1Copyright © 2011 Tata Consultancy Services

Limited

Trends, Challenges & Focus Areas in Banking Risk

Management

September 24th , 2011

A Presentation by TATA Consultancy Services

Risk – Trends, Regulations & Challenges

always changing, always expanding

3

Regulations

T20 - Global Risk Trends, Challenges,

Regulations

Credit Concentration Risk 1

Credit Risk KPI /Dashboard 2

Enterprise Risk Management12

Risk Appetite Framework13

Dodd Frank Act 18

Basel III 19

Counterparty Credit Risk 3Operational Risk Components Integration14

Living Wills 20

Risk Platform Assurance Automation 4 Basel - IFRS Synergy15

Liquidity Risk 5 New Risk methodologies16

Stress Testing, RAPM 6 Risk and Fraud Analytics17

Governance, Risk Compliance 7

Integrated Data Management 8

Distressed/Special Assets Management 9

Country Risk 10

Integrating Risks 11

Basel III

learning from the shortcomings..time will decide

5

Basel III Overview

Pillar 1 - Minimum Capital Requirements Pillar 2 SREP& ICAAP

Risk Policy, Risk Governance

Pillar 1 & 3 - Disclosures

Capital Definition (Tier 1, 2)

Capital Ratios

Capital Deductions

Securitization Exposures

External Credit Ratings

Stressed VaR, IRC

Stressed Inputs for risk

models

Credit Value Adjustment

Wrong Way Risk

Liquidity Coverage

Ratio

Net Stable Funding Ratio

Liquidity Monitoring

Metrics

Stress Testing, Model

Validation, Back testing

Leverage Ratio

Capital Buffers ,

Global SIFI & Local SIFI

6

Basel III Overview

Pillar 1 - Minimum Capital Requirements Pillar 2 SERP& ICAAP

Risk Policy, Risk Governance

Pillar 1 & 3 - Disclosures

Capital

Capital Market Risk Counterparty Credit Risk

Capital Definition (Tier 1, 2)

Capital Ratios

Capital Deductions

Securitization Exposures

External Credit Ratings

Stressed VaR, IRC

Stressed Inputs for risk

models

Credit Value Adjustment

(CVA)

Higher Capital Charge for

Specific wrong way

risk

Liquidity

Liquidity Coverage

Ratio

Net Stable Funding Ratio

Liquidity Monitoring

Metrics

Stress Testing, Model

Validation, Back testing

Leverage Ratio*

Capital Buffers ,

Global SIFI & Local SIFI

Business &

Balance

Sheet

• Change in the

business , balance

sheet & product mix

• Buffers will affect

the profitability

Data &

Processes

• LRM & Stressed

VaR , CVA will need

huge amount of

additional clean

historical data on an

enterprise wide level

Technology &

Infrastructure

• LRM , CVA will also

require additional

investments in

Technology and

Infrastructure

Liquidity Risk Management

never given importance, now it is of prime focus

8

LRM - Genesis

2008 - 2010

BCBS

LRM Papers

2011 - 2012

Implementation

2013 - 2015

Observation

2015 - 2018

Liquidity

Reporting

In 2008 & 2009, BCBS published “Principles for Sound Liquidity Risk Management & Supervision”,

FSA LRM rules

Require all banks to significantly enhance their liquidity risk infrastructure & functionality in providing

granular liquidity-related data, in-depth analysis & reporting

Strong Governance Model

9

Lo

wH

igh

Co

ntr

ol/C

om

ple

xity

Management StylePassive Active

Cash Flow Gap Analysis

Integrated

Gap AnalysisTactical Liquidity

Risk Management

Structural Liquidity Risk

Management

Duration Gap

Analysis

Operational

Sensitivity Analysis

Concentration Risk

Behavioral Analysis

Stress Testing

Tactical

StrategicContingency

Planning

Risk Appetite @

Board Level

Geo HOs

SBU/LOBs

Board

of

Directors

LRM Head

ALCO/

LRM Committee

Governance Regulation Technology

Basel

III

LRM Maturity Grid

Integration of Risks

uniquely identify risk contribution

11

Integration of Risks for Enterprise Wide View

Treasury & Capital Markets

Source System

1

Source System ..n

Loan &Commercial

Source System

1

Source System ..n

Traded products

(Enriched) Data

Loan & Commercial

products (Enriched)

Data

Market Risk Engine

Scenarios Hierarchy PositionsAdd-on

VaR

Time seriesData

VaR LimitsPnL

Valuations

Common Services

SimulationEngine

Stress Testing

ScenarioGenerator

Credit Risk Engine

LGD PortfolioRisk

Mitigants

PD and Risk Modelling

RaRocFacilities/

Limits

Market RiskReporting Cubes

Credit Risk Reporting Cubes

Regio

ns

Busin

ess lin

es

Ratings

Curre

ncie

s

Limits Position

M Data VaR

Limits Exposure

Maturity EAD

Governance, Risk & Compliance (GRC)

for strategic decisions & actionable steps

13

GRC & Performance Conundrum

Stakeholders

Investors, Board Members, Risk Managers, Governance

and Compliance, Officers, Regulators, Customers,

Customers’ Customers, Suppliers, Suppliers’ Suppliers,

Larger Public

Organization

14

- 14 -

Governance Risk & Compliance - Components

•Governance

•Risk

•Compliance

•Audit

•Loss management

•Event management

GRC

Components

Enterprise level

Governance Reports

Compliance Reports

• Sox

• SEC, FINRA

• Fed/OCC, FSAs

• Basel II

• Legal

• Regulatory

• KYC

Risk Reports

• Regulatory

• Internal

Metrics & Trends

Dashboards & Alerts

GRC Controls

Enterprise level

•Enterprise Integration

•ETL

•Work Flow

• Document Mgmt

•Data warehouse

•Reporting

Technology

Enablers

Enterprise level

Business Systems

Silo level

•Corporate Governance

• Market Risk

• Credit Risk

• Operation Risk

• Compliance

• Trading

• Insurance

• Capital Mgmt

• Legal

• Sales

• Ethics

• Business continuity

• Information Mgmt

• Others

Enterprise Risk Management (ERM)

a culture, a philosophy an amalgamation of concepts

16

ERM Future State - Business Architecture

Risk

Assessment

Qualitative Scoring

Risk Prioritisation

Material Risks

7 Risk Quantification

Netting

Deposit Netting (IDNA),

Derivative NettingRepo Netting

Capital Calculations

Regulatory Economic

Modelling

PD, LGD, CCF/EAD, VaR, AMA (PE, LGE)

Retail Segmentation

Mitigants

InsuranceCollaterals

Guarantees

Hedge

New VaR methodologies

Integration of RCSA, KRI & Loss Data

8

Leverage Ratio

Capital Planning/ Projection

CapitalProjections

Projection ofDelinquencies, expected lossIFRS Loan

LossProvisioning

9

Risk Based Performance Measures

Earnings at Risk

RAPM, RAROC

10

Disclosures/Reports

Quantitative (COREP, FFIEC)

Qualitative (Risk Policy,Governance)

MIS Risk KPI Dashboard

External Reports Internal Reports

AuditLiving Wills

12

BI/Reporting

Risk

Identification

Financial Risks - Credit, Market,

Operational

Non-financial risks (Strategic, Reputational)

Pillar II Risks (Liquidity,

Concentration,IRRBB)

6

AssetsRisk ContextTrading Book(On Balance,

Client Specific)Banking Book

Business Units

Retail/Consumer

Commercial

Capital Markets

Securitisation

Business Strategy,

Objectives, Goals

Risk Policy

Risk

Governance

Risk Appetite

Special Assets

Business ProcessesSupport

Functions (HR,

IT, Legal,

Marketing)

Credit OriginationTrading

New Product Introduction

Structured FinanceCorporate Finance

Risk Culture

Trading Book(Off Balance,Proprietary)

12

3

4

5

Risk Monitoring & Control

Back TestingStress Testing &

Scenario AnalysisValidation of Internal

ModelRisk Based Internal

Audit

Risk Based Supervision (Regulator)

Risk Appetite, Tolerance, Limits, KPI

11

Data Management

single point of truth

18

Consumers Functional Areas

Enterprise Information Platform – Single Point

Of Truth

Data Sources

Customers

Loans & Leases

Equity

Traded

Securitization

Mitigants

Stressed Assets

Basel II

MIS (Portfolio/Risk)

F&A (US GAAP/IFRS)

Business Performance

Reporting (OCC, OFAC)

ALM

Risk Analytics

DWH

Enabling integrated view of customers, assets & liabilities

Compliance

Finance

Risk

Portfolio

Monitoring

19Copyright © 2011 Tata Consultancy Services

Limited

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