Beyond Compliance:Extending the Value of Risk Insights

Jin Oh, Moody’s Analytics

Roshni Patel, Moody’s Analytics

Mehna Raissi, Moody’s Analytics

Agenda Highlights

‣ Current Risk & Finance Trends and Role of Technology

‣ Interconnectedness of Risk and Finance

‣ Beyond Compliance, Thinking Strategically

Current Risk & Finance Trends and Role of Technology

What are some of today’s risk management concerns?

Data Quality &

Availability

Internal

Expertise

Complexity of

ModelsStandardized

Process

Different Modeling

Approaches

Balancing old and

new technologiesUnforeseen

Market Changes

Ongoing

Monitoring/Validation

Lack of Integrated

Frameworks

Internal

Priorities

ComplianceSystematic

Qualitative

Information

Risk Management Professionals

Our model risk management relies on multiple systems, separate excel, SAS or R / Python codes, and model documentation spread out

across many different teams.

Traceability is a problem as systems for handling datasets and modelling decisions are often missing or spread

across multiple divisions.

Many of our processes are labor intensive and rely on knowledge of the specific

individuals.

”

New developments or changes to existing models require a long project execution

timeline and considerable effort for implementation/testing.

Creating a governance structure and maintaining validation requirements in a streamlined and timely fashion is a challenge.

Considerations for Risk Management Ownership and/or Partnership

‣ Balancing the cost to build vs. buy based on organizational strengths and goals

Personnel Costs

Data Maintenance

Validation TechnologyOne-Time vs.

Recurring

Enabling Optimized Risk Management with Technology

Ideal State Example: Connected risk management across the credit life cycle

Market AnalysisPre-

Qualification

Origination &

Risk Rating

Portfolio

MonitoringCompliance

Assess,

compare, and

understand

market dynamics

for your

portfolios

Pre-qualify by

running potential

deals before

accruing

business costs

Scale with

consistent

origination

practices & risk

rating using best-

in-class

methodologies

Monitor all your

exposures for

deterioration and

empower your

team take to

action

Manage the

complete IFRS9,

CECL, and

stress testing

workflow, with

consistent

modeling

expertise across

all asset classes

Rest of World Country specific Central bank / Regulator view

vary Huge investments in local country

clouds

Europe ECB and PRA comments and

guidance around use of cloud Innovation and investment on

“Technology Innovation” Automation of processes via

Machine Learning and AI

Americas More competitive marketplace

with the emergence of FinTech More complex accounting

standards Automation of processes via

Machine Learning and AI

Technology Evolution…

…and Why Is It a Priority!

› Connect an organisation› Sound model life cycle – scalability › Balancing current state with the future

state 2025 view…set the foundation!› Growth

Operational Efficiency Cost

› Expenditure› Economies of scale › Competitive market

Resources

› Scalability› Flexibility of understanding

different elements› Streamlining and adaptability

Regulation and Accounting Standards

› IFRS9 and CECL – day 1 profitability impacts

› Focus on data and model accuracy (ICFR in US and TRIM in Europe)

Local vs International

› Scope variations› Greater complexities› Various different drivers and

stakeholders› Country nuisances

Market

› Greater competition: SME and Fintech

› Demand – more speed, ease of use, transparency for volume based world, accuracy

Technology

Interconnectedness of Risk and FinanceRegulatory and Accounting Rules Driving Convergence with Enterprise Risk

Challenges today…

Business

• Shifting from short-term to 10 year long term views

• Transformation and Innovation teams

• Skillsets• Portfolio Strategies, investment

and management

EMEA

• Reactive state thus far• No linkages amongst functions• Divergence in strategies and

independent goals • Interconnectedness increasing• Accountability and ownership

from top-down

Continued focus from Regulators on

ICAAP, Stress Testing, Reviews of Internal

Models, ILAAP

How to link the Risk and Finance requirements to

Business and Economists

Americas

Increased Requirements including CECL in a

limited time

• Still in a reactive stage to each required mandate

• Silo operations to meet the deadline – not enough time to execute a strategic interconnected view

• CECL bringing different functions together

• Accountability from top-down

Having the Right People at the Table is Critical for Risk Management

Connect Stakeholders Via a Common Language & Technology

Underwriting

Risk Management

Line of Business

Finance

Accounting

Portfolio Management

Technology

Tax/Procurement

Risk and Financial Management Target Capabilities

Underwriting

Forward looking view of credit

Enhanced assessment taking into account obligor/facility characteristics and the macro economic outlook

Pricing

Measuring the impact of Expected Credit Loss on credit earnings

Consideration of impact of scenarios on credit quality and staging

Risk Measurement and Provisioning

Scenario driven assessment of default and severity

Formalisation of the idiosyncratic and systemic effects on risk assessment

Stress Testing and Strategic Planning

Consistency in methodology and scenarios for alignment between BAU risk management and stress testing

Ability to quickly assess impact of an evolving world on existing and emerging risks

Embedding scenario based analysis and stress testing into strategy and decision making

Portfolio Management

Ability to identify and explain impact of IFRS9 on deal and portfolio risk and earnings

Understanding of portfolio risk profile and concentrations to detect sources of earnings volatility

Definition of appropriate actions to improve portfolio’s risk and return

Governance

Breaking of business and function silos through rationalisation of operations and decision making

Extended scope of Risk Management’s role in managing the firm’s financial resources

Strategic and Operational Implications

Measure, Assess and digest impact

of changes in operating model and

infrastructure

Business decision making, taking

into account forward looking

macroeconomic outlook

Integrated Risk management

framework

Key components

2019 sees a change in

dynamics for banks, with

introduction impairments and

changing business dynamics.

Manage capital, address direct effect

on Tier 1

Improve profitability, incorporate

Lifetime ECL and address volatility impact

on growth strategies

Diversification to foreign operations

Acquisitions in foreign banks

Jurisdiction specific strategies

Risk Appetite impact and monitoring

Resource Mix is changing, to reflect Risk and Finance data and processes

Global vs Local exptertise to address Group vs. Sub requirements

Consistency of skillset across requirements (ST, ICAAP, IFRS9/CECL)

Operational cost - to support multiple

processes within limited budget

Infrastrucure requirements - Tactical vs.

Automated solution

Business costs to adopt new regulation,

validation efforts, model maintanance,

enhancing business requirement (e.g.

Origination, RAROC)

IFRS9/CECL forecasting to provide

multiyear view of ECL under stress

scenarios and manage volatility

linkage to ICAAP, Regulatory Stress

Testing

Pre and post deal pricing as a business

impact, forecast RAROC for new deal

Limits setting and deal structuring

PeopleBusiness

StrategiesST/ ICAAP/

RAROC Operations

Future Changes

Rapid technology

innovation

Management of this

progression

Global consistencies

Benchmark models

Adapting quickly to requirements

such as Regulatory Stress Testing,

ICAAP, and Accounting Standards

Key skills set and capability

development

Beyond Compliance, Thinking StrategicallyUnification and Efficiency

Embedding into Business

The Strategy Behind Risk Management Governance

Should be about long-term business goals not the short-term fixes

Regulatory Aligned Model Development & Implementation

Modeling in a Systematic & Transparent Environment

Producing repeatable and

understood monitoring,

validation and applicability

reports

Determine organizational model tailoring and thresholds

based on business practices

Implementing Model Lifecycle Best Practices

Integration

Development

Implementation

Deployment Development

API

Best Practices

Define structured models by

asset class and purpose

Utilize comprehensive

development and validation

datasets

Leverage expert modeling

frameworks & processes

Link models with the

associated business process

Automate traceability and

documentation

Establish ongoing monitoring,

testing and validation

frameworks

Data

Models

Expertise

Integrated Systems

System Record

Controlled Process

Linking the Model Lifecycle to the Business of Lending

CFO and ControllerRisk and FinanceCredit On-Boarding

CECL/IFRS9 cornerstone

Capital PlanningEPS forecast

Peers analysisROE

decomposition

Profitability analysis

Portfolio Acquisition and

M&A

Pricing

Origination process

Structuring

Origination activities under the new CECL/IFRS9 regime requires new rigor in terms of data capture at origination and better alignment of risk right at the point of on-boarding Portfolio

Management

Reserving at time of origination changes the profitability equation requiring active management of portfolios and understanding options to manage returns. The more prepared institutions will lead to better performing banks

Understanding where one stands with respect to peers, and have the ability to evaluate portfolios or bank acquisitions within the capital planning and EPS forecasting framework will be a key capability all institutions should have

Seamless Integration of Lending with Management of Credit Lifecycle

In Summary: Keys to Addressing the Challenges

» Ensure traceability by allowing users to chosefactors and store data. Make modelling decisionsfrom data quality andmodel capabilities

» Combine internal and external data in aseamlessway

» Allow the users to see results in real time withthe option of writing automatic reports in yourchosen format

» Run extensive modelling jobs with increasedefficiency by using cloud based computingpower

» Publish final models via API’s and place intomodel inventory tomake it “production ready”

» Auditability and validation framework formodels and regulatory requirements

The Challenge: Effectively Conducting Model Risk Management

Best Practices: A workflow and mass scale approach to Model Risk Management

» Banks and non-banking financial institutionsmodel risk management often rely on multiplesystems and model documentation spread outacrossmany different teams

» Many of these processes are labor intensiveand rely on knowledge of the specificindividuals

» Traceability often becomes a problem assystems for handling datasets and modellingdecisions are often missing or spread acrossmultiple divisions

» New developments or changes to existingmodels require a long project executiontimeline and considerable effort forimplementation/testing