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First part of the presentation AIS used when was convocated by IMF in Washington to show their stress testing method (RDF). ----- Primera parte de la presentación empleada por los representantes de AIS durante su comparescencia organizada por el FMI en su sede de Washington para conocer el método RDF de stress testing de AIS.
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© AIS 2002- 2012
G r o u p
Stress-Testing: A Practical Approach to the Analysis of Systemic Stability
Systemic Risk RDF
Washington DC, July 2010
IMF
(Risk Dynamics into the Future)
José Manuel AguirreDirector - AIS Group
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Agenda
Presentation of AIS
Objectives and applications of RDF- Credit portfolio- Calculation of regulatory or economic capital- Change in Real Estate values- Sales planning
Technical architecture of RDF- How it works- Macro economic model formulae- Micro economic model formulae- Formulae to integrate both models
Initial test for integrated risks- Projected B/S and P&L under crisis scenarios - Integration of bankruptcy risk
Case study
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
AIS a Global Company
Headquarters in Barcelona (inc.1987)
Branches around the world
International Alliances: Oracle, Microsoft, ESRI, IBM, PWC, Accenture, Deloitte, EVERIS, AFI, INTEL
Mexicosince 1993
Argentinasince 1994
Portugalsince 1995
Chile since 2002
Argentina Brazil Chile Colombia Costa Rica Ecuador Honduras Mexico Peru Puerto Rico Dominican Rep. Uruguay USA Venezuela
Andorra Australia Azores Cape Verde Belgium Italy Poland Portugal Spain United Kingdom
90 employees in five countries
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Risk Management
Granting and monitoring
models
Collection software tool
Portfolio Models RDF - Economic Capital - RAROC
Support platforms SCACS
AIS segments and products / services
ConsultancyManagement tools
SIC-GMR
Marketing
Modeling in marketing database Geodemographic Marketing:Provision of external information
Customer value
Other services
Valuation of real Estate assets Economic and Social impact assessment of financial
institutions
Cardboard manufacturers plants planning
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Agenda
Presentation of AIS
Objectives and applications of RDF- Credit portfolio- Change in Real Estate values- Calculation of regulatory or economic capital- Sales planning
Technical architecture of RDF- How it works- Macro economic model formulae- Micro economic model formulae- Formulae to integrate both models
Initial test for integrated risks- Projected B/S and P&L under crisis scenarios - Integration of bankruptcy risk
Case study
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
What is RDF?
RDF (Risk Dynamics into the Future) is the methodological proposal of AIS for the analysis of the impact on the credit investments portfolio, valuations and key areas of an entity in extreme yet plausible situations, generally resulting from an economic crisis or economic changes.
RDF is a method composed of mathematical, statistical and econometric procedures that helps analysts and managers in the stress testing exercises.
The RDF method will be published and its use will be free, under GNU License.
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
What is RDF?
RDF is a Methodology composed of:
- A micro economic model: in which the user inputs data to be stressed such as: Credit portfolios, Real Estate Values, ALM positions, a complete balance sheet and P&L statement, etc….
- A scenario generator that reflects macro environment components that can be modified according to different criteria.
- Results RDF produces:
A distribution of results for a given scenario. This may say a lot about risk.
There can also be a distribution of budget portfolios as affected by a variety of scenarios.
Liquidity may be calculated as well – not just “risk” – Also an interaction of various items including volumes, spreads and expenses to produce the income statement
Finally it may produce, under different scenarios both an income statement and a balance sheet/capital calculation.
- Constraints and Objectives of the bank, especially but not only risk appetite. Ultimately the bank will have to determine the most likely scenario and budget accordingly.
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
The main objectives of the RDF method
To analize the credit quality of portfolios
To determine capital requirements under different scenarios
To determine liquidity and interest rate gaps
To help optimize commercial actions and business plans
To forecast balance sheet and P&L changes under stressed conditions
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
RDF accomplishes these objectives combining statistical, mathematical and econometric tools with accounting information
The main objectives of the RDF method
VAR model to control the conditioned forecast distribution of macroeconomic variables
Microeconomic models to estimate portfolio, ALM and other components depending on macroeconomic variables
Integration of economic scenarios, macro and micro models with core information
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
RDF solutions
Real Estate Value
Credit Risk management
Sales Planning
Mgment. of Real Estate values
Credit Risk
Sales and business planning
Applications based on Risk Dynamics into the Future
RDF is the solution for the management of values in
unstable situations
B/S / P&L projection Projection of statements under stressed situations
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Agenda
Presentation of AIS
Objectives and applications of RDF- Credit portfolio- Calculation of regulatory or economic capital- Change in Real Estate values- Sales planning
Technical architecture of RDF- How it works- Macro economic model formulae- Micro economic model formulae- Formulae to integrate both models
Initial test for integrated risks- Projected B/S and P&L under crisis scenarios - Integration of bankruptcy risk
Case study
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Applications – Credit Risk
Bancaja (Spain)
One year project and implementation.
47 credit segments for individuals and corporations:- Geographic, risk and economic activity criteria.
The software has been in use for one year. It is being successfully used for risk planning purposes and portfolio optimization. It helps decide the investment policies and the credit risk follow up criteria.
Expected and unexpected losses are calculated and included in the regular control procedures.
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Applications – Credit Risk – Bancaja (Spain)
Portfolio Optimization
To measure the aggregate risk of the bank’s debtors, taking into account the diversification and correlation effects
- Capital segments
- PD & LGD models by credit portfolio
To manage the credit structure to obtain a Risk Adjusted Return RAR:
- To optimize the investment in each portfolio through the adequate capital assignment according to different macroeconomic scenarios
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Applications – Credit Risk
Financiera Rural (Mexico)
One year project and implementation
10 segments were developed:- Geographic, by distribution channel and settlement procedures
The project has been successful. The tool is being used for reporting and endowment negotiation with the National Regulator (CNBV) and the Mexican Government.
Financiera is requiring the Regulator (CNBV) to approve the use of the software for management purposes:
- Prices fixing (Credit Risk Prime)
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Budgeted Portfolio orCurrent Portfolio or
Hypothetical Portfolio
Proposal
Results• B/S• P & L• Losses• Capital Req.• RAROC• Reg. Capital• ROE• Liquidity• etc
Feedback
Macro-economy Segment economies
Financial SystemDynamics (Integr.)
RDF Scenario Generator
Risk AppetiteOther Constraints
Objectives and applications of RDF
Calculation of regulatory or economic capital
ALM riskLiquidity, interest
GapsOther Treasury
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
The RDF method provides complete macroeconomic scenarios, from a given and known historic economic scene.
It allows to combine scenarios with the opinion and knowledge of experts, generating new macroeconomic scenarios.
It permits to differentiate behaviors at different geographic levels within a country, state, county, city or neighborhood.
Objectives and applications of RDF
Change in Real Estate values
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Objectives and applications of RDF
Change in Real Estate values
The RDF method allows a company to:
Quantify the capital required to stand a generalized and long downtrend in the economy.
Evaluate ex-ante the investment decisions for each credit portfolio (unique investments, diversified portfolios,…) through the risk adjusted profitability.
Evaluate the level of risk concentration of loses in Real Estate portfolio segments or regions.
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
1999-T1 2000-T1 2001-T1 2002-T1 2003-T1 2004-T1 2005-T1 2006-T1 2007-T1 2008-T1 2009-T1
PH (clientes)-Flias. activas clase alta IPC GENERAL OCUPADOS FBCF EURIBOR
-15.00%
-10.00%
-5.00%
0.00%
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10.00%
15.00%
20.00%
1999-T1 2000-T1 2001-T1 2002-T1 2003-T1 2004-T1 2005-T1 2006-T1 2007-T1 2008-T1 2009-T1
PH (clientes)-Flias. activas clase alta IPC GENERAL OCUPADOS FBCF EURIBOR
Demand adjusted to the economic scenario
Constant demand
Demand adjusted to a given macroeconomic model
The VARMA model allows to estimate future demand conditioned to the economic situation
The traditional model considers a constant demand for each class of client
Objectives and applications of RDF
Sales Planning
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
menos de 44 - 77 - 1111 - 1616 - 2121 - 30más de 30
Potential Market for a product
Tipologías Habits A B C D E F .... R
Productos de ActivosTarjetas de CréditoTarjetas de DébitoPréstamos ConsumoPréstamos HipotecariosPréstamos Financiación Vehículos..........
Productos de PasivoFondos de InversiónPlanes de PensionesPlanes de JubilaciónSeguros..........
Propensity of demand
Distribution of demographics
The analysis of the potential market in each zone considers the number of families of each socio type and the demand propensity for any product of the entity.
The analysis of the potential market in each zone considers the number of families of each socio type and the demand propensity for any product of the entity.
Individuals• Market potential estimated by office • Identification of offices with higher potential• Identification of expansion zones.
Market niches
Own offices and competitors in a given city
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EURIBOR Fondos de Inversión
Scenarios simulation
Map of income by zone
Objectives and applications of RDF
Sales Planning
© AIS 2002- 2012
G r o u p
© AIS 2002- 2012
Agenda
Presentation of AIS
Objectives and applications of RDF- Credit portfolio- Calculation of regulatory or economic capital- Change in Real Estate values- Sales planning
Technical architecture of RDF- How it works- Macro economic model formulae- Micro economic model formulae- Formulae to integrate both models
Initial test for integrated risks- Projected B/S and P&L under crisis scenarios - Integration of bankruptcy risk
Case study
© AIS 2002- 2012
G r o u p
AIS Intelligent Decisions
c/ Castillejos, 365, 2ª Planta 08025 Barcelona - Spain
Tel: +34 93 414 35 34 Fax: +34 93 414 10 28 www.ais-int.com
Thank you!
José Manuel Aguirre
