RISK AND FINANCE INTEGRATION IN THE CAPITAL PLANNING PROCESS

Transcription

1 RISK AND FINANCE INTEGRATION IN THE CAPITAL PLANNING PROCESS MARTIM ROCHA RISK COE OCTOBER 2015 Copyr i g ht 2012, SAS Ins titut e Inc. All rights res er ve d.

2 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

3 RISK AND CAPITAL MANAGEMENT WHAT IS THIS ABOUT Financial institutions operate on Capital, the best they manage it, the better they will do on Returns 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.

4 RISK AND CAPITAL MANAGEMENT INTEGRATING RISK AND FINANCE ANALYSTS VIEWPOINT 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

5 RISK AND CAPITAL MANAGEMENT DRIVERS FOR CHANGE AND ACTION THE REGULATORY PUSH BCBS239 Risk Data Aggregation and Reporting EBA, CCAR, APRA Regulatory Stress-testing Capital Planning and Management Basel III ICAAP Capital Adequacy BCBS 277 Sound Capital Planning Recommendation A4 of ESRB/2012/2 Funding Plans Copyr i g ht 2012, SAS Ins titut e Inc. All rights res er ve d.

6 RISK AND CAPITAL MANAGEMENT Finance Sales STATUS FUNCTIONAL SILOS HAMPER DECISIONS Operations Risk / Treasury? Manual processes and low sophisticated technology. Higher risk on the reliability of the results. Regulators and shareholders uneasy Issues 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 Copyr i g ht 2012, SAS Ins titut e Inc. All rights res er ve d.

7 RISK AND CAPITAL MANAGEMENT IMPACTS 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 INCREASE OPERATING EXPENSES MISSING OPORTUNITIES Risk adjusted measures at the right level of detail to make fact-based investment decisions about products, regions etc. MISSING OPORTUNITIES Undermine any attempt of creating a framework of predictive analytics due to the lack a historical integrated information UNDER OPTIMIZE RETURN Reduce drastically the number and depth of scenarios analyzed for planning LACK OF INFORMATION TO TAKE DECISIONS Copyr i g ht 2012, SAS Ins titut e Inc. All rights res er ve d.

8 WHY BANKS NEED TO DO IT? Compliance Regulatory Stress-testing (EBA, CCAR, APRA, ) ICAAP Capital Planning and Management 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

9 RISK AND CAPITAL MANAGEMENT ARCHITECTURE Capital Monitoring, Capital Projections, Capital Allocation, Return on Capital Reporting Projection Risk and Finance Reporting Capital Planning & Management SAS Capital Planning & Management Consolidation Risk and Finance - Integrated Data mart Calculation Credit Risk Scoring and Rating Credit Portfolio Risk Market Risk ALM & Liquidity Op Risk Leverage existing Risk Engines Collection Data Collection / Data Quality Trading Loans Treasury Deposits General Ledger

10 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

11 RISK AND CAPITAL MANAGEMENT DATA POINT MODEL DPM

12 RISK AND CAPITAL MANAGEMENT MAPPING REGULATORY TO INTERNAL Regulatory Categories dse_x2 Central Banks Internal Coding 0200 Central Banks dse_x4 - Credit Institutions G008 Central Government G009 Government Local/Regional dse_x5 General Governments dse_x9 Non-Financial Institutions dse_x12 Other Financial Institutions dse_x6 Households B036 - General Banks B038 - MDB s 0251 Corporates excluding Financial Institutions P021 - Insurance 0299 Other Financial Institutions P049 - Individuals

13 RISK AND CAPITAL MANAGEMENT HOW CAN I SEE MY BINDING CONSTRAINTS STATUS UNDER VARIOUS SCENARIOS? Company Confidential - For Internal Use Only Copyright 2014, SAS Institute Inc. All rights reserved.

14 CAPITAL PLANNING AND MANAGEMENT SOLUTION PROCESS Prepare Data Model Workflow Consolidation and Review Analysis, Reports & Templates Model Manual Economic Forecasts Rate Tables Loss rates Prepay rates Payment Charge offs Loan rates Deposits rates. Line of Business Input Operating Budgets New Loans Deposits Balance Sheet Income Statement Finance Data Risk Data Business Rules Projections Capital Available Capital Ratios Automation and Workflow

15 RISK AND CAPITAL MANAGEMENT MACROECONOMIC INDICATORS BY COUNTRY AND SCENARIO

16 RISK AND CAPITAL MANAGEMENT PROBABILITY OF DEFAULT AND LOSS GIVEN DEFAULT PROJECTIONS Formula example: ln PD 1 PD = 2,264 2,916 GDP q 2 3,892 CPI q 3 Beta estimators derived from current portfolio and loaded in the solution

17 When changing the Scenario Factors, the impact on PD is immediate. Unemployment, Interest Rate and VIX impact the PD.

18 CAPITAL PLANNING AND MANAGEMENT BUSINESS RATES Business rates that drive the performance of the different portfolios are loaded by: Region/entity Time Business/Product Scenario Rating Grade

19 CAPITAL PLANNING AND MANAGEMENT ICAAP PROJECTIONS GROSS LOANS EXAMPLE Previous Period Data Integration Rates/Amounts LOB Input Opening Balance - Payments - Charge offs + New Loans Ending Balance Assets L & SE Cash Net Loans Retained Earnings Gross Loans ALLL Charge offs Recoveries Balance Sheet Available Required Tier 1 Tier 2 Core T1 Additional T1 Tier 2 Net Income Interest Income Provisions RWA Non- Interest Income Income Statement Capital Measures

20 Review the impact on PD. See impact on EL and RWA

21 RWA is calculated based on Basel Advanced IRB f(pd, LGD, EAD)

22 CAPITAL PLANNING AND MANAGEMENT PROJECTION OF BALANCE SHEET, INCOME STATEMENT AND CAPITAL

23 CAPITAL PLANNING AND MANAGEMENT THE BANKING FRAMEWORK FINANCIAL STATEMENTS

24 CAPITAL PLANNING AND MANAGEMENT THE BANKING FRAMEWORK CAPITAL REPORTS

25 CAPITAL PLANNIG AND MANAGEMENT MONITOR ACTUALS VS PLAN

26 Copyri ght 2014, S A S Ins ti tute Inc. All ri ghts res erved. CASE-STUDIES SAS CAPITAL PLANNING AND MANAGEMENT

27 STRESS TEST AND CAPITAL MANAGEMENT (CCAR) US INSTITUTION 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. Benefits Understand relationship between macro-economic variables and loss drivers using data visualization Meet regulatory requirements Solution Capital Management solution that correlates macroeconomic scenarios with loss drivers Capital Planning Stress Testing Visualization $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 Copyr i g ht 2012, SAS Ins titut e Inc. All rights res er ve d.

28 CAPITAL PLANNING & MANAGEMENT FRANCO-GERMAN REGIONAL BANK 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 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 Solution Capital Planning and Management Credit Risk Management $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. Copyr i g ht 2012, SAS Ins titut e Inc. All rights res er ve d.

29 INTEGRATED RISK AND FINANCE PLANNING CHINESE BANK WITH INTERNATIONAL NETWORK 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, scorecards and compliances US$ 200+ billion total assets 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 A wholly-owned subsidiary which serves as the key platform for its investment banking business. Copyr i g ht 2012, SAS Ins titut e Inc. All rights res er ve d.

30 UNICREDIT GROUP Roberto Monachino, CFO Head of Data Governance - UniCredit Group RISK AND FINANCE INTEGRATION IN ACTION 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 Risk to ensure Adjusted comparability Performance at Group level. by Product, Therefore, business Customer data elements (BDEs) were produced locally and merged into a unique DWH Segment, repository Business aimed at avoiding Area, overlapping Legal Entity and redundancies, and Group 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 Risk be accessed and Finance and new Reconciled data be added into a sandbox to prototype new BI deliverables for business. When approved they can be implemented in the production database. 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 Business Model supported by Global Services for about 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 9400 Capitalia branches Group and and their 50 combination markets with where the German Unicredit HVB Group, is including Bank Austria and its 19 Eastern European country organisations. present 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.

31 Copyr i g ht 2012, SAS Ins titut e Inc. All rights res er ve d.