken commendable steps
losses and high unemployment, and acerbated by the increase in public
to enhance their responsiveness, but
to face potential new shocks. Several borrowing needs in advanced coun-
the crisis has also highlighted the
emerging markets are faced with a tries. Ministers registered concern
need for more fundamental reforms.
surge of capital inflows with potential about the shortfalls in delivery of
risks of rising inflationary pressures concessional assistance and asked Agreement and implementation of
and asset price bubbles. donors to fulfill their prior commit- such reforms must be a centerpiece
ments. They underscored the impor- of the agenda this year.
Furthermore, the Ministers noted that tant contribution made by IDA and
sustaining economic recovery called for an ambitious IDA-16 re-
against this backdrop will require plenishment with the support of all
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6. Data Mining
DATA MINING
A New Culture in Adapting Banking
Decisions through Data-Centric
Methodologies
AMJAD ZAIM, PHD – CEO, COGNITRO ANALYTICS
In today’s knowledge-based globalized economy, information is the bloodline in most
economic sectors and business institutions operating in a rapidly changing market-
place. Data, being the building block of any body of knowledge, has become abundant
- thanks to the recent innovation in IT and computer technology which has led to
the accumulation of massive new data. Within these piles of electronic repositories of
marketing, operational, and transactional data lay important trends and patterns in-
valuable to managers and executives, as well as regulators and policy makers.
Nevertheless, the enormous size of those gigantic data makes the job of analyzing and
deriving meaningful information a formidable task, and results in
business environments that are “data-rich-yet-information-poor”.
Data mining is changing the landscape of decision making, empowering financial and
non-financial companies to harness the full power of its most valuable assets – data,
and creating a new business culture of information-driven decisions.
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7. Data Mining
Data Mining, in its proverbial sense, posit," or "Will this customer cancel vestment portfolio management.
involves sifting through data in our service if we introduce fees?"
search of precious information Data Mining uncovers facts that are
(nuggets). From a business point of traditionally either too obscure to Banking Analytics, or applications of
view, it is the process that allows an discover with conventional tools or Data Mining in banking, can help
organization to “read between the are time-consuming to resolve. improve how banks segment, target,
lines” and discover the needs, aspi- acquire, and retain customers. Addi-
rations, risks and opportunities Aside from the tactical use of data for tionally, improvements to risk man-
within the target market. Technically top line sales forecasts and bottom agement, customer understanding,
speaking, it’s the art and science of line financials, competitive organiza- risk and fraud enable banks to main-
tain and grow a more profitable cus-
tomer base. The importance of these
measures has been implied in Basel
II accord that explicitly emphasizes
the need to embrace intelligent credit
management methodologies in order
to manage market uncertainty and
minimize exposure risk. A number of
financial institutions have been quick
to recognize and adopt this emerging
technology – and it is changing the
banking landscape and giving banks
and financial institutions previously
untapped savings, margins and profit.
According to an Oracle survey, 92 %
of US banks are achieving high re-
turn on investment (ROI) by imple-
extracting hidden patterns from large tions are using their data strategically menting intelligent data mining
databases, describing an interesting to improve profitability, reduce costs, solution. Also, a recent Gartner study
phenomena and predicting future and enhance customer satisfaction concluded that banks that don’t es-
trends, hence the terms descriptive and retention. The technology has tablish intelligent risk management
analytics and predictive analytics. delivered on its promise, rewarding capabilities are likely to lose cus-
Having its roots in computer science, companies such as Johnson & John- tomers, increase capital cost and de-
statistic and psychology, the value of son, GE Capital as well as Procter & crease credit ratings, compared to
prospective insights offered by data Gamble by enabling them to profit competitors.
mining far exceeds those of OLAP from their data by adopting knowl-
(Online Analytical Processing) edge-driven decision making philos- Being a data-intensive industry with
queries and statistical hypothesis test- ophy and gaining competitive typically massive graveyards of un-
ing, and moves beyond traditional intelligence. One study reports that used and unappreciated ATM and
retrospective analysis found in com- the payoff from an effective data- credit processing data, banks and fi-
mon standard reports. mining project can be as high as $24 nancial institutions are some of the
million in some cases, with an ROI sectors that stand to reap great bene-
Through carefully-designed and ap- that can reach triple fold in some
fits from adopting data mining in its
plication-specific models that cap- sectors of the economy including the
organizational strategy. As banks
ture and represent embedded banking and the financial sector. As
compete for customers, they will
knowledge in the data, a user can global competition amongst banks
have to improve customer satisfac-
discover an array of intricate rela- soars, the battle to proactively cap-
tion and loyalty by finding answers
tionships and root causes, forecast ture and maintain market shares be-
to questions such as: which financial
unexpected outcomes, and answer comes more intense, and banks with
instruments are more likely to be re-
questions such as why things hap- reactive customer acquisition and
quested together by which groups of
pened and what is likely to happen. conventional mass marketing strate-
customers, and what is the profile of
It even provides "what-if" scenarios gies are more likely to fall behind.
a frequent ATM customer. Also,
that can’t be queried directly from Moreover, the recent economic
learning what transactions a cus-
the database. Examples include: downfall is exerting tremendous
tomer typically do before closing
"What is the expected lifetime value pressure on banks and financial insti-
his/her account will help customer
of a customer," "Which customers are tutions to adopt new intelligent
relationship department improve
likely to request a certificate of de- strategies to money lending and in-
customer retention and reduce attri-
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8. Data Mining
tion. In credit and risk departments, more sophisticated in their business ers and progressive-thinking man-
more proactive credit and risk man- operations and marketing service of- agers are successfully utilizing data
agement measures can be taken to ferings, the role of data mining be- mining to guide their decisions
prevent defaults, identify bad loans, comes much more essential. knowledgeably and steer their organ-
and improve the process of loan ap- ization effectively. They are realizing
plication assessment, screening and Despite that the field is poised to a significant return not only on their
scoring. Default risk can be mini- grow exponentially over the next investment in data mining but in all
mized by identifying the profile of decade, its adoption across banks other complementary services in-
high-risk borrowers and by examin- and other industries has been hin- cluding the data infrastructure. At the
ing the characteristics of previous de- dered for several reasons. For one, end, strong banks that place data at
faulters. Smarter investment the convoluted math behind the the center will use knowledge and
decisions can also be made by fore- scenes is mystifying, and the heavy not finance as a main asset to lever-
casting stock and bond performance analytical skills required make it re- age their competitive and even sur-
based on advanced portfolio opti- sourcefully prohibitive. More funda- vival strategy. Traditional banks, on
mization techniques derived through mentally, it is the culture of decision the other hand, that choose to under-
data mining. Data mining can also making in banking that has to evolve; mining data mining will eventually
guard against bank fraud and money that is, it has to depart from decisions give away their future to competitors
laundry activities by detecting poten- that relies on personal assumptions, which today are busy mining for in-
tially suspicious credit card and wire- subjective experience and occa- formational gold.
transfer transactions. By sional hunch into a fact-based
understanding early signs of fraud, process driven by data analysis and “Cognitro Analytics, is a US-based
banks will be well-equipped to un- information discovery. At some company that provides advanced an-
dertake fraud prevention initiatives point, banks will learn that not ex- alytics services and business intelli-
which will help reduce fraud risk and ploring the full potential of data min- gent solutions. Cognitro Analytics
minimize losses. The Royal Bank of ing simply mean greater uncertainty helps banks and financial institutions
Canada is a good example: the adop- overshadowing profitable business to better manage risk, optimize mar-
tion of Banking Analytics saved over decisions. I believe that we are still keting, uncover fraud and retain cus-
$15m when a new fraud rules engine in the early days of the inevitable tomers by maximizing the value of
that incorporated predictive analytics widespread use of the data mining data to make more insightful and in-
was implemented. As banks become technology. Today, innovative lead- formed business decisions”.
MARKETING OPERATION CREDIT
ANALYTICS ANALYTICS ANALYTICS
Credit and Debit Card Fraud Detection
Profile Highly Profitable Loans
Money Laundry Protection
Customer Segmentation
Internal Credit Scoring
Product Cross selling
Collection Analytics
High Risk Detection
Customer Profiling
Attrition Modeling
Default Prediction
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9. 40