RISK AND FINANCE INTEGRATION IN THE CAPITAL PLANNING … · 2016-03-11 · and Management •Credit Risk Management Benefits •Streamline budgeting and forecasting process •Improve

Copyr i g ht © 2012, SAS Ins t i tu t e Inc . A l l r ights reser ve d .

RISK AND FINANCE INTEGRATION IN THE

CAPITAL PLANNING PROCESS

MARTIM ROCHA – RISK COE

OCTOBER 2015


RISK AND

CAPITAL

MANAGEMENT

AGENDA

• Context

• Risk and Capital Management

• The market status

• Status in the Banks

• Drivers for change and action

• Capital Planning and Management

• SAS Approach

• Architecture

• Process and Model

• References


RISK AND

CAPITAL

MANAGEMENT

WHAT IS THIS ABOUT

• The objective of capital management is to optimize the Banks's capital

structure given the adopted risk profile.

• With capital being the foundation of which every bank is built upon., it is

important to properly prepare for the expected and unexpected.

• 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.

Financial

institutions operate

on Capital, the best

they manage it, the

better they will do

on Returns


RISK AND CAPITAL

MANAGEMENT

INTEGRATING RISK AND FINANCE – ANALYSTS VIEWPOINT

“lack of integration

between risk and finance

has limited the

effectiveness of

decision-making around

risk versus return, capital

management and

regulatory charge

optimization”

“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”

“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”


RISK AND CAPITAL

MANAGEMENTDRIVERS FOR CHANGE AND ACTION THE REGULATORY PUSH

Capital Planning and Management

BCBS239

Risk Data Aggregation and

Reporting

Basel III ICAAP Capital

Adequacy

Recommendation A4 of

ESRB/2012/2

Funding Plans

BCBS 277 Sound Capital

Planning

EBA, CCAR, APRA

Regulatory Stress-testing


RISK AND CAPITAL

MANAGEMENT

STATUS –

FUNCTIONAL SILOS HAMPER DECISIONSIssues

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 processManual processes and low sophisticated technology.

Higher risk on the reliability of the results.

Regulators and shareholders uneasy

Finance

Operations

Risk /

Treasury

Sales

?


RISK AND CAPITAL

MANAGEMENTIMPACTS OF NOT USING A SOLUTION

• Data discrepancies that require added reconciliation effort

• Cross reporting at a highly-aggregated level - losing important detail and

hiding problems

• Risk adjusted measures at the right level of detail to make fact-based

investment decisions about products, regions etc.

• Undermine any attempt of creating a framework of predictive analytics due

to the lack a historical integrated information

• Reduce drastically the number and depth of scenarios analyzed for

planning

INCREASE OPERATING

EXPENSES

MISSING OPORTUNITIES

MISSING OPORTUNITIES

UNDER OPTIMIZE RETURN

LACK OF INFORMATION TO

TAKE DECISIONS


WHY BANKS NEED TO DO IT?

• Compliance

• Regulatory Stress-testing (EBA, CCAR, APRA, …)

• ICAAP

• Cost Reduction

• Streamline IT processes, eliminate Data issues, reduce man-hours

involved

• Increase Return

• Strategic Planning

• Identify opportunities to increase RoE

• Move the bank to (again) be interesting for shareholders

Capital

Planning and

Management


RISK AND CAPITAL

MANAGEMENTARCHITECTURE

Capital Monitoring, Capital Projections, Capital Allocation, Return on Capital

Calculation

Collection

Consolidation

Risk and Finance - Integrated Data mart

Credit

Portfolio

Risk

Market

RiskALM & Liquidity Op Risk

Projection Capital Planning & Management

Data Collection / Data Quality

Trading Loans Treasury Deposits General Ledger

Credit Risk Scoring and

Rating

Reporting Risk and Finance Reporting SAS Capital

Planning &

Management

Leverage existing

Risk Engines


RISK AND CAPITAL

MANAGEMENT

RISK AND FINANCE DATA REPOSITORY

Unique integrated Repository for Risk and Finance Data

Unique integrated Repository for all Regulatory Reporting

Reconciled between risk and finance and between internal and

regulatory perspectives

Avoid duplication and data redundancy

Incorporates EBA recommned DPM data model

One central place to maintain and extend regulatory mappings

Traceability, lineage back to the source system

Open Data Model - ability to adapt to the banks specific

Incremental implementation

Risk and Finance

Integrated Data mart


RISK AND CAPITAL

MANAGEMENTDATA POINT MODEL – DPM


RISK AND CAPITAL

MANAGEMENTMAPPING REGULATORY TO INTERNAL

dSE_x2 – Central Banks 0200 – Central Banks

dSE_x4 - Credit Institutions

G008 – Central Government

G009 – Government Local/Regional

dSE_x5 – General Governments

B036 - General Banks

B038 - MDB’s

dSE_x9 – Non-Financial Institutions

0251 – Corporates excluding Financial Institutions

P021 - Insurance

dSE_x12 – Other Financial Institutions

0299 – Other Financial Institutions

dSE_x6 – Households P049 - Individuals

Regulatory Categories Internal Coding

Company Confidential - For Internal Use Only

Copyright © 2014, SAS Insti tute Inc. Al l r ights reserved.

RISK AND CAPITAL

MANAGEMENT

HOW CAN I SEE MY BINDING CONSTRAINTS STATUS

UNDER VARIOUS SCENARIOS?


Prepare Data ModelAnalysis, Reports &

Templates

Consolidation and

ReviewWorkflow

Line of Business Input

• Operating Budgets• New Loans• Deposits• …

Economic Forecasts

Finance Data

Risk Data

Balance Sheet

Income Statement

Capital Available

Capital Ratios

CAPITAL PLANNING

AND MANAGEMENTSOLUTION PROCESS

Business Rules

Rate Tables• Loss rates• Prepay rates• Payment• Charge offs• Loan rates• Deposits rates ….

ManualModel

Projections

Automation and Workflow


RISK AND CAPITAL

MANAGEMENT

MACROECONOMIC INDICATORS BY COUNTRY AND

SCENARIO


RISK AND CAPITAL

MANAGEMENT

PROBABILITY OF DEFAULT AND

LOSS GIVEN DEFAULT PROJECTIONS

• Beta estimators derived from

current portfolio and loaded in

the solution

Formula example:

ln𝑃𝐷

1 − 𝑃𝐷= −2,264 − 2,916 × ∆𝐺𝐷𝑃𝑞−2 − 3,892 ×∆𝐶𝑃𝐼𝑞−3


When changing the Scenario

Factors, the impact on PD is

immediate. Unemployment, Interest

Rate and VIX impact the PD.


CAPITAL PLANNING

AND MANAGEMENTBUSINESS RATES

Business rates that drive the performance of the different portfolios are loaded by:

Region/entity

Time

Business/Product

Scenario

Rating Grade


Income Statement

Balance Sheet

Gross Loans

CAPITAL PLANNING

AND MANAGEMENT

ICAAP PROJECTIONS GROSS LOANS EXAMPLE

Payments

Charge

offs

New

Loans

+

-

-

Data

Integration

LOB Input

Rates/Amounts

∆

Previous Period

Opening Balance

Ending Balance

Assets

L & SE

Net Income

Cash

Net Loans

ALLL

Charge offs

Recoveries

RetainedEarnings

InterestIncome

Provisions

Non-InterestIncome

Capital Measures

Available

Tier 1

Required

Core T1

Tier 2

Additional T1

Tier 2

RWA


Review the impact on PD.

See impact on EL and RWA


RWA is calculated

based on Basel

Advanced IRB

f(PD, LGD, EAD)


CAPITAL PLANNING

AND MANAGEMENT

PROJECTION OF BALANCE SHEET, INCOME STATEMENT

AND CAPITAL


CAPITAL PLANNING

AND MANAGEMENTTHE BANKING FRAMEWORK – FINANCIAL STATEMENTS


CAPITAL PLANNING

AND MANAGEMENTTHE BANKING FRAMEWORK – CAPITAL REPORTS


CAPITAL PLANNIG

AND MANAGEMENTMONITOR ACTUALS VS PLAN

Copyr i gh t © 2014, SAS Ins t i tu te Inc . A l l r i gh ts reserved .

CASE-STUDIES

SAS® CAPITAL PLANNING AND MANAGEMENT


Business Issue

•Understand macro-economic scenarios and their correlation with retail losses

•Project next 9 quarter losses for the retail portfolio

•Produce CCAR files/reports.

Solution

•Capital Management solution that correlates macroeconomic scenarios with loss drivers

•Capital Planning

• Stress Testing

•Visualization

Benefits

•Understand relationship between macro-economic variables and loss drivers using data visualization

•Meet regulatory requirements

STRESS TEST AND CAPITAL MANAGEMENT (CCAR) US INSTITUTION

$2.4 TRILLION TOTAL ASSETS

OPERATING IN MORE THAN 60 COUNTRIES ACROSS:• INVESTMENT BANKING• RETAIL BANKING• SMALL BUSINESS• COMMERCIAL BANKING• FINANCIAL TRANSACTION

PROCESSING• ASSET MANAGEMENT; AND • PRIVATE EQUITY


Business Issue

• Integrate finance and risk figures using SAS.

• Extended use to sales planning

• Integrated finance and risk plan.

• RWA planning

• portfolio based asset plans

• migration matrices to forecast RWA changes

Solution

• Capital Planning and Management

• Credit RiskManagement

Benefits

• Streamline budgeting and forecasting process

• Improve timeliness and accuracy of reporting

• Minimize manual spreadsheet processing

• Support various reporting requirements from dashboard to KPIs, from static reports to multidimensional analysis

• Roadmap for Risk Adjusted Performance Management

CAPITAL PLANNING & MANAGEMENTFRANCO-GERMAN

REGIONAL BANK

$20 billion total assets

Serves multitude of

customers cutting across:

• Corporate customers

• Real estate investors

• Project financing

(particularly for

renewable energies)

• High net worth

individuals and

• Institutional banking.


Business Issue

• Rapid domestic and international growth

• Planning process taking 2-3 months longer than required

Solution

• SAS to support various dashboards, KPI reporting all the way to multidimensional analysis.

• Roadmap for performance management including financial modelling, scorecardsand compliances

Benefits

• Improve overall timeliness and accuracy of reporting by more than 30%

• Streamline budgeting and forecasting process by 60%, reduction from 5 months to 2 months

• Save 15% headcounts in budget preparation and reporting

• Minimized manual spreadsheet processing

INTEGRATED RISK AND FINANCE PLANNINGCHINESE BANK WITH

INTERNATIONAL NETWORK

US$ 200+ billion total

assets

A wholly-owned

subsidiary which serves as

the key platform for its

investment banking

business.


UNICREDIT GROUP RISK AND FINANCE INTEGRATION IN ACTIONRoberto 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.

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.

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.

Risk Adjusted Performance by Product, Customer

Segment, Business Area, Legal Entity and Group

Risk and Finance ReconciledSingle Vocabulary and a Common Logical Model

One Unified source for Capital Planning and Regulatory Exercises

– EBA Stress-test, ICAAP and BCBS239 compliant

Business Model supported by Global Services for about

9400 branches and 50 markets where Unicredit is

present

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RISK AND FINANCE INTEGRATION IN THE CAPITAL PLANNING … · 2016-03-11 · and Management •Credit Risk Management Benefits •Streamline budgeting and forecasting process •Improve