economic capital model and system implementation
TRANSCRIPT
Risk and Capital Management Solution Delivery
Economic Capital Process & System
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Enterprise Risk Management (ERM) Framework
New Business
Efficiency in Leverage & Liquidity: Efficiently Manage Leverage as it
Pertains to ALM and Trading Book Efficiently Manage Asset &
Funding Liquidity Protect Bank’s Solvency
Improved Risk Awareness: Know your Risk and Plan Ahead Timely Identification of Portfolio
Volatility & Proactive Decision Making
SuccessfulReturn
Capital &Loss Reserve
PortfolioRisk
Sm
art
Ris
k
Tak
ing
Jointly Chairedby
Risk & Finance
Optimize Capital Allocation: Link Risk to Capital (Expected and
Unexpected Losses based on risk drivers)
Set Capital Target based on solvency rate
Define Risk Appetite and Limits Adequacy in Capital in Relation to
Bank’s Overall Risk Profile Comprehensive Pricing System
that Covers Expected Losses Effective Downturn Treatment
(PIT/TTC Risk parameters & stress based factors)
Maximize Risk-Return: Proactive Measurement of
Exposure Quality Proactive Measurement of
Exposure Concentration Be Able to Forecast Losses and
Earning at Risk Shareholders Value-Add
Hold good Risk Adjusted Return on Capital (RAROC) and SVA
Hold good Economic Profit/EVA, ROA, ROE, IRR etc.Competitive Advantage
and Level-Playing Field: Build Goodwill & Reputation as Strong
Capitalized & Asset holding Bank (Good value-proposition for Investors)
Stay Current on Demanding Regulatory Response (SEC, FFIEC, FDIC, FASB, OCC, FED, BASEL/NPR, Dodd-Frank etc.)
Recognize Risk Appetite and Reward Stakeholders: Clear Understanding of Bottom-UP Risk Assumed
in Portfolio Tailor Risk for Business to Develop Top-Down
Classification that is Transparent to External Stakeholders
Articulation of Risk Attributes for Senior Management
Buffer
/
Cus
hion
Must be built on a strong data and analytics foundation with continuous measurement and optimization than establishing empirical goals based on general or indicative market trends.
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Capital management framework
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Risk Appetite & Limits – Capital Management Process
Governance
Business Processes
Measures
Committee Structure Roles and Responsibilities Policies and Documentation
Board Level Risk and Capital Committee (RCC)
• Business• Risk• Finance• Treasury• Internal Audit
• ICAAP Policy and Manual• Risk Appetite Statement• Contingency Plans• Methodology Documents• Model Validation GuidelinesRisk
CommitteeRisk & Capital Committee
Planning Execution EvaluationRisk Appetite Setting
Strategic Planning
Capital Planning and Budgeting
New Product / Business / M&A
Initiatives
Capital Adequacy Assessment
Risk-Adjusted Performance Review
Incentives
ICAAP Reporting and Disclosure
Business Execution (Service Offering, Pricing, Client Portfolio Management)
Risk Identification, Measurement and
Monitoring
Financial Assessment and
Forecasting
Capital Management Contingency
Planning
Liquidity Management Contingency
Planning
Risk Inventory
Economic and Regulatory Capital
Capital Measures
Risk Adjusted Performance
MeasuresStress Testing and Scenario Analysis
Allowance /Other Credit Risk
Valid
ation and Assurance
Well-designed capital management programs include governance, business processes and measures based on lessons learned and regulatory requirements.
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The Total Risk has to be Matched by Different Layers for Risk Taking Capacity
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Credit Risk ECAP Calculation Engine -- Illustrative
A sound economic capital model and system must be built on a strong data and analytics foundation with continuous measurement and optimization depending on risk profile and target rating than establishing empirical goals based on general or indicative market trends. The Total Risk has to be matched by different layers for Risk Taking Capacity.
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Risk , Return & Capital Management Building Blocks
Develop Risk Appetite and Risk Taking Capacity with deep learning from your own portfolio data , risk drivers, model results and performance metrics. We will assist banks building out the capability pyramid driving from strategy through implementation.
Risk AppetiteRisk Capacity
Target Risk Profile
Optimize risk and return Measures RAP & RBP
Risk & Finance Data Provisioning
Process & Workflow
Focused Portfolio Reporting and Analysis on Credit Quality and Concentrations, Which Drills Down to
Risk Drivers
Allocate Economic CapitalLinking to Risk
Proactive Use of Traditional Risk Mgmt Methods
Limits, Approvals Standards, Asses Risk Drivers
Model Development, Validation & Model Risk Management (Rating Models, Loss Models, Risk & Economic / Regulatory Capital
Models)
IRR
Interest Rate
IRR
Group
IRR
Liquidity
OR
Operational
MR
Market
CR
Credit
BR
Business
Actual Risk Profile
Risk / Finance Dimensions
TBE – Group Concentration
Industry
Geography
Product
Collateral
Tenor / MaturityN
IAC
C
RA
RO
C
Capital Allocation
LOB
CIB Comm
Consumer
North-East $$ $$ $$
Central $$ $$ $$
Mid-West $$ $$ $$
South-East $$ $$ $$
South-West $$ $$ $$
Total $$ $$ $$
Geog
rap
hy
Polic
y G
over
nanc
e &
Ove
rsig
ht
Port
folio
Ris
k Rev
iew
“Portfolio Risk Reporting” “Measure
Performance / Maximize NIACC”
Portfolio Management Committee
Jointly Chaired by Risk & Finance
Bott
om
-Up
Top
-Dow
n
“Optimize Risk / Return”
“Allocate Economic Capital”
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Building Blocks for an Economic Capital System
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Identification & Quantification of Risk – Risk Aggregation
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Industry Practices to Address Economic Capital Allocation Methodology
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Economic Capital Allocation Methodology Comparison
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ICAAP Framework – Business Impacts, Scenario Analysis, Risk Identification & Planning
How an economic downturn would affect the firm's capital resources and future
earnings; and the firm’s CRR taking into account future
changes in its projected balance sheet. The institution’s “baseline” capital forecasts (at
least quarterly, based on its annual business plan)
A 3-year summary forecast capital position and a description of the institution’s capital planning and management process, including an outline of how ICAAP is incorporated into this process.
Forward Looking Planning & Assessment