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Implementing Basel II and Beyond
Michael Barak SVP, Basel Capital Manager October 16, 2012
*Views expressed here are my own and do not represent those of Union Bank
1 |
• Union Bank Overview
• Current Status
• Union Bank Solution
• Risk Management: Basel II End-to-End Controls
• Current Challenges
• What Worked – Applicability for Basel III
Agenda
2 |
• Headquartered in San Francisco, CA
• Financial Highlights • Total assets: $90B • Total loans held for investment: $54B • Core deposits: $53B • Tier 1 common capital ratio: 13.78%
• 407 Branches
• Key Markets • Consumer • Small Business • Middle Market • Real Estate • Corporate
• Union Bank is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group
Union Bank Overview: Financial Highlights
Source: SNL, 2Q12, end of period
3 |
Union Bank Overview: Risk Management Framework
4 |
Basel II Capital Accord
Validation, Oversight and Governance Data Integrity and Management
Pilla
r 1
Capi
tal R
equi
rem
ent
Pilla
r 2
Capi
tal A
dequ
acy
Pilla
r 3
Mar
ket D
isci
plin
e
Pillar 2 – Capital Adequacy •Validate capital calculated in Pillar 1 •Consider risks not valued in Pillar 1 •Establish Risk Appetite •Challenge capital calculation through:
– Stress Testing – Concentration Analysis – Economic Capital
Pillar 3 – Market Discipline Public disclosure of capital requirement for publicly traded companies and additional regulatory schedules for all Basel II companies
Pillar 1 – Capital Requirement Calculate capital for: •Credit Risk
– Establish Rating Philosophy – Advanced Internal Ratings Based
Approach – Retail exposure segmentation – Wholesale scorecards
•Market Risk
– Value at Risk modeling
•Operational Risk – Advanced Measurements Approach – Internal and External Loss Data – Business Environment & Internal
Control Factors – Scenario Analysis
Union Bank Overview: Basel II Capital Accord
5 |
•Union Bank entered parallel on April 1, 2011 • Leading up to the parallel run entry, UB conducted three self assessment exercises which served
as the basis for entering parallel • Parallel entry has triggered Regulatory Reviews and increased scrutiny • Submitted 5 quarters of Basel II results to the Supervisors
•Regulatory Changes
• CCAR • Basel III • Basel Standardized & Advanced
•Union Bank Changes
• Acquisitions • New Products • Supervisory Recommendations
Current Status
6 |
Deliverable
Business Solution
Documentation
Deliverable
Regulatory Gap
Documentation
Deliverable
Business Requirements Documentation
Deliverable
Data Requirements Documentation
Deliverable
Key Data Elements
Objectives Deliverables
Using the Basel II Pillar I Advanced Approach, calculate the Bank’s RWA across all exposures
Deliverable
Policies and Procedures
Implement a vendor supported risk-weighted asset and economic capital engine and data model
Integrate the risk-weighted assets results with the required Regulatory Reports
Integrate the economic capital results within Performance Reporting
Define and execute a monthly process where the results are timely and accurate (Attestation)
Union Bank Solution: Objectives & Key Deliverables
7 | Source: Basel II FP&A Process Documentation
Wholesale excl . Trading
Systems and Data Sources Data Warehouse
SAS
Limits Management System
Excel
Direct Input
Retail excl . SAS
General Ledger
Retail
Trading ( Credit )
Securitized Assets
Equities / Funds
Wholesale Securities
GL Adjustments
ARC
Counterparty Impairment
Wholesale Impairment
Fronting Committed Unissued LC’s
Wholesale Impairment
Credit Default Swaps (CDS)
Total Return Swaps (TRS)
FDIC Indem. Asset
RWA Calculator
Basel II Reporting
FFIEC 101
Electronic Submission
FFIEC 101
Other Reporting
FFIEC 031 & FR Y - 9 C
Management Reporting
Moody’s
Operational Risk
Acquisition
Data
Quali
ty, D
ata M
anag
emen
t, Da
ta Go
vern
ance
Pro
gram
• The RWA calculation is an integrated process encompassing attributes from multiple sources. A vendor tool from Moody’s is used for the RWA calculation, FFIEC 101 reports and the electronic submission.
Acquired Loan Data Mart FDIC
Acquisitions
Market Risk
Union Bank Solution: Basel II RWA Overview
8 |
Exposure Category
A
Exposure at Default
($M)
B
Wt Avg PD (%)
C
Wt Avg LGD (%)
D
Wt Avg Maturity (Years)
E
RWA($M)
F
RWA / EAD (%)
Wholesale Exposures Corporate / Bank / Sovereign 1,463 0.2 (0.6) (0.3) 554 -1% Real Estate: IPRE & HVCRE 299 1.8 (0.9) (0.0) (146) -5% Securities (3,880) 0.0 (0.1) 0.1 (389) 0% Counterparty (Derivatives) (2) 0.1 (1.6) 0.4 93 6%Retail Exposures Mortgage - First Lien 751 (0.2) (0.8) (486) -3% Mortgage - Junior Lien (1) 0.1 (1.6) (41) -1% Other Retail Exposures 513 0.0 (6.4) 188 -3%Securitization Exposures 123 (0.0) (71) -3%Equity Exposures (15) (315) -15%Other Assets (1,801) (32) 13%Acquisition (2,041) (529) 38%Excess Credit Reserves (25) Market Risk Assets 41 Operational Risk (781)
TOTAL (4,592) (1,889) 1%
Union Bank Solution: Use Test - Basel II QoQ Changes
Higher PDs due to integration of acquired assets; otherwise lower.
June sales of securities drive decrease in wholesale borrowings; proceeds fund repayment of short-term debt
Decrease in Equity RWA driven mainly by continued fund sales due to Volcker Rule
Completed integration of acquired exposures into Basel II AIRB
Annual scenario analysis resulted in increased alignment with AMA model, thus less additional capital required
HPI decrease results in lower LTVs, and thus decreased PD and LGD
>10% change, benefit to RWA 5%-10% change, benefit to RWA
>10% change, detriment to RWA 5%-10% change, detriment to RWA
<5% change, minimal RWA impact
Legend
9 |
Allocated Capital Total of Business Unit Capital Consumption is greater than Allocable Capital Pool. •“Residual” credited back reduces Business Unit Capital Consumption. Pro rata based on Consumption
Segment Capital Consumption (Basel II, Pillar 2) Risk Based Capital •Economic Capital on segment assets
•Basel II Credit EC (8.5% x RWA)
Other EC Components •Ops Risk (8.5% x RWA), market risk, pension risk, business risk, management buffer, less diversification benefit
•No ALM Market Risk
Minimum 5% TCE floor applied •Tangible floor of 5% is less than 7% bank-wide hurdle
•Represents some diversification benefit
Goodwill •Including privatization
Allocable Capital Pool (Basel I Based) GAAP Shareholder’s Equity •Represents UB capital, the base upon which a return is expected
Strategic Capital •Determined by Basel I as constraint •Undeployed capital reserved for strategic purposes •Segments not expected to earn a return on Strategic Capital
Management Reporting
Union Bank Solution: Use Test – Capital Allocation
10 |
Risk Management: Basel II End-to-End Controls
Basel II End-to-End
Controls Framework
6. Attestation 3. Documentation
1. Governance 2. Testing
4. Data Integrity 5. Operational Process
Utilize for key decisions, policy and procedures, executive milestones and result review
Process for testing Basel II as a whole covering key functionality, IT infrastructure, data sets and complete data
Defining business and data requirements; defining solution design and desktop procedures
Examines completeness, validity, consistency, timeliness and accuracy of data as it moves from source to target
Ensures on-going security, integrity and continuity of systems and data; incorporates change management
Process that requires business users to sign-off completeness, accuracy and timeliness of data; overall ownership & approval
11 |
Executive Steering Committee
• Corporate & Retail Banking Vice Chair
• CIO
• CRO-Chair / CFO Co-Chair
• CEO
Basel II PMO
• Regulatory Liaison • BTMU Liaison
• Project Managers • Budget Analysts
Workstream Leads
• Risk-Weighted Assets
• Data Integrity • Pillar II / ICAAP • Regulatory
Reporting
• Counterparty Risk • Market Risk • Operational Risk • Wholesale Credit
Risk • Retail Credit Risk • Other Credit Risk
RWA Steering Committee
• EVP, Controllers • SVP, Internal Audit • SVP, IT
• Basel PMO • EVP, FP&A • CFO, Treasury • EVP, Risk Mgt.
Board of Directors
• Risk Committee
• Utilize governance for key decisions, executive milestones, budget approval and project execution.
Risk Management: Governance Overview
12 |
Moody’s Calculator Testing
RWA Engine & FFIEC 101
Testing
Testing By Portfolio
Entire Portfolio Testing
5 Months 4 Months 7 Months 3 Months
• Verify RWA calculations
• Verify solution meets project requirements
• Obtain UA for FFEIC 101 and RWA implementation
• Verify data provisioning by major exposure type
• Verify entire portfolio data • Verify activity execution
• Create core test cases
• Fast start
• Identify and address any critical data quality issues
• Mitigate implementation risk
• Run the period close process and make necessary adjustments
• RWA engine is installed
• Test data is mapped to the RWA calculator
• UB’s parameterization and customization are performed
• UB’s specific target data elements are identified.
• Calculator testing results variances are explained
• Basel II upstream IT projects are finished
• Development of RWA data provisioning is complete
• Attestation process participants are trained; RWA data sources are in production
• Development of outbound interfaces and management reporting is complete
• Development • Mock-up data
• Test • Data for GL, Commercial
and Retail • Mock-up data for Trading,
Securitization & Equity exposures
• Test • Snapshots of real UB
portfolio data
• Production • Min. 2 monthly runs of UB
data with 1 month being quarter end
Objective
Benefits
Data & Environment
Dependencies
Risk Management: Testing Activities & Timeline
13 |
Exposure Class Parameters Tested Results Tested # of Test Cases # of Variances
Commercial
• Exposure Sub-Category • Default Flag • PD Floor • Maturity Floor & Ceiling • PD Substitution • LGD Adjustment • UB PD/LGD Combinations
• R based on exposure sub-category • K & DRBC amount based on defaulted
and non-defaulted exposures • RWA & ECL
131 0
Trading – OTC Derivatives
• Exposure Sub-Category • Default Flag • PD Floor • Maturity Floor & Ceiling • Derivative Type • Collateral Type, Issuer & Rating • Remaining Principal Payments • Holding Period • Currency Mismatch • Netting
97 14
Trading – Repo Style Transactions 65 65
Retail
• Exposure Sub-Category • Default Flag • PD & LGD Floor • Sovereign Guarantee • Segmentation
30 11
Securitization • External rating & rating type • Seniority • Granularity
• RWA & Deductions from capital 352 0
Equity • Exposure Sub-Category • RWA based on exposure sub-category 9 0
Other Exposures • DvP/PvP and Non-DvP/Non-PvP flag • Failed business days
• RWA 10 1
Retail/Wholesale Boundary • Monitoring retail-wholesale boundary • Basel II exposure class 11 4
Wholesale + Retail • Cross-default functionality • Exposure & obligor default consistency 10 3
Risk Management: Testing – Overview of Results
14 |
• Detailed requirements addressing exposure completeness, RWA calculation, reporting and input
• Defines the data elements, data structure, data owners used to determine source to target mapping and coding
• Defines all the regulatory rules, rule by rule
• Describes how the business requirements, data requirements and Basel II requirements are integrated into the comprehensive Basel II solution
• Describes the functional roles and responsibilities, the operating calendar, procedures and controls for executing the quarterly process and producing the regulatory reports and executive presentations
Business Requirements
Data Requirements
Solution Design
Gap Analysis
Objectives Deliverables
Desktop Procedures
Risk Management: Documentation
15 |
Priority
Criteria
Key Components
Examples
1
Data elements that impact the RWA calculation and asset classification
RWA calculation drivers
Asset Classification
Performing Status
Specific Allowances
Responsibility Center
PD, LGD, M, EAD, External Agency Ratings
Sovereign, Bank, Corporate, Residential Mortgage
Default
Expected Loss
Holding Company vs. Bank
2
Data elements that impact the economic capital calculation and both regulatory and management reporting
Regulatory reporting
Economic Capital
Management reporting
LTV, Lien Position, FICO Score
ZIP, Collateral type, Owner Occupied Flag
Chart of Account
3
Data elements that impact internal analysis Internal Analysis
Obligation Name, Data Source, Originating Responsibility Center, Purpose code
The process to identify the RWA data element priorities was based on the overall impact that the data elements have on the calculation and reporting functions, categorized as follows:
Risk Management: Data Integrity – Key Data Elements
16 |
Gather Data
Verify Data
Prepare Feed
Load Data in FDM
Manual Data Entry
Run DQ Checks
Prepare & Load
GL
ID Non-Matl & Other
Exposures
Perform GL
Recon Adjust
Calculate RWA
Analyze, Enter OTT Adj. Rerun
Attest
Prepare Regulatory
Reports
Analyze Rerun,
Attest and Submit
Investigate Communicate and Disclose
1. Prepare Portfolio / Data for RWA 2. Instrument Data Provisioning 3. GL Data Provisioning 4. Exposure Completeness
5. RWA Calculation 7. Post-Submission Inquiry Support
6. Regulatory Reporting
Line of Business
ITG ITG
Finance & Reg. Reporting
Finance & Regulatory Reporting Regulatory Reporting Finance & Regulatory Reporting
Key Process Primary Process Owner
Source: Basel II FP&A Process Documentation
Risk Management: Operational Process – Overview
17 |
Deliverable
KDE Quality Tracking & Reporting
Deliverable
Data Governance
Policy
Deliverable
Key Data Elements Inventory
Deliverable
End-to-End Data Process Maps
Deliverable
Roles & Responsibilities for Data & Controls
Objectives Deliverables
Establish one source of data and data process truth
Deliverable
Policies and Procedures
Create a centralized repository for documentation
Establish governance and controls around data and data processes to ensure quality standards are met
Union Bank Solution: Objectives & Key Deliverables
18 |
1. Prepare Portfolio Data for RWA
• Gather and verify data from system of record’s (SOR’s) into data repositories • General ledger (GL) asset classification including review by Controllers and Finance Team • Capital calculation parameters as defined by Credit Risk Function
2. Instrument Data Provisioning
• Load data into Fermat Data Mart (FDM) • Information technology group (ITG) and Finance Teams runs error checks for data quality
issues
3. GL Data Provisioning • Prepare and load GL data into Fermat and perform GL data quality check • May require multiple load of GL data • Identify non-material and other exposures
4. Exposure Completeness
• Reconcile GL amounts against instrument data and identify variances • Analyze and remediate variances and trigger adjustment process
5. RWA Calculation
• Calculate risk-weighted asset (RWA) • Perform comparative and variance analysis • Input over the top (OTT) adjustments from controllers (as needed) and recalculate RWA • Communicate results and obtain approvals
6. Regulatory Reporting • Collect data, including results of RWA calculation, manual inputs from the controllers • Prepare regulatory reports • Analyze, re-run, attest and submit
7. Post-Submission Inquiry Support
• Investigate and resolve feedback from the regulators following submission of regulatory reports. This step requires close cross-functional coordination
• Regulatory reporting group communicates and discloses
Source: Basel II FP&A Process Documentation
Risk Management: Operational Process – Activities
19 |
Finance
• Responsible for regulatory and economic capital calculations • Responsible for capital calculator changes when regulatory requirements
change • Attests accuracy of the risk-based capital numbers
Controllers Regulatory Reporting
• Attests accuracy of the FFIEC 101 schedules • Maintains GL account hierarchy and coordinates chart of accounts (COA)
communications
Credit Risk • Defining and maintaining policies and procedures around risk parameters
(e.g. probability of default (PD) risk rating scale, loss given default (LGD) risk rating scale, and default flags)
Data Integrity • Provides data quality support to business data owners • Defines data governance policies specifying data quality thresholds and data
resolutions
Line of Business • Attests to accuracy and completeness of data • Supports Finance in exposure completeness and GL Reconciliation
Information Technology Group
• Part of Bank’s ITG function supporting Bank’s systems • Manages data repositories and technology processes • Responsible for managing and resolving IT related issues
Moody’s Support • Support is provided under a contract between the bank and Moody’s
Risk Management: Operational Process – Roles
20 |
Business Units FP&A
Gather securitizations and equity data for electronic transfer load
Regulatory Reporting
Manually input over the top entries, capital adjustments and intercompany eliminations
KEY CONTROLS Business units attest to accuracy and
completeness of source data. Additional controls are currently being developed and put in place.
POINTS OF CONTACT Wholesale Retail Traded Products Securities Securitizations and Equities
KEY CONTROLS 1. Conduct attestation meetings with BUs
that certify to the accuracy and completeness of source data
2. Review and analyze data integrity and proxy issues
3. Reconcile GL to RWA exposures 4. Perform RWA variance analysis 5. Provide attestation to RWA calculation
to Regulatory Reporting 6. Present results to governance
committees for review
KEY CONTROLS 1. Review all workpapers and schedules
by 2 levels of managers 2. Reconcile FFIEC 101 to FRY9C 3. Obtain certifications from all BUs that
provide data 4. Resolve all data validation checks 5. Prepare reports in accordance with
regulatory instructions 6. Perform variance analysis of all line
items
Submit FFIEC 101 to regulators through IESUB
Manually input Market Risk, Operational Risk , and acquisition information
Develop and
maintain source data
Coordinate resolution of data integrity and exposure completeness issues
Generate FFIEC 101 reports, including Capital and RWA
Data Management Office
Gather data for input to
data models
Risk Management: Attestation
21 |
Data integrity is a focal point for the industry, regulators, and UB
Processing time for RWA calculations
Matters Requiring Attention (MRA)
As implementation progresses and matures, variability in results must be
understood and explained to BTMU and other stakeholders
New products
The challenges outlined below are by no means unique to UB. These are challenges that have had to be addressed by all Basel II banks whether domestic or international
Current Challenges
22 |
Proj
ect M
anag
emen
t • Teamwork
• Project Management 101 Bu
sine
ss &
Dat
a R
equi
rem
ents
• Extra time spent on gathering and finalizing business & data requirements
• Basis for change control
• Basis for Vendor communication
Staf
fing
and
Res
ourc
ing • Right resources
with subject matter expertise
• Training
• Key resources in testing / quality assurance
• Key resource in Data Analyst / bridge between IT and Business Ve
ndor
Rel
atio
nshi
p • Business knowledge
• Receptive to change / lack of bureaucracy
• Incorporated into initial planning and design
What Worked – Applicability for Basel III
23 |
Reporting capital in accordance to
Basel I general risk-based approach Basel II advanced approach
CCAR stress testing exercises and reports (FR-Y14A, FR-Y14Q, FR-Y 14M) Starting January 2015, Union Bank is required to report capital as per Basel III-Standardized Approach Report capital in accordance with BIII Advanced Approach Phase in the G-SIB initiative – FRY-15 Single Counterparty Credit Limit CCAR exercise with updated reporting requirements (FR-Y14A, FR-Y14Q, FR-Y 14M) Basel III Liquidity risk (LCR and NSFR liquidity ratios) once US rules will be defined
Changing Regulatory Landscape
Current regulatory environment
Future regulatory environment
23
24 |
Impacts due to changing regulatory landscape
CCAR and Basel calculations should be integrated to be consistent with regulatory filings to handle reconciliation issues between FRY-14 schedules and FR-Y 9C
Regulatory capital calculations: A greater data granularity is required for regulatory capital calculations
Regulatory capital optimization
– sourcing collaterals and guarantees data – optimization algorithms for Standardized approach
Regulatory capital forecasting processes become more complex since regulatory capital calculations require more granular data
FR-Y 15 requires credit and liquidity risk information
24