Risk & Finance Integration Part 1: Bridging the Gap between Ambitions and New Realities

Transcription

1 Risk & Fiace Itegratio Part 1: Bridgig the Gap betwee Ambitios ad New Realities Abstract As authorities cotiue to curb the excessive risktakig ature of the acial idustry, some rms are adjustig to the ultra-low iterest rate eviromet. However, the retur o equity (ROE) ad overall ecoomics of acial rms, both large ad small has take a hit. Firms of the future must raise the bar, ad carefully maage ad execute iitiatives to mitigate cost impact ad complexities.

2 Itroductio Regulatory Dyamics Market ad regulatory chages cotiue to drive ad shape the acial idustry's search for sustaiable busiess models. I a post crisis era, especially, acial istitutios are faced with reduced access to cheap fudig, ad are weighed dow by ew capital requiremets for the risks they carry o their balace sheet ad i operatios. Capital, Liquidity & leverage Structural reform & rig-fecig Regulatory supervisio & reportig Coduct & compesatio Market structure & OTC derivatives reform Tax Trasparecy Accoutig Stadards Busiess Implicatios Reewed stadards for busiess coduct Fiacial resources required to operate Operatioal cofiguratios ad legal etities Impact Areas Mis-sellig Market abuse Fiacial crime RWA capital Leverage capital Liquidity Rig-fecig Local regulatio Fiacial Impact Fies Compliace costs Reveue/growth Capital Fudig costs Returs Capital Fudig costs Compliace costs Overall Impact Structurally lower returs... 20% 15% 10% 5% 0% 20% 2006 ROE 10% 2018 ROE... ad challeges to strategic ambitios Global Stadards Reveue growth Risk maagemet ad related regulatory compliace sped i 2019 is expected to exceed $74b globally¹, with the average expeditures of a tier 1 bak stadig at over $0.5 BN for post-crisis regulatory reforms². Market ad Regulatory Dyamics: Facig the Impact of the Great Erosio Source: Celet, Oliver Wyma³ Baks have to be smarter i beig able to uderstad ad triagulate the multifaceted risk ad capital-related drivers that play ito the pro tability ad cost equatio. These iclude aroud collateral, valuatio adjustmets, fudig, leverage, ad risk-weighted assets (RWA) i relatio to the P&L targets i both busiess as usual coditios ad stressed scearios. To differetiate themselves, respod, repositio, ad evetually thrive i the comig times, leaders ca adopt these strategic capabilities i risk maagemet operatios: Cohesive risk ad ace decisio-makig Real-time risk maagemet capabilities as a paradigm Risk maagemet digitizatio ad eablemet This paper will discuss o strategic imperatives ad tactical steps required to alig risk ad ace capabilities to make cohesive risk-eabled acial decisios

3 Cohesive Risk ad Fiace Decisio- Makig: Issues ad Pai poits Their legacy risk ad ace IT ad operatios Sourcig ad maitaiig high quality data to eable effective decisio-makig across both frot ad back of ces, especially for rms that have udergoe multiple iteratios of M&A activity. Their risk ad ace operatios are typically distict, siloed, or drive by process-speci c delivery chais, limitig data sharig, ad promotig icosistecies. Fiace P&L reportig Accoutig & policies Target settig ad budgetig Performace maagemet Cotrol & recociliatio Fiacial/ regulatory reportig Strategic plaig Reportig to seior mgmt & committees Provisioig Cosequeces of siloed approach to Risk ad Fiace operatios ad iformatio delivery value chais Icreased latecy ad timeliess i reportig Reduced accuracy ad graularity Limited risk-aliged fiacial maagemet Higher cost of duplicative ifrastructure Risk Positio & limit moitorig Liquidity risk maagemet Risk parameters Risk modellig ad sceario aalysis Developmet of risk policies FO risk decisio support Stress testig Gaps ad Ief ciecies i Misaliged Fiacial ad Risk Maagemet Operatios Source: Celet³ Drivers for Chage Some of the exteral pressures bak are facig iclude: Capital rules ad reportig, which icreasig i scope ad depth, based o the evolutio of Basel (2.5 & III) regulatios that require rms to allocate buffer capital based o risktakig activities of speci c lies of busiess, as well as product, cliet segmets Regulators eed rms to demostrate stroger data maagemet practices ad approaches to itegrated risk ad ace data based o striget stadards. Fiacial stability cocers are also drivig idustry-wide regulatory assessmets such as US Fed's Comprehesive Capital Assessmet ad Review (CCAR), ad EU's Comprehesive Assessmet exercise.

4 Key Challeges i Forecastig ad Maagig Risk Primary Challeges of Fiacial Services Firm s Ability to Forecast ad Maage Risks Perceived Beefits of Better Coordiatio betwee Fiace ad Risk Itegratig risk ad forecastig data to strategic decisio makig 51% Improved quality of fiace ad risk iputs from across busiess uits 60% Capturig relevat data withi the compay 31% Cosistet busiess/market assumptios 60% Forecastig ad aalytical skills i orgaizatios Capturig relevat data from exteral sources Corporate resources 33% 30% 22% Improve the cosistecy of data used for risk ad FP&A aalysis Improved ability to commuicate risk-adjusted fiacial plas to executive ad board 63% 51% Corporate IT resources 16% Ability to add greater value to busiess 42% Executive maagemet support for forecastig 17% Develop ad ehace aalytical capabilities withi risk ad FP&A 41% 0% 10% 20% 30% 40% 50% 60% 70% 0% 10% 20% 30% 40% 50% 60% 70% Risk ad Fiace: Challeges, Drivers, ad Expectatios toward Greater Aligmet Source: AFP ad Oliver Wyma 2014 Survey, Celet³ Beyod the regulatory les, seior maagemet of acial rms will require aliged risk ad acial maagemet processes to aswer the followig questios: How do we sustai, maage, ad cotrol escalatig costs associated with regulatory ad risk maagemet iitiatives? With supervisory demads cotiuig to rise across jurisdictios, we believe that ow is the time to make the busiess case for a more itegrated risk ad ace approach. How will our strategic pla impact the risk ad retur of our bak's busiess portfolio uder oerous regulatory regimes that we operate i? Is our istitutio's pla for capital deploymet realistic uder differet ecoomic ad idustry scearios, or will it edager our acial obligatios? Should we reduce the capital budget or let it stay the same to provide a buffer? Actio Poits ad Recommedatios To address these strategic questios, rms must coordiate across busiess, risk, ad ace activities to esure the layers of chage are plaed for ad maaged.

5 Broader scope ad upgrades to capital rules ad reportig Basel 2.5 & III / CRR & CRD IV FiRep CoRep SSM oversight ad reportig IFRS 9 (particularly provisioig) Striget data maagemet ad stadards BCBS 239 / risk data aggregatio for G- SIBs ad a icreasig set of D-SIBs BCBS 248: Itra-day liquidity data & reportig Supervisors require detailed data marts (rather tha merely reports): e.g. AaCredit Idustrywide regulatory assessmets US Fed CCAR / Stress Testig Comprehesive Assessmet (CA): Asset Quality Review (AQR) EBA/ECB Stress Testig Fiace P&L reportig Accoutig & policies Target settig ad budgetig Performace maagemet Cotrol & recociliatio Fiacial/ regulatory reportig Strategic plaig Reportig to seior mgmt & committees Provisioig Cosequeces of siloed approach to Risk ad Fiace operatios ad iformatio delivery value chais Icreased latecy ad timeliess i reportig Reduced accuracy ad graularity Limited risk-aliged fiacial maagemet Higher cost of duplicative ifrastructure Risk Positio & limit moitorig Liquidity risk maagemet Risk parameters Risk modellig ad sceario aalysis Developmet of risk policies FO risk decisio support Stress testig A B C D E Goverace & Steerig Process Itegratio Busiess & IT architecture Data Maagemet Model Aalytics, Metrics, & Reportig Ops Fiace P&L reportig Accoutig & policies Target settig ad budgetig Performace maagemet Cotrol & recociliatio Shared Fiace ad Risk Fiacial/regulatory reportig Strategic plaig Liquidity risk maagemet Reportig to seior maagemet ad committees Fiacial resource (capital ad liquidity) maagemet Provisioig Firmwide stress testig Risk Positio & limit moitorig Liquidity risk maagemet Risk parameters Risk modellig ad sceario aalysis Developmet of risk policies FO risk decisio support Stress testig Risk ad Fiace Trasformatio: A Strategic Approach is Required Source: Celet³ Recommed Actios for Firms Let s upack each layer ad highlight pertiet cosideratios. Layer#1: Goverace ad Steerig Esure aligmet betwee busiess processes, goverace, IT. Goverace ad steerig mechaisms for rst, secod, ad third lies of defese eed to be clari ed ad co rmed, ad accoutabilities eed to be elevated to the seior maagemet. Layer#2: Process Itegratio Risk ad ace process itegratio across the group will ot oly eed to be well-de ed, but collaborative activities ad data hadover poits will also have to be redesiged ad itegrated. Layer#3: Busiess ad IT Architecture Firms eed to esure that adopted busiess ad IT architecture strategies re ect a high degree of aligmet across frot of ce busiess uits, with risk ad ace applicatio architecture,

6 data itegratio architecture, ad techical ifrastructure. The focus should be o simpli catio, with more imble, platformbased architecture methodologies. Layer#4: Data Maagemet Model Firms must esure that data architecture ad data maagemet models preset a sigle versio of the truth. Layer#5: Aalytics, Metrics ad Reportig Operatios Aalytics, metrics, ad reportig operatios will eed to be desiged for greater exibility ad timeliess, i particular, to accommodate ad-hoc what-if aalysis, itegrated stress sceario modelig ad testig, as well as er graied data outputs, ad a wider rage of data aggregatio ad aalyses. Coclusio: Lookig Forward Leaders, with ambitios to thrive i the ew world, will drive better risk-eabled acial maagemet to couter the erosio of returs from regulatory developmets, ad to focus o pro tably sustaiig the right busiesses ad cliet segmets. Forward-thikig rms that uderstad the profoud impact of emergig regulatory regimes ad future competitive requiremets will adopt a strategic stace (beyod regulatory compliace) to deploy capabilities for itegrated balace sheet ad acial resource maagemet paradigms. This will help them achieve acial ef ciecy whe weighig risk-reward cosideratios. Oly the ca rms break away from merely complyig, toward actually thrivig i the emergig regulatory ladscape. Refereces [1] Celet, "Navigatig the Risk ad Regulatory Maze with a Clearer 20/20 Visio" (May 2016), [2] Oliver Wyma, Addig 5% to RoE: How Baks Ca Do More With Less, [3] Figures are illustrative ad projected ROE gures are based o the wholesale bakig sector, with expected average aroud 10%. From Celet report, Back to the Future for Risk: Risk-eabled Fiacial Maagemet,

7 About The Authors Vijayaraghava Vekatrama Vijayaraghava Vekatrama (Vijay) is a Seior Cosultat ad the Global Head of the Risk Maagemet practice withi the BFS, totalig 17 years of experiece i the IT idustry with focus o bakig, risk maagemet, ad regulatory compliace. Zeesha Rashid Zeesha Rashid is a Seior Cosultat with the Risk Maagemet practice withi BFS. He is a GARP certified Fiacial Risk Maager, ad curretly leads the practice for UK ad Europe. Cotact Visit TCS Bakig ad Fiacial Services uit page for more iformatio bfs.marketig@tcs.com Blog: Drive Goverace Subscribe to TCS White Papers TCS.com RSS: Feedburer: About Tata Cosultacy Services Ltd (TCS) Tata Cosultacy Services is a IT services, cosultig ad busiess solutios orgaizatio that delivers real results to global busiess, esurig a level of certaity o other firm ca match. TCS offers a cosultig-led, itegrated portfolio of IT ad IT-eabled, ifrastructure, egieerig ad assurace services. This is TM delivered through its uique Global Network Delivery Model, recogized as the bechmark of excellece i software developmet. A part of the Tata Group, Idia s largest idustrial coglomerate, TCS has a global footprit ad is listed o the Natioal Stock Exchage ad Bombay Stock Exchage i Idia. For more iformatio, visit us at All cotet / iformatio preset here is the exclusive property of Tata Cosultacy Services Limited (TCS). The cotet / iformatio cotaied here is correct at the time of publishig. No material from here may be copied, modified, reproduced, republished, uploaded, trasmitted, posted or distributed i ay form without prior writte permissio from TCS. Uauthorized use of the cotet / iformatio appearig here may violate copyright, trademark ad other applicable laws, ad could result i crimial or civil pealties. Copyright 2016 Tata Cosultacy Services Limited TCS Desig Services I M I 12 I 16