Impact of Risk Based Supervision Technology Departments Arun Pingaley, Industry Director FSI, SAP India Conference on Risk Based Supervision Hotel Trident, Mumbai, October 8, 2013
Highlights of a Basel II / III Solution RBI Regulations Ris sk types Default risk Dilution risk Settlement risk (direct, 3 rd party) Residual value risk Specific market risk Time Series Management Basel II / III Reporting Basel II / III predefined Customer Specific RWA Calculation Optimal collateral distribution Support of stress tests Financial Data Model Complex product modeling Data versioning Simp ple standard Com mprehensive Sta andard on IRB Foundati Adv vanced IRB Bank Product Mapping Bank Process Environment 2013 SAP AG. All rights reserved. 2
Basel II / III Implementation Waves Ef ffort Data Management RWA Calculations Pillar 2 & Pillar 3, LRM Regulatory Capital Internal Models (e.g. Internal PD, LGD, models EAD) (e.g. PD, LGD, EAD) Early stages of implementation Half Time Late stages projects Time 2013 SAP AG. All rights reserved. 3
SAP Analytical Banking Customers for Risk & Finance Over 80 Banks in Over 30 Countries 2013 SAP AG. All rights reserved. 4
Liquidity idi Risk Management
Transforming the Liquidity Management Process Drives $20M in annual benefits Business Impact From Current Process Weekly/Monthly report using stale data Limited insight below aggregate levels: Impacting margin management at instrument level Static reports and limited ad hoc capability Significant cost due to high complexity Business Impact Through LRM Interactive report based on intra-day data Visibility at instrument level: Improved stress testing and accuracy of analysis Improved margin management at contract level: Move the right product at the right time Lower Cost through simplified architecture Cash and Cash Equivalents: $19.94B Cash Impacted: 10% = $1.994B Overnight Lending Rate: 1% = $19.94M 1% Benefits Realized ($M) $40M $20 $14 $6 Customer Investment Income from improved liquidity management 2013 2014 2015 *Conservative benefits realization ramped up as 30% in 2013, 70% in 2014 and 100% from 2015 onwards 2013 SAP AG. All rights reserved. 6
Challenges in Liquidity Risk Management BASEL III REQUIREMENTS Mandatory Basel III liquidity rule compliance Moving target as full Basel III implementation runs to 2018 MARKET SITUATION Mortgage crisis, European debt crisis, Greece Euro Exit? Increasing costs for refinancing and liquidity procurement ORGANIZATION & PROCESSES Strong collaboration between Finance, Risk, Treasury required ORGANI- Change in liquidity management processes possible ZATION& HIGH DATA VOLUMES PROCESSES Cash flow orientation causes big-data sized volumes How to handle these volumes for adhoc reporting / steering purposes? ANALYTICS Simulations, predictive analytics, scenario analysis required A solution needs to cover compliance, analytics and steering BASEL Ut III enim Reduzierung ad des minim RBIveniam, Zeithorizontes quis MARKET nostrud IFRSexercitation LIQUIDITY RISK MANAGE- MENT DATA VOLUMES Aktualität der Planungsgrundlage mit entsprechend ANALYTICS konkreten Zielvorgaben LRM EN NVIRONME ENT Multidimensional challenges impact banking and liquidity Basel III 2013 SAP AG. All rights reserved. 7
Integrated Finance and Risk Management Leverage Common Data about Financial Instruments Integrated Finance and Risk Management Business Capabilities Liquidity / cash flow optimization Legend 1 Near-term Longer-term Risk CRO Finance CFO Common Data Layer Treasury CTO Comm mon Data Layer Liquidity / Treasury Management Risk Analytics Accounting, Finance and Profitability Interest rate management Instrument-level cash flows / planning 2 Aggregated cash flows (e.g. by company / business / product) Limit management Regulatory capital, economic capital, credit calculations / risk management Daily Basel reporting (i.e., liquidity) Accounting rules engine (AFI; Hedging) Effective interest / profitability calculations Funds transfer pricing Cost allocations Planning and Forecasting Top-down / bottom-up budgeting Financial close (FMS live) Regulatory liquidity risk reports will have to be produced at least monthly with the ability to be delivered weekly or even daily - Moody s Analytics, Jan 2011 Integrated Reporting Management reporting (e.g., RAROC) Statutory / disclosure reporting Regulatory reporting, stratification A comprehensive, accurate and timely common data layer enables financial, treasury and risk capabilities, and ensures consistent data use throughout the bank 2013 SAP AG. All rights reserved. 8
Liquidity Risk Management Steps in Implementation Pre-deal check Plan mid-term strategy Personalized alerts and KPIs Interactive simulation of haircuts, run-off and renewal rates Comparison reports SAP HANA Cash flow calculation Data Transformation and Data Quality Data upload Flexible hierarchies and dimensions Liquidity limits Realtime execution LCR and NSFR according to Basel III Forward LCR and Bank-internal key figures 2013 SAP AG. All rights reserved. 9
LRM on HANA Value proposition 1BP less in Improve liquidity capital management & free up liquidity idit for higher h return-driven di investments t liquidity buffer = $$$ Leverage platform & simplify landscape, reduce 10%-15% 15% project risk, and reduce total cost of ownership savings Increasing demanding regulatory requirements to perform daily and up to intraday liquidity analysis (Basel III framework) Compliance out of the Box Accelerated liquidity risk management Phase of significant regulatory changes Big Data 360 degree business details 2013 SAP AG. All rights reserved. 10
Calculate SAP HANA
Calculate: Regulatory and internal key figures On-the-fly for mass data Calculation Liquidity Risk LCR > = 100 % NSFR High Quality Liquid Assets Net Cash Outflow (30 D Horizon) Available Stable Funding (Sources) Required Stable Funding (Uses) Level 1: Cash, Sovereign and Central Bank Debt (usually 0 % Risk Weight*), Level 2: Sovereign and Central Bank Debt (usually 20 % Risk Weight*), AA- or higher rated bonds, Cash Outflows: Retail deposits, Unsecured Wholesale Funding, Repos, CCLs, Derivative Outflow Cash Inflows: Reverse Repos, Obtained Credit Lines, Other Inflows Regulatory Capital (Less) Stable Deposits, Wholesale Funding All other Liabilities Cash, Securities, Debt, Off-balance Sheet Exposures Bonds, Equities, Gold, Specific Loans All other Assets LCR (Liquidity idi Coverage Ratio) and NSFR (Net Stable Funding Ratio) calculation according to Basel III User-defined calculation routines based on flexible input parameters (e.g. liquidity groups, scenarios, maturity bands, dates, currencies) Forward LCR New business simulation Timetable: Comparison with current LCR Unprecedented performance based on lowest granularity 2013 SAP AG. All rights reserved. 12
LRM goes beyond limits of current risk management applications Proposed intraday liquidity reports not feasible, banks say. Basel Committee's proposed p new reports on daily liquidity needs would involve "thousands upon thousands" of data points. Risk Magazine, Sept 2012 290M Cash Flows >60 minutes Standard System 4000x faster Aggregated & Selected <1 seconds In-Memory System Latest result: 1.8 billion cashflows in 2.4 seconds 2013 SAP AG. All rights reserved. 13
Analyze SAP HANA
Analyze: LRM Monitor Personalized Alerts and KPIs Requirements e e Alerts show combination of calculation results and limits Automatic Realtime update of alerts Drilldown to Detailed Reports 2013 SAP AG. All rights reserved. 15
Analyze: Liquidity Explorer Drilldown to details and simulation on-the-fly Intuitive user experience Visualization of aggregated cash flows in maturity bands Performance Ability to analyze and simulate granular data on-the-fly Slice and dice into liquidity curves Usage of multiple scenarios 2013 SAP AG. All rights reserved. 16
Analyze: Liquidity Scenarios Comprehensive Simulation Capabilities Simulation Parameters Market Data (e.g. FX, interest rates, stock prices) Risk Parameters (e.g. Haircuts) Run-off and renewal rates according to flexibly definable parameters Simulated transactions, e.g. new money market transaction 2013 SAP AG. All rights reserved. 17
Take Action SAP HANA
Take Action: Make informed decision Pre-deal check and plan strategy Pre-deal check of immediate transaction Sell liquid asset positions Issue Bond Money Market transactionsti Do Repo transaction with Central Bank Plan mid-term strategy Buy short-term liquid assets Increase maturity of liabilities Etc. 2013 SAP AG. All rights reserved. 19
Summary and Next Steps Your Transformation Starts Now Compliance: meeting regulatory requirements And what comes next? Collaborate with SAP to Integration: Take up the regulatory challenge managing liquidity and uncover areas for risk holistically improvement, Consistency: Integrated data repository, no redundancy Flexibility: react quickly to changing regulatory demands and market situations deploy system transformation for improving the bank s profitability benefit from prominent SAP innovations like in-memory technology 2013 SAP AG. All rights reserved. 20
Impact of Risk Based Supervision Technology Departments Arun Pingaley, Industry Director FSI, SAP India Conference on Risk Based Supervision Hotel Trident, Mumbai, October 8, 2013
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