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Basel III compliance implementation has significant implications for risk management practices across the banking industry. The presentation, given by Pierre Gaudin Director - Enterprise Risk Solutions at Moody's Analytics, is from a conference organized by The Asian Banker in Kuala Lumpur on risk management.
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Risk Management Transformation& Basel III ImplementationOverview of practices and trends
Presented by Pierre GaudinDirector – Enterprise Risk Solutions, Moody’s Analytics
May 2014
Agenda
Basel guidelines have consistently promoted risk transformations across the financial industry. Bringing Implementations challenges in terms of data management, risk models and infrastructure.
1- How Basel requirements affects typical data flow infrastructures
2- How BIII liquidity monitoring and FTP practice affect cash flow modeling
Enterprise Risk Solutions
2- How BIII liquidity monitoring and FTP practice affect cash flow modeling
3- How stress testing and forecasts practices initiated in US and EU can leverage an integrated infrastructure in a cost efficient way
2
How do Basel requirements affect risk management data flows & infrastructures ?
Enterprise Risk Solutions
data flows & infrastructures ?
3
Credit Risk Silo
Data and processes are commonly organized in silo
Risk Management Data flows using front office transactions for Risk Management purpose typically fall into 3 silos
Using different data to deliver various Measurements
Using different Models in
Market Risk Silo Finance/ALCO Silo
Ratings Models
Asset Classes
Cash Flow Projections
Behavioral ModelsPricing
Stochastic Models
RWA / ECProvisioning
Interest Rate RiskLiquidity Risk
Profitability & FTP
MR Capital - VaRExposure Profile
Sensitivities
Risk Management
Governance & Compliance
Enterprise Risk Solutions
nature
With different frequency and data availability
At different aggregation level
Asset Classes
Retail Scoring
CRM Allocation
Behavioral Models
Budgets assumptions
Hedging & Pricing
Stochastic Models
Position Keeping
4
Deposits / CasaLoans
CommitmentsSecurities
CounterpartiesGuaranteesCollaterals
OTC Netting
Wholesales – RetailTrading
SecuritiesDerivatives
Hedges&
Funding
Treasury – Capital MarketFront Office
Daily or WeeklyIntraday Monthly or Quarterly
Detailed Assets & CounterpartiesHigh Data Volumes
Semi Detailed Assets & LiabilitiesMedium Data Volumes
Detailed Trading PortfolioLow Data Volumes
Basel 2 initiated a first rationalization: Data Warehouse
Credit Risk SiloMarket Risk Silo Finance/ALCO SiloRisk Management
Governance & Compliance
Data Warehouse initiatives have been promoted by Basel II requirements » Centralization of detailed data
» Data Quality Management & GL reconciliation
Enterprise Risk Solutions
Data WarehouseData Warehouse
5
Deposits / CasaLoans
CommitmentsSecurities
CounterpartiesGuaranteesCollaterals
OTC Netting
Wholesales – RetailTrading
SecuritiesDerivatives
Hedges&
Funding
Treasury – Capital MarketFront Office
Daily or WeeklyIntraday Monthly or Quarterly
Detailed Assets & CounterpartiesHigh Data Volumes
Semi Detailed Assets & LiabilitiesMedium Data Volumes
Detailed Trading PortfolioLow Data Volumes
Data Warehouse
However, different dataflow frequency prevent this model to apply across all silos, especially for intraday Market
Risk.
Also, daily T+1 ALM time window were often incompatible with data
warehouse loading delays .Typically demanding a direct feed for
a portion of the portfolio
Basel 3 LCR/NSFR merges Credit & Cashflow dataflowsRisk Management
Governance & Compliance
Credit Risk Silo
Ratings Models
Asset Classes
Retail Scoring
RWA / ECProvisioning
Finance/ALCO Silo
Cash Flow Projections
Behavioral Models
Budgets assumptions
Interest Rate RiskLiquidity Risk
Profitability & FTP
Liquidity Contingency Planning
LCR / NSFRLiquidity Contingency
Monitoring
Cash Flows Projections
Behavioral Models
Ratings Models
Basel III requirements yet again provides challenges to dataflow structures
Creating a new liquidity data flow merging cash flow projections and credit risk asset classes and risk weight
Cash flow projections now need to apply on detailed
contract and issuer
Enterprise Risk Solutions
Deposits / CasaLoans
CommitmentsSecurities
CounterpartiesGuaranteesCollaterals
OTC Netting
Wholesales – RetailTrading
SecuritiesDerivatives
Hedges&
Funding
Treasury – Capital MarketFront Office
CRM Allocation
Monthly or Quarterly
Detailed Assets & CounterpartiesHigh Data Volumes
Budgets assumptions
Hedging & Pricing
Daily or Weekly
Semi Detailed Assets & LiabilitiesMedium Data Volumes
Data Warehouse
Asset Classes
Up to Daily
Detailed Assets, Liabilities, Commitments and issuers
6
contract and issuer segmentation, up to daily
Behavioral models for Liquidity Monitoring need to account for
asset classes and credit ratings
How do liquidity monitoring and FTP practiceaffect cash flow modeling ?
Enterprise Risk Solutions 7
Europe publishes Monitoring Reporting Requirements
EBA has recently published Additional Liquidity Monitoring Metrics requirements
Providing a view of Institutions internal liquidity behaviors model, projected on to LCR regulatory classifications
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Contingent Liquidity Behavioral ModelingLiquidity Reserve and Inflows rely on counterparty and credit lines characteristics, especially Performing statuses and ratings. Monitoring demands a clear understanding of the effect of these drivers on internal cash flow models.
This way, liquidity managers can provide the institution with a framework for:- Contingent Liquidity Monitoring & Ratios Anticipations
- Fund Transfer Pricing accounting for Contingent liquidity on both assets and liabilities
Enterprise Risk Solutions 9
FTP and Profitability Analysis then leverage detailed data
Managing profitability then demands the attribution of the liquidity & contingent liquidity spreads into FTP policy.
FTP therefore relies on data and models coming from the liquidity contingency planning dataflow
Risk Management
Governance & Compliance
Credit Risk Silo
Ratings Models
Asset Classes
Retail Scoring
RWA / ECProvisioning
Finance/ALCO Silo
Budgets assumptions
Profitability AnalysisPro forma FTP
Liquidity Contingency Planning
LCR / NSFRLiquidity Contingency
Monitoring
Cash Flows Projections
Behavioral Models
Ratings Models
Asset Classes
Liquidity Contingency Planning
LCR / NSFRHQLA Selection
Monitoring
Cash Flows Projections
Behavioral Models
Ratings Models
Asset Classes
ALM
Budgets assumptions
Hedging & Pricing
FTP Spreads
IRRBBProfitability Analysis
Pro forma FTP
Enterprise Risk Solutions
In turn, ALM managers then need to leverage the same data and models within the balance sheet forecasts, pro forma FTP models and forecast profitability analysis.
10
Deposits / CasaLoans
CommitmentsSecurities
CounterpartiesGuaranteesCollaterals
OTC Netting
Wholesales – RetailTrading
SecuritiesDerivatives
Hedges&
Funding
Treasury – Capital MarketFront Office
CRM Allocation
Monthly or Quarterly
Detailed Assets & CounterpartiesHigh Data Volumes
Hedging & Pricing
Daily or Weekly
Semi Detailed Assets & LiabilitiesMedium Data Volumes
Data Warehouse
Asset Classes
FTP Models
Up to Daily
Detailed Assets, Liabilities, Commitments and issuers
Asset Classes
FTP Models
Up to Daily
Detailed Assets, Liabilities, Commitments and issuers
How stress testing and forecasts practices can leverage an integrated infrastructure in a cost efficient way
Enterprise Risk Solutions
cost efficient way
11
Stress Testing Regulatory Framework in EU & USinsist on an automated bottom up governance process
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1.European Banking Authority (EBA), European Central Bank (ECB), National Competent Authorities (NCA), Bank of England (BoE), Prudential Regulation Authority (PRA)2.Asset Quality Review (AQR)3.Advanced data collection (ADC), Transparency (TR) and Calculation, Validation & Support (CSV) Templates4.Firm Data Submission Framework (FDSF)5.Financial Policy Committee (FPC); Capital Requirements Directive IV (CRD IV)6. Bank Holding Companies (BHC), Foreign Banking Organizations (FBO)
12
The Industry is shaping stress testing task forces , focusing on processes automation, leveraging enterprise wide infrastructures
• Data quality and integrity• Harmonized NPLs and RWAs definitions
• Regulatory and internal driven scenarios• Strategic planning• What-if analysis• Inclusion on the living wills • Quantify contingency planning metrics
• Forecasting dividend policies• Reverse Stress Testing• RoE/RoA analysis/projections
under scenarios/strategies• Budgeting planning
AQR & Balance Sheet
Reviews
Strategic Planning & Forecasting
Dividend Planning & Budgeting
Enterprise Risk Solutions
• Quantify contingency planning metrics
• CCAR, PRA, EBA, ECB• Linkage stress testing to capital plan• Dynamic balance sheet forecasting• Pre-provision net revenue forecasting • Margins & Volumes• M&A activity
• Growth strategy, M&As, deleverage• Setting risk limits & RAROC pricing• Capital allocation
• ILAAP• LCR forecasting• Funding projections• Liquidity stress testing• HQLA optimization strategies
Stress Testing
Capital Planning &
ICAAP
Risk Appetite
Liquidity Planning &
Management
The most important challenge for the next 3-5 years is process & workflow efficiency
13
Overall: Now interconnected practices can leverage the integration incepted by Basel III requirements
Deploying Stress Testing tools as an autonomous computation, leveraging risk results and data coming from different silos, actionable in enterprise wide stress tests as consistent stress assumptions are synchronized on macro-economic factors
Risks and Performance Governance then leverage
» Data Integration
Enterprise Risk Solutions
» Data Integration
» Consistent models
» Common Stress Assumptions
The resulting decision can then applying back to Origination point, through
» FTP / Risk Based Pricing
» Credit Approval and Concentration Limits
14
Moody’s Analytics is recognized as a leader in risk and regulatory solutions.
Voted #1 in Economic Capital Calculation Management –
third consecutive year
» #2 in Regulatory Capital Calculation and Management
» Top Vendor in Liquidity Risk
Ranked 40th Overall
» Moody’s Analytics has been voted as a Preferred Vendor
Voted #8 Top Vendor Overall –up significantly
» #1 in Economic & Regulatory Capital Calculation Solutions
» Top Vendor in Regulatory Compliance and Reporting and
Voted #5 in Overall Rankings – up from #7 (out of 100)
» #1 in Organizational Strength for second consecutive year
Enterprise Risk Solutions 16
» Top Vendor in Liquidity Risk Management
» Best Regulatory Reporting Software
» Best Data Management Service Provider
Pricing, Valuation & Risk Management Award 2012
» Moody’s Analytics #1in customer service by
Structured Credit Investor
Recognized for Risk Management Technology
» Risk Magazine predicts Moody’s Analytics will be one
of the most influential Technology Vendors over the
next five years
Compliance and Reporting and Credit Risk Management
Ranked in Top Five for Two Risk Management Areas
» #3 Regulatory/Economic Capital Calculation
» #5 Credit
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