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Oracle Financial Services Analytical Applications: Improving sustainability in banks through liquidity and capital management
Austin TrippenseeFinancial Services Analytical Applications
Asian Banker SummitHong Kong
April 7, 2011
The following is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions.The development, release, and timing of any features or functionality described for Oracle’s products remains at the sole discretion of Oracle.
© 2011 Oracle Corporation – Proprietary and Confidential
What did you know?
• 5 years ago– What was your worst-case stress scenario for the U.S.
Financial Markets?– Did you know who Barack Obama was?
• 3 years ago– Did you think oil would go above USD 140/bbl?– Would you have bought gold at USD 1,400/ounce?
• 1 year ago– How did your stress tests include Egypt or Libya? – Do your stress tests include natural disasters?• Japan, Haiti, Iceland, etc
Liquidity Risk Management ChallengesBasel III Regulations – Going Beyond Liquidity Gaps
• 2 Liquidity risk measures to be calculated based on detailed prescriptive guidelines on how to treat inflows and outflows:• Liquidity Coverage Ratio – identifies the amount of high
liquid assets that need to be maintained to withstand a supervisor specified stress scenario
• Net Stable Funding ratio – measures the amount of stable long-term funding that needs to be maintained
Liquidity Risk Measures
• Increased focus on intra-day liquidity• Liquidity Reporting to cover – contractual mismatch, funding
concentration, Unencumbered Assets , Market Related Monitoring
Monitoring & Reporting
• In addition banks need to comply with the qualitative guidelines issued on liquidity management
Qualitative Guidelines
5© 2011 Oracle Corporation
Liquidity Risk Management ChallengesCurrent Situation
• Liquidity Risk management gets significant attention with reinforced principles and prescriptions from regulators (BIS, FSA, FDIC, APRA, OSFI, etc)
• Liquidity Stress Testing highlighted as a key industry-wide weakness
Increasing Regulatory Pressures
• Liquidity Risk becomes an Enterprise concern which highlight disconnects with other risks and company-wide business practices
• Inter-relationships between Credit, Market and Liquidity Risks not understood
Inadequacy of “Silo’d” Approach to Risk Management
• Stress testing carried out as a standalone exercise and the results not used in the strategic decision making process of the institution
• Stress Scenarios are not uniformly applied and additionally do not cater to severe liquidity events across all risk silos
• Liquidity management process limited to estimation of liquidity gaps
Weakness in Current Liquidity Risk Stress Testing Practices
• Current management, analytical and resolution approaches to Liquidity Risk are not transparent, responsive or flexible
• Materiality Assessment of Liquidity Risk non-existing
Liquidity Risk Management Process an inflexible “Black Box”
6© 2011 Oracle Corporation
Liquidity Risk Management Challenges“To meet these challenges, I need to…”
• Ability to respond on an intra-day and on-demand basis to regulatory requirements and marketplace events
• Build comprehensive library of stress scenarios that are consistent with enterprise use and reflect regulator needs catering to market-wide and idiosyncratic requirements
Meet all Regulatory Compliance Requirements in a Timely Manner
• Adopt a simple and transparent solution that allows regulators to understand the defined Stress Scenario, the impact on underlying data and the calculation process
• Enterprise wide involvement to effectively assess liquidity profile and • Cross-functional team that is able to understand and model inter-relationships across risk
categories
Create a Transparent and Auditable Stress Testing Program
• Develop funding strategies based on anticipated market conditions and associate those with stress scenarios
• Identify net exposure after mitigating strategies and manage the institutions risk appetite
Develop Multiple Alternative Counterbalancing Strategies
• Develop a process of timely availability of Liquidity reporting and dashboarding• Provide a means for management, board and supervisors to be well satisfied with
“explanatory detail” for critical issues
Establish Supervisory & Management Dashboards
7© 2011 Oracle Corporation
8
Liquidity Risk Management Process Flow
Define Liquidity Time Buckets•Near Term Buckets for Operational purposes
•Long Term Buckets for Strategic Decision making
Execute Contractual Run •Contractual data from bank’s systems
•Contractual gaps without overlaying assumptions
•Highlights liquidity concentration on the balance sheet
Define Baseline Assumptions using Baseline Rules•By business user•BAU assumptions on roll-over, run-offs, delinquencies, margin requirements due to market movements,
Execute Baseline Run•Compute business-as-usual cash flows and gaps based on BAU behaviour assumption
•Compute liquidity ratios under BAU
Define Stress Scenarios• Idiosyncratic and systemic scenarios•Worsening of BAU assumptions •Regulatory and internally modeled •Stress varies by dimensions such as Legal Entity, Currency, Etc
Execute Stress Scenarios•Assess cash flows, gaps and ratios under stress scenarios
• Intra-day assessment•Assessment under multiple scenarios
Counterbalancing•Define credible counterbalancing strategies – asset sale, repo rollover, new repos
•Assess gaps under each counterbalancing strategy
•Maintain audit trail of results
Materiality Assessment & Action Planning•Liquidity profile based on qualitative and quantitative assessment
• Identify and manage liquidity hotspots on an operational and strategic level
Advanced Reports•Regulatory reports in pre-specified templates
•Management reports and dashboards on gaps, ratios and counterbalancing results
•Heat maps
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Stress Testing Challenges“To meet these challenges, I need to…”
• Behavioral Assumptions• Bring together the entire portfolio.
Define Base Case
• At the individual risk factor level• Groups of risk faScenario, the impact on underlying data and the calculation
process• Enterprise wide involvement to effectively assess liquidity profile and • Cross-functional team that is able to understand and model inter-relationships across risk
categories
Define Shocks
• Develop funding strategies based on anticipated market conditions and associate those with stress scenarios
• Identify net exposure after mitigating strategies and manage the institutions risk appetite
Develop Multiple Alternative Counterbalancing Strategies
• Develop a process of timely availability of Liquidity reporting and dashboarding• Provide a means for management, board and supervisors to be well satisfied with
“explanatory detail” for critical issues
Establish Supervisory & Management Dashboards
9© 2011 Oracle Corporation
Reporting Cycle Event
Day 10: 9:00 AM Monthly reports due in 2 days
Day 10: 9:15 AM Regulator requests modification to submission
Day 10: 9:22 AM Economic event happens
Day 10: 9:26 AM CFO wants revised profitability estimates
Day 10: 9:27 AM CRO requests new stress run to assess impact
A Day in the Life: Day 10 of Monthly Reporting Cycle
© 2011 Oracle Corporation 10
Monthly Cycle Event
Day 10: 9:00 AM Monthly reports due in 2 days
Day 10: 9:15 AM Regulator requests modification to submission
Day 10: 9:22 AM Economic event happens
Day 10: 9:26 AM CFO wants revised profitability estimates
Day 10: 9:27 AM CRO requests new stress run to assess impact
Day 10: 9:30 AM Regulatory capital run submitted with regulator modifications
Day 10: 11:00 AM Regulatory run completed (1:29:21)
Day 10: 11:00 AM Profitability run submitted per new specifications
Day 10: 12:46 PM Profitability run completed (1:46:00)
Day 10: 12:46 PM New stress liquidity run submitted
Day 10: 12:56 PM Stress run completed (0:10:06)
A Day in the Life:OFSAA with Exadata Changes the Game
© 2011 Oracle Corporation 11
Summary
• Liquidity risk management should leverage organizational excellence across all risk areas• Models continue to evolve to address micro & macro
economic factors across all risk types• Organizations will need flexibility to adapt to changing
conditions• Systems need to manage libraries of scenarios and
be able to support intraday analytics• Must support risk culture across entire organization
© 2011 Oracle Corporation – Proprietary and Confidential 13
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