STRENGTHEN FINANCIAL STABILITY THROUGH EFFECTIVE RISK AND CAPITAL MANAGEMENT MAY 23, 2014
STEFAN DE LOMBAERT, SENIOR DIRECTOR MARTIM ROCHA, ADVISORY BUSINESS SOLUTIONS MANAGER, SAS RISK CENTRE OF EXCELLENCE- EMEA/AP C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
RISK AND CAPITAL MANAGEMENT
AGENDA
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Context •
Risk and Capital Management • The market status • Status in the Banks • Drivers for change and action •
SAS Approach •
Key points of value • Solution Process •
Risk Modeling and Calculation •
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C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
EBA Stress-test example
Case-studies
CONTEXT RISK AND CAPITAL MANAGEMENT
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
KEY MESSAGES
RISK AND CAPITAL MANAGEMENT
Financial institutions operate on Capital. The best they manage it, the better they will do on Returns
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
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The objective of capital management is to optimize the Banks's capital structure given the adopted risk profile.
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With capital being the foundation of which every bank is built upon., it is important to properly prepare for the expected and unexpected.
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To understand and optimize the bank’s capital adequacy for each business model, capital must be viewed from many perspectives. Growth, credit issues, earnings, interest rate fluctuations, and dividends have an effect on each of these perspectives.
RISK AND CAPITAL THE MARKET STATUS MANAGEMENT
Lessons from the financial crisis: •
In the absence of information banks spent capital that could have insulate them from losses
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Sound capital planning is critical for determining the prudent amount, type and composition of capital that is consistent with a longer-term strategy …, while also withstanding a stressful event.
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Banks’ processes were(are) not sufficiently comprehensive, appropriately forward-looking or adequately formalized
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Management teams underestimated the risks inherent in their banks’ business strategies and, in turn, misjudged capital needs
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RISK AND CAPITAL STATUS - FUNCTIONAL SILOS HAMPER MANAGEMENT DECISIONS
Issues Risk / Treasury
Finance
? Sales
Operations
Manual processes and low sophisticated technology. Higher risk on the reliability of the results. Regulators and shareholders uneasy C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
Translating data to knowledge manual interfaces Excel based Guerilla-tactics Decision support analytics Heterogeneous across silos Little firm-wide scenario analysis
Results Decisions based on intuition Not in support of the business process
RISK AND CAPITAL IMPACT MANAGEMENT •
Data discrepancies that require added reconciliation effort • •
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Cross reporting happens only in very aggregated levels, losing important detail and in many cases hiding problems that could be otherwise addressed pro-actively. •
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The world is flat but each region, demographic group, provided service has its particular characteristics – the devil is in the details as well as the return
Undermine any attempt of creating a framework of predictive analytics due to the lack a historical integrated information. •
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To overcome the difficulties on combining data, reporting is done in very aggregated levels – limits effectiveness
Difficulties on accurately calculate risk adjusted measures at the right level of detail, making decision around which products and which regions to invest almost only based on gut feeling. •
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IT systems are organized by departments – each uses it’s own coding, grouping, hierarchies, time reference, … Combined data doesn’t match, added effort for reconciliation and data quality
To anticipate the future you should look into the past, the more detailed you have on the past the best estimate you do on the future
Reduce drastically the number and depth of scenarios analyzed for planning. •
The cumbersome and manual based processes you have today take too much time for each analysis you do thus limiting the scenarios you analyze
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RISK AND CAPITAL DRIVERS FOR CHANGE AND ACTION MANAGEMENT
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Banks across many developed markets remain undercapitalized. • Unwilling, or unable, to write down asset values to more realistic levels and accept credit losses. • Many still under liquidity support from central bank with tight repayment deadlines. • Sub-10% ROEs have rendered many North American and European business models obsolete
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RISK AND CAPITAL DRIVERS FOR CHANGE AND ACTION MANAGEMENT
Basel III ICAAP
BCBS239 Principles for Risk Data Aggregation and Reporting
Capital Planning and Management
BCBS 277 Sound Capital Planning
… • • •
EBA Stress-testing (EUR) Risk Appetite Framework CCAR – Comprehensive Capital Analysis and Review (US)
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REGULATOR PUSH
RISK AND CAPITAL DRIVERS FOR CHANGE AND ACTION MANAGEMENT
Standalone impact of Basel III on Capital and Funding of Banks is Euro 1.6 Trillion (2019 target) : Roughly a drop of 400 bp in RoE Higher Costs of Capital
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RISK AND CAPITAL INTEGRATING RISK AND FINANCE MANAGEMENT
“Financial institutions can boost profitability by a better alignment of risk and finance” “investing more in technology to improve their ability to integrate risk information into financial and performance management”
“lack of integration between risk and finance has limited the effectiveness of decision-making around risk versus return, capital management and regulatory charge optimization”
“Integration of risk and finance reporting, together with greater analytical capabilities, is enabling financial institutions to manage the risk, funding, liquidity and capital requirements of their business in a more dynamic fashion”
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
SAS APPROACH RISK AND CAPITAL MANAGEMENT
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
RISK AND CAPITAL THE SAS APPROACH MANAGEMENT
Capital Planning
(Optimized) allocation of capital to profit centers
Forward Looking Planning Capital Estimate surplus / deficit in capital over projected planning horizon
Capital Planning and Management Risk Adjusted Performance Measurement
Integrated Risk and Financial reporting Risk Adjusted Performance of Capital
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Capital Allocation
RISK AND CAPITAL MANAGEMENT
THE SAS APPROACH
Capital Monitoring, Capital Projections, Capital Alocation, Return on Capital Reporting
Risk and Finance Reporting
Projection
Capital Planning & Management
Risk and Finance Integrated Datamart
Consolidation
Calculation
Credit Risk Scoring and Rating
Credit Portfolio Risk
Collection
Market Risk
ALM & Liquidity
Op Risk
Data Collection / Data Quality
Trading
Loans
Treasury
Deposits
General Ledger
New or Reuse existing Risk Engines
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
KEY POINTS OF VALUE
Integrate Risk and Finance • Align risk, capital and business goals
Manage the process – workflow and automation • Collect and consolidate inputs • Reviews and approvals
Pre-configured capital planning framework • Full pro-forma projection • Dimensions, formula, templates
Instant consolidation for iterative scenario analysis • Automated construction of pro forma financials
Enable an integrated Risk and Finance reporting repository • Ensure consistency • Transparency and auditability
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CAPITAL PLANNING SOLUTION PROCESS AND MANAGEMENT
Prepare Data
Model
Model
Economic Forecasts
• • • • • •
Workflow
Consolidation and Review
Manual
Rate Tables Loss rates Prepay rates Payment Charge offs Loan rates Deposits rates ….
Line of Business Input
• • • •
Balance Sheet Income Statement
Operating Budgets New Loans Deposits …
Finance Data
Business Rules Risk Data
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Projections
Automation and Workflow
Capital Available Capital Ratios
Analysis, Reports & Templates
CAPITAL PLANNING PROJECTION OF BALANCE SHEET, INCOME STATEMENT AND MANAGEMENT AND CAPITAL
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RISK MODELLING & CALCULATIONS RISK AND CAPITAL MANAGEMENT
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
RISK MODELLING & HOT TOPIC : EBA STRESS TESTS CALCULATIONS
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EBA issued macro-economic scenarios, developed by ESRB.
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Exercise runs from May till Oct 2014.
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For 124 banks in Europe, on Group level. GR : Alpha Bank – NBG – Piraeus Bank – Eurobank • CY : BoC – Hellenic Bank – Coop Central Bank •
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Local regulators assess, EBA coordinates, stores & publishes results.
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Scenarios for 3 years, with hurdle rates; • •
Base scenario : 8% Common Equity Tier 1 Capital Adverse scenario : 5,5% Common Equity Tier 1 Capital
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RISK MODELLING & MORE DETAILS CALCULATIONS
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Starting Point : Figures as of 31-12-2013 with STATIC Balance Sheet. • • • • •
Zero growth, just replace matured positions Same currency mix Same business mix No capitalisation measures allowed No workout of defaulted assets (they disappear from the BS)
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Base scenario assumes low inflation (< 1.5%) and is based on Winter 2014 forecasts of DG ECFIN, with a 2016 model-based extension.
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Adverse scenario looks at most pertinent systemic risks (PD decrease, Bond Yield increase, Funding Cost increase, ….)
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Russian Gas, UK Housing ????
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Reporting Templates
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RISK MODELLING & WHICH SCENARIOS (1/3) ? CALCULATIONS
5 Broad Categories •
Focus Area • •
Market Risk Credit Risk
Market Risk List of individual RF values provided under Base, Adverse & 4 Historic Crises Scenarios => Worst of 6
Credit Risk •
Other areas • • •
Securitization Risk Sovereign Risk Funding Cost & NII
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
Starting from existing PD/LGD, moving to projected Point-in-Time PD/LGD (ev. Rating Migration), per COREP Asset Class, based on 2 macro-economic scenarios
RISK MODELLING & WHICH SCENARIOS (2/3) ? CALCULATIONS
Securitization Risk 5 Broad Categories •
Focus Area
Stressed RW for STD (5 Ctp Risk levels) & IRB Approach (12 Ctp Risk levels) and 3 Product Buckets under Base & Adverse Scenarios;
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Market Risk Credit Risk
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Low Risk Medium Risk High Risk
ABS + EMEA RMBS EMEA CMBS + CDO NA RMBS + CMBS + CDO
Other areas • • •
Securitization Risk Sovereign Risk Funding Cost & NII
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
Sovereign Risk Bond Valuation haircuts for M-to-M Approach, by Country & Tenor
RISK MODELLING & WHICH SCENARIOS (3/3) ? CALCULATIONS
5 Broad Categories •
Focus Area • •
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Market Risk Credit Risk
Funding Cost & NII Banks will have to use their own methodology in projecting lending and funding rate paths, looking at; •
Other areas
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•
•
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Securitization Risk Sovereign Risk Funding Cost & NII
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C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
Macro‐economic environment (GDP, unemployment, house prices, etc.); Evolution of reference rates (e.g. swap rate curve); Market structure (market power – potential to mark-up over marginal cost); Credit risk and its effect on setting the interest rate; Supply constraints (capital position, liquidity position).
RISK MODELLING & WHICH CALCULATIONS ? CALCULATIONS
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Market Risk
Calculation distinguishing between VaR Banks (revaluation of positions) and non-VaR Banks (reduction in Net Trading Income)
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Credit Risk
Calculation of Provisioning & RWA, with constant residual maturity !
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Securitisation Risk
Calculation of Provisioning & RWA
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Sovereign Risk
Banking Book : RWA AsF & HfT : M-to-M on stressed factors + haircut
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Funding & NII
NII after shocked CoC and lending/borrowing rates
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RISK MODELLING & CONCLUSION CALCULATIONS
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From the details of the methodology & the scenarios it should be clear that as much as possible calculations need to be executed with existing tools & methodologies, except for the simplifications.
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But…..since this will involve indeed a multitude of systems and entities, there is a need for a central scenario repository and a central result data repository.
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One can expect that in a later stage the stable BS restriction will be removed - at least for internal stress purposes - in which case a central set of projection rules become a vital part of the solution as well.
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And….a central set of reports will conclude the infrastructure
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
RISK AND CAPITAL MANAGEMENT
THE SAS APPROACH
Capital Monitoring, Capital Projections, Capital Alocation, Return on Capital Reporting
Risk and Finance Reporting
Projection
Capital Planning & Management
Risk and Finance Integrated Datamart
Consolidation
Calculation
Credit Risk Scoring and Rating
Credit Portfolio Risk
Collection
Market Risk
ALM & Liquidity
Op Risk
Data Collection / Data Quality
Trading
Loans
Treasury
Deposits
General Ledger
New or Reuse existing Risk Engines
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
CASE STUDIES RISK AND CAPITAL MANAGEMENT
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
UNICREDIT GROUP RISK AND FINANCE INTEGRATION IN ACTION Roberto Monachino, CFO Head of Data Governance - UniCredit Group •
Data governance organization is an enabler to apply the target performance risk adjusted measurement framework starting from product, customer and business area consolidated by legal entity and country up to group level, reconciled with accounting with integration of risk related data. Consistent Group Golden Profitability Rules (PGR) and Data Governance Rules were adopted across the organization and laid down in a single vocabulary and a common logical data model to ensure comparability at Group level. Therefore, business data elements (BDEs) were produced locally and merged into a unique DWH repository aimed at avoiding overlapping and redundancies, creating a common language and optimizing data flows. BDEs for local needs may be added but require Central approval before implementation. A governance tool within the DWH controls transparent workflows for parameters, rules and adjustments across business areas. Alignment between business and IT is also enabled by a data lab environment. It fills the gap between a business idea and the ability to implement it. Existing data can be accessed and new data be added into a „sandbox‟ to prototype new BI deliverables for business. When approved they can be implemented in the production database.
Risk Adjusted Performance by Product, Customer Segment, Business Area, Legal Entity and Group
Risk and Finance Reconciled
Single Vocabulary and a Common Logical Model
In this presentation he will go through all the above steps, showing concrete experience on how the entire value chain from Data Production to Data Delivery has been considered a success experience for the final business community. Shorten the data process is a key element for having more time to do better analysis and support the decision making process.
One Unified source for Capital Planning and Regulatory Exercises – EBA Stress-test, ICAAP and BCBS239 compliant
UniCredit is one of 25 banks operating worldwide with extensive international presence spanning 50 markets and about 9,400 branches. The company is the result of the merger of nine of Italy‟s largest banks, the Capitalia Group and their combination with the German HVB Group, including Bank Austria and its 19 Eastern European country organisations. The divisional business model structured by customer segments and regions is supported by global services including the Group‟s centralised risk management and information technologies.
Business Model supported by Global Services for about 9400 branches and 50 markets where Unicredit is present
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PART OF BIG DUCTH FINANCIAL SERVICES GROUP
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FRIS: FINANCE & RISK INTEGRATED SOLUTION
FRANCO-GERMAN CAPITAL PLANNING AND MANAGEMENT REGIONAL BANK
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The bank has integrated already finance and risk figures using SAS. • Recently enhanced the application with sales planning • and is now moving forward to an integrated finance and risk plan. • Next project will be RWA planning, using Portfolio based Asset plans and applying migration matrices on customers rating to determine the change of RWA over the plan period of 5 years
C op yr i g h t © 2 0 1 4 , S A S I n s t i t u t e I n c . A l l r i g h t s r es er v e d .
AROUND 20 BILLION TOTAL ASSETS
Improve timeliness and accuracy of reporting. Streamline budgeting and forecasting process Minimize manual spreadsheet processing Support various reporting requirements from dashboard to KPIs, from static reports to multidimensional analysis Roadmap for Risk Adjusted Performance Management
THANK YOU
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