Download - Leveraging an Enterprise-wide Stress Testing Automation

Leveraging an Enterprise-wide Stress Testing Automation

OCTOBER 22, 2014

Agenda

1. Stress Testing Industry Challenges

2. Best Practices of Efficient Infrastructure and Data Management

3. End-to-End Automation across Models, Scenarios, and Reporting

4. Conclusion

3

Global regulatory radar: growing trends of stress test regulations and data integration

Source – Moody’s Analytics market research and own analysis as of April 2014

AS

IA P

AC

IFIC

EMEA

AM

ER

ICA

S

2014

2015

2016

2017

2014

2015

2016

2017

20132014201520162017 2014 2015 2016 2017

CRD IV/CRR

CCAR/DFAST ST

EBA / ECB ST

B3/ CRDIV

Volker Rule

Review of trading book (market risk)

Large exposures/ concentration risk

Basel 3 (IRB) Vickers Reform

LEI

Review of Securitization rules

LCR framework

Basel 2Basel 3

Global systemic risk report (FED)

Basel 3

UK FDSF Basel 3 (STD)

Stress tests FBO

Cover Bonds Rule 3







LEI

LEI

Basel 3

RBC 2/ ERM Ins. Inv.req

CROSSIBA

Superann. Req. Ins Prud. Stand

SAM

Full Solvency II

Solvencia II

SII-like P1 BMA

ORSA

SST

ORSA US

AIFMD

CRDIV AM?

MIFID II

UCITS Liquidity Stress Test

MMF Internal Ratings/ST

CCP EMIR

G-SIIs rules

G-SIIs rules

G-SIIs rules

SIFI surcharge & risk mgt



UK ICAS

NIMM

NIMM

COREP/ FINREP

ECB CR4

IFRS 4,9

LCR

LCR

Insurance Capital Standard

Insurance Capital Standard

Insurance Capital

Standard

Interim Measures

SII Interim Measures

NIMM

CCAR/DFAST ST

Capital Plan Submission1

CRR LCR2

CRR LCR2

Qatar Insurance Prudential rules

IRDA risk-based solvency

Capital Rules & Final Market Risk Rule)

BoE / PRA ST(Top 8 banks)

BoE/PRA ST (Top 8 banks + Mid sized + SIFIs)

Internal Ratings

ICAAP

ICAAP / ILAAP

ICAAP / ILAAP

ICAAP / ILAAP

CCAR/DFAST ST

CCAR/DFAST ST

ICAAP

ICAAP

ICAAP

Retail Banks ST

FSA ST

FSA ST

FSA ST

Blue – Stress Testing-related Regulatory Requirements

Black – Other Regulatory Requirements

BoE / PRA ST

ICAAP

EBA/ECB ST

FI/Riksbank ST

FI/Riksbank ST

FI/Riksbank ST

Retail Banks ST

Stress Testing – Main Areas of Focus from Regulators

» Increased expectations for scenario design

» Firm-wide risk identification and assessment

» Auditing and automation

» Risk data aggregation (RDA)*

» Analytics: Granular models; challenger process

» Narrative: Validation, documentation, and calibration

» Road mapping: Show a commitment to building out processes, controls, and governance of/for the exercise

*Principles for Effective Risk Data Aggregation and Risk Reporting; Basel Committee on Banking Supervision. January 2013

Stress Testing – Industry Challenges

Process & Reporting

» Integration of stress testing with forecasting processes and resources

» Increasing frequency of stress testing

» Lack of harmonization between regulatory stress testing methodology and accounting

» Evaluation of banks on the basis of ex-ante / ex-post analysis (i.e., backtesting)

» Auditability of results

» Publish reports in required format; fully automated process

2

Technology

» Spreadsheet-based infrastructure

» Manual processes constrain:- Frequency of stress testing- Reconciliation (FINREP, COREP) and

controls- Ability to analyze results

» Competing priorities:- Need for long term infrastructure

planning and enhancements - Short-term stress tests timeline

» Existing infrastructure not well-suited for stress testing process

3

Governance

» Coordination efforts across finance, treasury, and risk groups

» Need for timely communication through chain of command as C-suite and senior management are engaged in scenario definition, results review

» Ongoing board education efforts

» Transparency of the process

1

Models & Data

» Methodologies continue to evolve

» Emphasis on greater granularity

» Consistency of loss estimation and new business methodologies

» Quantifying “unknown unknowns”

» Event-driven scenarios need to use thorough and well-governed analysis rather than routine models

4

The Industry’s Response Focuses on Automating & Streamlining the Stress Testing Process across the Enterprise

• Data quality and integrity

• Harmonized NPLs and RWAs definitions

• Regulatory and internal driven scenarios

• Strategic planning

• What-if analysis

• Inclusion on the living wills

• Quantify contingency planning metrics

• Linkage stress testing to capital plan

• Dynamic balance sheet forecasting

• Pre-provision net revenue forecasting

• Margins & Volumes

• M&A activity

• Early warning indicators

• Growth strategy, M&As, deleverage

• Setting risk limits & RAROC pricing

• Capital allocation

• ILAP

• LCR forecasting

• Funding projections

• Liquidity stress testing

• HQLA optimization strategies

• Forecasting dividend policies

• Reverse Stress Testing

• RoE/RoA analysis/projections under scenarios/strategies

• Budgeting planning

Stress Testing

AQR & Balance Sheet

Reviews

Strategic Planning & Forecasting

Capital Planning &

ICAAP

Risk Appetite

Liquidity Planning &

Management

Dividend Planning & Budgeting

One of the biggest challenges for banks is coordinating the stress testing process amongst the different stakeholders in a way that is transparent, controlled, auditable, dynamic, and repeatable

Source – Moody’s Analytics

How Are Institutions Using Stress Testing? Capital Planning & Risk Management is High on the agendas of Banks and regulators

Regula

tory

Com

pliance

Capita

l Adeq

uacy

Mea

sure

men

t and P

lannin

g

Risk

Appetite

Def

initi

on

Risk

Man

agem

ent a

nd Mea

sure

men

t

Finan

cial

Pla

nning /

Budgetin

g, Stra

tegic

Pla

nning

Limit

Settin

g and M

easu

rem

ent

Portfolio

Stru

cturin

g

Pricin

g


Stress Testing – Key Areas of Investment / Changes Planned for 2015 and Beyond

Process/Workflow Infrastructure Governance Structure Organization


Do Banks Have a Roadmap for Improving the Stress Testing Results Over the Next Two Years?

Yes 77%

No 23%

Key areas of enhancement in the roadmap – Modeling / automation of the process / risk data aggregation / staffing / reporting / governance

….but it is a work in progress to define the contents of the

roadmap.


Agenda



3. End-to-End Automation Across Models, Scenarios, and Reporting

4. Conclusion

The Stress Testing Workflow

Structured

Corporate CRE C&I Retail

Forecast RWA

Required Capital

Forecast NCO / ALLL

Forecast Other Losses

Forecast Net Interest Income

Forecast Non-Interest

Inc / Exp

PPNR

Changes to Available Capital

Business Forecasting

Models

Forecast Positions

P & L Models

Financial Planning & Analysis

• Other revenue• Op losses• Trading losses• Counter-party

losses• Other expenses

Forecast Positions

Treasury / ALM

• Base Runoff• New Business

Interest Income / Expense Models

Market Risk

Strategy / Risk

Appetite

Regulatory Reports

Key Performance Indicators / Balanced Scorecard Variables

Source Database

Source Database

Source Database

Current PositionsRegulator Scenarios

Stress Testing Inputs

Economic Variables and Alternate

Scenarios

Pricing Curves

C & I

Credit Models

CRE

Mortgages

Credit Cards

Auto

Other

Forecast Positions

Op Risk

Market Risk

Risk

12

Stress Test Infrastructures and Automation Leverage the Effective Risk Data Aggregation Principles

Overarching governance

and infrastructure

Risk data aggregation capabilities

Risk reporting practices

Supervisory review, tools,

and cooperation

3. Accuracy and Integrity

4. Completeness

6. Adaptability

5. Timeliness

1. Governance

2. Data Architecture and

Infrastructure

7. Accuracy

8. Comprehensiveness

10. Adaptability

9. Clarity

11. Distribution

12. Review

14. Home/Host Cooperation

13. Remedial actions/supervisory

BIS will start to assess the above principles implementation starting 2013 and to comply by 2016

Not enforceable, but APRA is aligned with core principles (validation, automation, timeliness, control, etc.)

13

Best Practice Infrastructure: a Centralized Datamart to integrate Counterparty, Credit Risk, and Finance data

Central Datamart3 Tier Infrastructure

CalculationRules

Historical Views

CalculationWorkspaces

Portfolio

Source Systems Treasury,Investments,Assets & Liabilities,Commitments,Counterparties

Results

Overseas

Head Office

DomesticAU SG

Market Data Bloomberg, Reuters

General Ledger

GL Recon.

Capital

Items

Risks & Behavioral Models

Stress Scenario

Regulation

Configuration maintenance

Local Reporting requirements at each consolidation level

Business Rules & Workflows

Calculation & Reporting

Risk Engines

Data Editing & QueryingData Patching ToolError Checking

GL reconciliationAdjustment Workflows

Publishable ReportsDashboard & AlertsGraphical Analytics

Regulatory ReportsUpdated regularly for local compliance

Domestic

Overseas

Stress Test Data Completeness Requires a Bank-wide Data Model for Instruments and Referential Management

14

Fitness for Use: Data Quality, Correction, Validation, and Adjustments Can Be Automated at Data/Dataset Levels

» Data validation: format, type, value range, currency, presence, consistency, and completeness

» Cleansing: default value, patching, bulk-edit, adjustment, reload/upload

» Data set validation: control totaling, GL reconciliation, benchmarking, variance

15

Agenda



3. End-to-End Automation Across Models, Scenarios, and Reporting

4. Conclusion

StructuredCard

Auto

Resi

CRE

C&I

MuniOther Retail

Trading

MSR

Funding

Other

A Stress Testing System Is Seen as Mission ControlStress Test solution: the backbone to automate and integrate for firm-wide stress testing

WORKFLOW

MODEL MANAGEMENT

INPUT/OUTPUT AND ASSUMPTION

MANAGEMENT

ETL SYSTEM ACCOUNTS

HIERARCHY MANAGEMENT

» Centralized management of all primary credit models

» Can be extended to challenger credit models and econometrically-based PPNR calculations

» Supports reconcilement across all legacy “feeder” production risk and finance systems

» Supports all required regulatory and internal reporting

» Single point-of-entry to compile all stress test submission elements (inputs, scenarios, results)

» Highly configurable to support each unique client business model and user requirements

GL RECONCILIATION ACCOUNTING REPORTING

Model Inventory: Banks rely on the Stress Testing platform to centralize and monitor the catalog of models

» Commonly required details:

– Owner, validity, validation dates, Model input/output description, Upstream/Downstream dependencies

– Model documentation, comments, missing doc, alerts…

» Categorization of models per:

– Group/Portfolios/Sub-Portfolios

– Importance, Risk Types, Status…

Banks Expect Multi-jurisdictional Regulatory Reports with Granular Drill-down to Underlying Scenario Results

Internal Dashboard Can Support Results Sign-off Via Flexible Slice & Dice Across Portfolios, BU, Countries

Understand Stress Testing & Capital Forecasting Results Under Multiple Scenarios with Drill-down Discovery

Agenda



3. End-to-End Automation across Models, Scenarios, and Reporting

4. Conclusion

23

Stakeholders Expect the System to Centralize the Stress Testing and Forecasting Process across the Enterprise

» Enterprise-wide view – consistent view at a group and subsidiary level; meet regulatory and business requirements across jurisdictions

» Multiple models (internal & third-party vendor) – development and deployment of multiple models (top-down, bottom-up) from different stakeholders

» Cost-effective, consistent , centralized architecture – flexibly adapt to changes in stress testing regulatory requirements, future enhancements and integration of banks’, third-party, or regulators’ models, scenarios, and data

» Scalability, maximize return-on-investment – highly configurable framework to support changing and varied methodologies

» Drill-down and auditing capabilities – users are able to drill-down into loan-level data; audit the stress testing results and end-to-end workflow

» Off-the-shelf regulatory reporting – produces stress testing regulatory reporting and reconcile results across jurisdictions

Thank You

moodys.com

25

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Download - Leveraging an Enterprise-wide Stress Testing Automation

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