Business Model Analysis: The Slow Shift to a New ... Model Analysis: The Slow Shift to a New Supervisory Paradigm Deloitte Ireland | Dublin 23 January 2018 Supervisory approaches in

Business Model Analysis: The Slow Shift to a New Supervisory Paradigm23rd January 2018

© 2018 Deloitte. All rights reserved

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“The SSM approach to business model analysis”

Stephen Woulfe

Head of Significant Bank Supervision

European Central Bank


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“A slow shift to a new Supervisory Paradigm”

Helmut Bauer

Deloitte Senior Advisor and former Chief Executive Director and Head of Banking Supervision at BaFin

Business Model Analysis: The Slow Shift to a New Supervisory Paradigm

Deloitte Ireland | Dublin 23 January 2018

Supervisory approaches in Europe | Meeting of the AFME SCES (Full Configuration)

Business Model Analysis: The Slow Shift to a New Supervisory Paradigm




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1 2 3 4

Fail

or l

ikely

to

fail

SREP overall score measures distance to fail

Economic viability of the business model is at the very core of the supervisory approach


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ICAAP

• Ongoing fulfilment of all relevant legal, regulatory and supervisory requirements

• For the projections (covering at least 3 years), this means, e.g., ongoing fulfilment of

• TSCR (adverse)• OCR + P2R (baseline)

• Additional management buffer determined by bank, depending on business model, risk appetite and risk profile

Normative internal perspective

• All risks that may impact the economic viability are covered by capital.

• Economic viability concept (incl. e.g. net present value) is defined internally.

• Institution develop own risk quantification methods.

• Short term risk assessment, no additional projections expected.

• Internal definition of capital.


Economicinternal perspective

Mutual Information

• Sound governance.• Full integration in decision making, strategies

and risk management.

• Sound data quality, data aggregation and IT architecture.

• Thorough independent review and validation.

SSM ICAAP/ILAAP multiyear plan – CP 02/2017


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Normative Economic

Basel 2

use test

align regulatory and economic capital – a risk-sensitive and incentives-based capital regime – internal modelling for capital computation subject to use testincentives-based

risk-sensitive


10

Normative Economic

use testincentives-based

risk-sensitive


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Intensity and Effectiveness of SIFI Supervision

Recommendations for enhanced supervision

2 November 2010

Intensity and Effectiveness of SIFI Supervision

Recommendations for enhanced supervision

2 November 2010

Principles for An

Effective Risk Appetite Framework

18 November 2013

Guidance on Supervisory Interaction with

Financial Institutions on Risk Culture

A Framework for Assessing Risk Culture

7 April 2014

Julie Dickson (former SSM supervisory board member)

2 November 2010 18 November 2013 7 April 2014


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Sabine Lautenschläger (SSM vice chair)

Julie Dickson (former SSM supervisory board member)

Basel Committee on Banking Supervision

Core Principles for Effective Banking Supervision

September 2012

Core Principles for Effective Banking Supervision 31

determined by the particular conditions and circumstances of the country and the bank. The supervisor regularly assesses the quality, effectiveness and integration of its on-site and off-site functions, and amends its approach, as needed.

2. The supervisor has a coherent process for planning and executing on-site and off-site activities. There are policies and processes to ensure that such activities are conducted on a thorough and consistent basis with clear responsibilities, objectives and outputs, and that there is effective coordination and information sharing between the on-site and off-site functions.

3. The supervisor uses a variety of information to regularly review and assess the safety and soundness of banks, the evaluation of material risks, and the identification of necessary corrective actions and supervisory actions. This includes information, such as prudential reports, statistical returns, information on a bank’s related entities, and publicly available information. The supervisor determines that information provided by banks is reliable37 and obtains, as necessary, additional information on the banks and their related entities.

4. The supervisor uses a variety of tools to regularly review and assess the safety and soundness of banks and the banking system, such as:

(a) analysis of financial statements and accounts;

(b) business model analysis;

(c) horizontal peer reviews;

(d) review of the outcome of stress tests undertaken by the bank; and

(e) analysis of corporate governance, including risk management and internal control systems.

The supervisor communicates its findings to the bank as appropriate and requires the bank to take action to mitigate any particular vulnerabilities that have the potential to affect its safety and soundness. The supervisor uses its analysis to determine follow-up work required, if any.

5. The supervisor, in conjunction with other relevant authorities, seeks to identify, assess and mitigate any emerging risks across banks and to the banking system as a whole, potentially including conducting supervisory stress tests (on individual banks or system-wide). The supervisor communicates its findings as appropriate to either banks or the industry and requires banks to take action to mitigate any particular vulnerabilities that have the potential to affect the stability of the banking system, where appropriate. The supervisor uses its analysis to determine follow-up work required, if any.

6. The supervisor evaluates the work of the bank’s internal audit function, and determines whether, and to what extent, it may rely on the internal auditors’ work to identify areas of potential risk.

7. The supervisor maintains sufficiently frequent contacts as appropriate with the bank’s Board, non-executive Board members and senior and middle management (including heads of individual business units and control functions) to develop an understanding of and assess matters such as strategy, group structure, corporate

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Please refer to Principle 10.

September 2012


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Normative Economic

risk-sensitiveincentives-based

use test

Why it took so long?


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Normative internal perspective

Economicinternal perspective




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Risk Appetite Framework and economic viability

A risk appetite framework allows the firm to identify and determine the relative positions of its risk capacity, risk profile and risk appetite when evaluating and pursuing its strategy and business model and to take corrective action where necessary. In each of the five states illustrated, the firm’s risk profile has changed relative to its risk capacity and risk appetite (e.g. in response to external market conditions).

Note: In practice, for some risks, such as operational risk, the firm may not have a lower limit and trigger

Upper limit

Upper trigger

Capacity

Appetite

Profile

Escalation

Capacity

Appetite

Profile

Desired range

Capacity

Profile

Objective under threat

Appetite

Lower trigger

Lower limit

Risk profile is between the upper and lower triggers

Risk profile is between the upper trigger and limit. Escalation to consider corrective action.

Risk profile exceeds the upper limit. Corrective action must be taken

Profile

Capacity

Firm is unviable

Appetite

Risk profile exceeds risk capacity. The firm must enact its Recovery and Resolution Plan

Acceptable range for risk profile

Capacity

Appetite

Profile

Objective under threat

Risk profile is less than the lower limit. Corrective action must be taken.


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Financial services regulation: key issues


Business Model Analysis: The Slow Shift to a New Supervisory ParadigmBusiness Model Analysis: The Slow Shift to a New Supervisory Paradigm

Business environment

Strategy, Business

Model

Risk Appetite FrameworkRisk Culture


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Risk Appetite Framework

Developing risk appetite statements requires business input and understanding across the firm, driven by both top down leadership and bottom up management involvement. The cascading of high level statements down through the business is aimed at developing and implementing a comprehensive and coherent structure. It is also key to enabling transparency and communication of the firm’s risk profile as it creates a firm-specific common risk appetite language.

Based on the themes from the firm’s strategic plan and objectives and its business model, which are approved by the Board, the risk strategy is set by the CRO. It articulates the aspirational status of the firm’s risk profile (the firm’s targeted future risk profile).

Based on the risk strategy, the Board approves the firm’s enterprise-wide high-level risk appetite statement, and related measures and limits.

Board or Senior management provide direction to the rest of the firm. Theenterprise-wide high-level risk appetite statement, and related measures andlimits, are mapped to key risk drivers.

Specific activities that the firm can and cannot do are defined and documented qualitatively in principles and policies to operationalise risk appetite.

Quantitative detailed risk appetite measures and limits are articulated to allow risk appetite to be monitored and controlled in day-to-day risk management processes.

Top-down articulation of risk appetite statements and limits must be informed at all stages by bottom-up input and engagement. The risk appetite framework must take into account and respond to the firm's business dimensions (such as business model, customer profile, limits and controls, concentrations, competitive position and financials).

High level

Directional

Specific

Detailed

Strategic Plan & Objectives, Business Model,

Risk Strategy

High-level enterprise-wide risk appetite statement, measures

and limits

Principles and Policies to operationalise risk

appetite

Detailed risk appetite measures

and limits

Key Risk Drivers and related risk appetite statements ,

measures and limits

Business Dimensions

Risk

Appetite


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High level

Directional

Specific

Detailed

Strategic Plan & Objectives, Business Model,

Risk Strategy

High-level enterprise-wide risk appetite statement, measures and limits

Principles and Policies to operationaliserisk appetite

Detailed risk appetite measures

and limits

Key Risk Drivers and related risk appetite statements ,

measures and limits

Business Dimensions

Risk Appetite


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1. Set strategic plan & objectives, business model,

risk strategy and risk capacity

3. Monitor and report

4. Control and correct

2. Articulate risk appetite

statements and limits

Risk appetite framework links strategy and business model development with risk management across 3LOD, and bank operations

Internal Communication,

Risk Data, IT


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Financial services regulation: key issues

Strategy, Business Model Development (process involving many functions and intelligence)

Business environment analysis (function and process)

Function (not necessarily one) with skills and resources for analysis of• Macroeconomic environment• Competitive environment • Other relevant environmental variables (e.g. regulatory, technological, socio-demographic,

fiscal, etc.)

Process• Identify, analyse, monitor on an ongoing basis the macroeconomic and competitive

environment and other relevant environmental variables and determine the sensitivity of the business model to all relevant environmental variables

• Develop, review, and update (stress) scenarios across environmental variables for testing of current business and future strategy

• Communicate findings, feed into strategy/business development and budgeting process

Owner: the board

Function(s) and process for analysis of current and future profitability • Understand and monitor on an ongoing basis profit generation by business

lines/products, the key drivers, and related interdependencies

• Sound financial projection techniques based upon scenarios aligned to business model

• Demonstrate the courage to quit

Risk Appetite FrameworkReal-life spinning of the business model generating a continuous stream of business information to feed into the fine-tuning/development of the business model


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“Business Model Analysis – Challenges and Opportunities”

Panel Session

Panellists

• Helmut Bauer: Deloitte Senior advisor to Deloitte’s Centre for Regulatory Strategy in Londonand Deloitte’s Banking Union Centre Frankfurt and former Chief Executive Director and Headof Banking Supervision at BaFin

• Stephen Woulfe: Head of Division, Significant Bank Supervision, European Central Bank

• Richard Pike: Independent Non-Executive Director at Permanent TSB, JP Morgan FundAdministration Services (Ireland) Limited and JP Morgan Hedge Fund Services (Ireland)Limited

• Harry Bhoja: GARP member and previously Head of Risk and Middle Office at ZurichFinancial Services

• Sean Smith: Partner, Regulatory Risk, Deloitte

• Dr. Margaret Cullen: Director of Executive Education at the Institute of Banking

Moderator


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What are the challenges faced by Banks and Regulators in relation to BMA?


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Business Model Analysis – Panel Session

What challenges do banks face as part of Supervisory Business Model Analysis?

Challenges faced by Firms


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What are the challenges faced byRegulators when assessing theviability and sustainability of firms’business models?

Regulatory Challenges


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Business Model Analysis - Panel Session

What are the key challenges facing Boards in Business Model Analysis?

Board Engagement


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Where should ownership of Business Model Analysis sit within an organization?

Roles and Responsibilities


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What are the actions firms can undertake to improve business model analysis and strategic decision making?


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How can firms best define their approach to business model analysis to stakeholders?

Analysing business models


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What factors should firms consider when looking to improve the analysis of their business model?

Improving BMA


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How can banks incorporate technology threats into their business model analysis?

Innovation


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Key Panel Messages

Roles and Responsibilities: Clear definition of the responsibilitiesof stakeholders (particularly across Risk, Finance and Strategy) inassessing the firm’s business model and the link with strategicplanning is crucial

Peer Groups: Firms can benefit from identifying peer groupsagainst who they are likely to be benchmarked to better understandregulatory expectations

Board Engagement: Boards should be able to evidence toRegulators that they (1) fully understand business modelvulnerabilities; and (2) make informed strategic decisions based onthis understanding

Regulatory Challenges: Regulators face challenges understandingthe drivers behind differences in results of firms’ internal andregulatory exercises, particularly when benchmarking


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Key Panel Messages

Innovation: Firms should ensure their stress testing scenariosincorporate the threats to their business models posed by disruptivetechnologies/competitors

BMA Framework: Firms should have in place policies andprocesses which (1) define their approach to assessing its businessmodel; (2) outline how this is integrated with other key processes;and (3) illustrate how BMA feeds into strategic decision making

Strategic Balance Sheet Modelling: Firms should considerwhether the implementation of strategic balance sheet managementmodelling may enhance their ability to deliver sustainableprofitability within a suitable risk threshold, supported byappropriate capital/funding structure


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Key Takeaways

Review your business model analysis capabilities to ensure they provides a sufficiently forward looking, risk adjusted view of profitability

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1 Define and formalise your approach to analysing your business model (including peer group analysis)

2Use this to illustrate how you embed and integrate key regulatory processes into strategic decision making

Documents

Business Model Analysis: The Slow Shift to a New ... Model Analysis: The Slow Shift to a New Supervisory Paradigm Deloitte Ireland | Dublin 23 January 2018 Supervisory approaches in