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Economic Capital Model and System implementation
- 1. Risk and CapitalManagement Solution Delivery Economic Capital Process & System
- 2. 2 Enterprise Risk Management(ERM) Framework Efficiency in Leverage & Liquidity: Efficiently Manage Leverage as it Pertains to ALM and Trading Book Efficiently Manage Asset & Funding Liquidity Protect Bank’s Solvency Improved Risk Awareness: Know your Risk and Plan Ahead Timely Identification of Portfolio Volatility & Proactive Decision Making Successful Return Capital & Loss Reserve Portfolio Risk Jointly Chaired by Risk & Finance Optimize Capital Allocation: Link Risk to Capital (Expected and Unexpected Losses based on risk drivers) Set Capital Target based on solvency rate Define Risk Appetite and Limits Adequacy in Capital in Relation to Bank’s Overall Risk Profile Comprehensive Pricing System that Covers Expected Losses Effective Downturn Treatment (PIT/TTC Risk parameters & stress based factors) Maximize Risk-Return: Proactive Measurement of Exposure Quality Proactive Measurement of Exposure Concentration Be Able to Forecast Losses and Earning at Risk Shareholders Value-Add Hold good Risk Adjusted Return on Capital (RAROC) and SVA Hold good Economic Profit/EVA, ROA, ROE, IRR etc. Competitive Advantage and Level-Playing Field: Build Goodwill & Reputation as Strong Capitalized & Asset holding Bank (Good value-proposition for Investors) Stay Current on Demanding Regulatory Response (SEC, FFIEC, FDIC, FASB, OCC, FED, BASEL/NPR, Dodd-Frank etc.) Recognize Risk Appetite and Reward Stakeholders: Clear Understanding of Bottom-UP Risk Assumed in Portfolio Tailor Risk for Business to Develop Top-Down Classification that is Transparent to External Stakeholders Articulation of Risk Attributes for Senior Management Must be built on a strong data and analytics foundation with continuous measurement and optimization than establishing empirical goals based on general or indicative market trends.
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- 4. 4 Risk Appetite &Limits – Capital Management Process Governance Business Processes Measures Committee Structure Roles and Responsibilities Policies and Documentation Board Level Risk and Capital Committee (RCC) • Business • Risk • Finance • Treasury • Internal Audit • ICAAP Policy and Manual • Risk Appetite Statement • Contingency Plans • Methodology Documents • Model Validation GuidelinesRisk Committee Risk & Capital Committee Planning Execution Evaluation Risk Appetite Setting Strategic Planning Capital Planning and Budgeting New Product / Business / M&A Initiatives Capital Adequacy Assessment Risk-Adjusted Performance Review Incentives ICAAP Reporting and Disclosure Business Execution (Service Offering, Pricing, Client Portfolio Management) Risk Identification, Measurement and Monitoring Financial Assessment and Forecasting Capital Management Contingency Planning Liquidity Management Contingency Planning Risk Inventory Economic and Regulatory Capital Capital Measures Risk Adjusted Performance MeasuresStress Testing and Scenario Analysis Allowance /Other Credit Risk ValidationandAssurance Well-designed capital management programs include governance, business processes and measures based on lessons learned and regulatory requirements.
- 5. 5 The Total Riskhas to be Matched by Different Layers for Risk Taking Capacity
- 6. 6 Credit Risk ECAPCalculation Engine -- Illustrative A sound economic capital model and system must be built on a strong data and analytics foundation with continuous measurement and optimization depending on risk profile and target rating than establishing empirical goals based on general or indicative market trends. The Total Risk has to be matched by different layers for Risk Taking Capacity.
- 7. 7 Risk , Return& Capital Management Building Blocks Develop Risk Appetite and Risk Taking Capacity with deep learning from your own portfolio data , risk drivers, model results and performance metrics. We will assist banks building out the capability pyramid driving from strategy through implementation. Risk Appetite Risk Capacity Target Risk Profile Optimize risk and return Measures RAP & RBP Risk & Finance Data Provisioning Process & Workflow Focused Portfolio Reporting and Analysis on Credit Quality and Concentrations, Which Drills Down to Risk Drivers Allocate Economic Capital Linking to Risk Proactive Use of Traditional Risk Mgmt Methods Limits, Approvals Standards, Asses Risk Drivers Model Development, Validation & Model Risk Management (Rating Models, Loss Models, Risk & Economic / Regulatory Capital Models) IRR Interest Rate IRR Group IRR Liquidity OR Operational MR Market CR Credit BR Business Actual Risk Profile Risk / Finance Dimensions TBE – Group Concentration Industry Geography Product Collateral Tenor / Maturity NIACC RAROC Capital Allocation LOB CIB Comm Consumer North-East $$ $$ $$ Central $$ $$ $$ Mid-West $$ $$ $$ South-East $$ $$ $$ South-West $$ $$ $$ Total $$ $$ $$ Geography “Portfolio Risk Reporting” “Measure Performance / Maximize NIACC” Portfolio Management Committee Jointly Chaired by Risk & Finance Bottom-Up Top-Down “Optimize Risk / Return” “Allocate Economic Capital”
- 8. 8 Building Blocks foran Economic Capital System
- 9. 9 Identification & Quantificationof Risk – Risk Aggregation
- 10. 10 Industry Practices toAddress Economic Capital Allocation Methodology
- 11. 11 Economic Capital AllocationMethodology Comparison
- 12. 12 ICAAP Framework –Business Impacts, Scenario Analysis, Risk Identification & Planning How an economic downturn would affect the firm's capital resources and future earnings; and the firm’s CRR taking into account future changes in its projected balance sheet. The institution’s “baseline” capital forecasts (at least quarterly, based on its annual business plan) A 3-year summary forecast capital position and a description of the institution’s capital planning and management process, including an outline of how ICAAP is incorporated into this process. Forward Looking Planning & Assessment
Editor's Notes
- #3 Talking Points Think of data governance as a mission …. … to meet these principles Data is a critical corporate asset and must be managed as such. Data management is very important to meeting your business strategy and therefore presents an opportunity and a threat. Data cannot be managed without a proper data governance program. Data cannot be managed using silo-efforts. …. for these users The analyst - how will better metadata management simplify my job and make me more effective as opposed to creating additional work? The manager - how does this approach address my ongoing and growing list of “pain points” that I have in relation to data management? The executive - how does data governance help me improve the bottom line? The organization - how do we build a more collaborative, enterprise culture but still provide the flexibility and speed to market what we value as an organization?