Integrating Risk & Finance using SAS

Integrating Risk & Finance using SAS Jiri Kubalek, senior consultant SAS Czech Republic

Why solutions integration...?

List of typical requirements within financial industry Legal Consolidation (convergence of IFRS and regulatory standards) Controlling, Planning & Budgeting (refinement of controlling and planning processes) Tax Optimization (optimal income tax & VAT repartition) Regulatory Reporting (mixed conglomerates - Basel2/Solvency) Risk Management (consistent framework for credit, market, operational and insurance risks) Performance Measurement

Financial Consolidation, Controlling & Regulatory Reporting Financial Management 4.2 Credit Risk Management for Banking 4.2 Provides real-time consolidations, flexible budgeting, planning and fully supports all controlling and internal audit processes Faciliate reporting according to GAAP/IFRS, Basel2/Solvency and supplementary supervision of banking/insurance groups and mixed financial holding companies in terms of Capital adequacy Risk concentration Intragroup transactions

Overlaps between IFRS and Basel II It s crucial to have one, and only one, centralised set of fully reconciled data from which all risk and financial disclosures emanate.

Solution architecture FM Studio Portal... Data entry... Administration... Reporting Solution Datamart (SDM) FM4 CRMS FM Detailed Data Store (DDS) Regulatory Capital Engine (CRMS) Data Structures Mapping tables Trial B/S, I/S, CF/S DB of entities Portfolio data

Major IFRS & Regulatory enhancements Account Segment Currency Source Analysis Time Trader Organization Evidence Regulatory Business line Customer country Customer industry Maturity (Absolute, Remaining, etc.). Transferable regulatory capital Non-transferable regulatory capital Requirement (A,B,Op,Solvency) Regulatory capital limits. Balance at the beginning of fiscal period (+) Additions (-) Disposals (-) Amortization & impairment losses Balance at the end of fiscal period

Legal consolidation in FM 4.2 18 18 Data Entry Part Data entry and Validation forms Consolidation Rules Reports Consolidiation and reporting part Composite Result Model Composite Result Model: Combination of different RM s for combined reporting Result Model 1 Conso Rules 1 Result Model 2 Conso Rules 2 Result Model 3 Conso Rules 3 Solution Data Mart Data Entry &Reporting Cycle Result Model: logical data container, defined by a subset of the dimensions in the cycle & owning an own set of consolidation rules Cycle: Physical data container defined by a selection of dimensions Central FM Data Base DDS

Controlling, Planning & Budgeting tasks 1) Controlling, Planning & Budgeting performed by SAS Financial Management (same cycle, separate Result Models) can be based on consolidation or different chart of accounts usually different level of aggregation, segmentation and evidence provides organization annual business and financial plan on a monthly or quarterly basis tactical (2 and 3 years) business and financial plan on an annual basis strategic plan with a longer time horizon 2) Tax Optimization data collection (in local GAAPs) plan and simulate tax position of the group (scenario analysis)

Regulatory reporting requirements 1) Process pre-calculated capital requirements ( Aggregation ) performed by SAS Financial Management aggregate results at conglomerate level set, distribute and review exposure limits plan and simulate RWA and capital and aggregate results produce reports required by the regulator and reports for management 2) Calculate RWA and capital requirement for individually unregulated companies ( RWA Calculation ) performed by SAS Credit Risk Management Solution (CRMS) report results (more detailed) export results into FMS (less detailed)

Regulatory Reporting (financial conglomerates) Insurance companies Investment companies Local banks Brokers Foreign banks Individualy non-regulated financial companies CRMS Engine configured for STD/IRB Method Summary data in FM IFRS & Solvency I. Reports Basel II (CP04) Reports

SAS Financial Management Example: Regulatory dimension details

Financial Consolidation & Risk Management Financial Management 4.2 Credit Risk Management 4.2 SAS Forecast Server 1.2 Model each risk in terms of (earnings or value) volatility and target debt rating Look at the capital consumption and define limits Portfolio optimization (Buy/Sell/Hedge decisions) Alignment of regulatory requirements with best practice risk management (Pillar II) Development of robust Economic Capital/Solvency Framework

Simple EC calculation framework Defaults Hist. DB Recovery Hist. DB Contracts Hist. DB Regulatory Capital UL i = f( PD, LGD, EAD ) Economic Capital ULP= ( UL * ρ ij * UL T ) Time Series Default Correlations

Trading Book Banking Book Basel II / CAD Defaults Hist. DB Ratingsystem LGD System Recovery Hist. DB Collateral Retail Pool Builder EAD (t) Probability of Defaults PD 1 Year Capital Requirement K = f (PD, LGD) Probability of Default Vectors PD=f(t) Riskmitigation Reporting System Regulatory Capital RC = RWA * 8% Expected Loss EL= f (PD(t), LGD) Default Time Series Sector/Country Correlations ρ i,j Unexpected Loss Transaction UL i =f (EL, ρ PD, ρ LGD ) Unexpected Loss Portfolio ULP, RC i Capital Planning Economic Capital Securitisation MIS System Shareholder Value Added Accounting

SAS Risk Dimensions

SAS Portal

Integrating Risk Management into Decision Making More risky asset mix and if yes, equities, credit or should the company strive for more conservative investment policy and try to invest the capital for more growth? or New development in product design; Insurance savings & packaging of capital market commodities

Setting limits based on 4CAP approach REGULATORY CAPITAL AGENCY DRIVEN CAPITAL ECONOMIC CAPITAL ACTUAL CAPITAL Amount of capital required to protect the Group against statutory insolvency over a one-year time-frame Amount of capital the rating agencies expect in order to feel comfortable giving certain rating Amount of capital required to protect the Group against economic insolvency (over a one-year time-frame) Amount of equity capital or Embedded Value actually held to protect the Group against economic and statutoryinsolvency over a one-year time-frame Based on undifferentiated rules of thumb that do not reflect the real economic risks of the business and usually based on (relatively) public information Designed to protect policy holders and creditors Acts as a floor, which triggers takeover by the regulators Based on relatively undifferentiated rules of thumb (bank), and/or simple models (insurance) Not formulaic other factors such as quality of management and likelihood of Government bail-out are also considered Reflects real risks taken in the sense of unexpected movements in the value of assets and liabilities and on the confidence interval management wishes to tolerate Designed to be a tool for management Accounting result; expanded definition includes hidden reserves BARE MINIMUM CAPITAL YOU MUST HAVE CAPITAL YOU ARE EXPECTED TO HAVE CAPITAL YOU OUGHT TO HAVE CAPITAL YOU ACTUALLY HAVE

Setting limits based on 4CAP approach MM Available Financial Resources (Fair value) Required Capital (Economic Capital) Regulatory Capital (Statutory Reserves and Basel requirements) Actual capital Fair Value Economic Capital Amount of equity capital held to protect against economic and statutory insolvency Actual <- capital Regulatory capital --> Amount of capital required to protect the company against statutory insolvency. Acts as a floor, which triggers takeover by the regulators. - Based on rules of thumb that do not reflect real economic risk of the business.

Solution architecture FM Studio Portal... Data entry... Administration... Reporting Solution Datamart (SDM) FM4 CRMS + FS Business Intelligence &Analytical tools... FM Detailed Data Store (DDS) Regulatory Capital Engine (CRMS) Risk Dimensions Data Structures Mapping tables Trial B/S, I/S, CF/S DB of entities Portfolio data Risk factors Condor+ Reuters

Finance, Risk, Analytics and Performance Measurement Financial Management 4.2 Credit Risk Management 4.2 SAS Forecast Server 1.2 Strategic Performance Mgmt 2.2 Determining Risk-Return & RAPM profiles (lines of business) Risk-based pricing (products) Internal Transfer based pricing (banking-trading book)

SPM: Linking financial, regulatory and risk perspective Accounting view RoA (Return on Assets) RoE (Return on Equity) RoC (Return on Capital) Regulatory view RoRE (Return on Required Equity) Economic view RaRoC (Risk Adjusted Return on Capital) RoRaC (Return on Risk Adjusted Capital) RaRoRaC (Risk Adjusted Return on Risk Adjusted Capital)

Risk Adjusted Performance Measures (RAPM)

SAS Strategic Performance

Solution architecture FM Studio Portal SPM Solution Datamart (SDM) FM4 + SPM CRMS + FS Business Intelligence &Analytical tools... FM Detailed Data Store (DDS) Regulatory Capital Engine (CRMS) Risk Dimensions Data Structures Mapping tables Trial B/S, I/S, CF/S DB of entities Portfolio data Risk factors Condor+ Reuters