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Copyr i g ht © 2016, SAS Ins t i tu t e Inc . A l l r ights reser ve d .
#SASFPT17
Building a Bridge between Risk and
Finance to Address IFRS 9 and Stress-
testingMartim Rocha
SAS
Experience your new possible
SAS® FORUM
PORTUGAL 2017
Copyright © SAS Inst i tute Inc. Al l r ights reserv ed.
The Financial Services Landscape
Intermittent growth: changing interest rate environment, continued pressure on margins
Sustained regulatory pressure: enhanced rules lead to higher operating and compliance costs
Increasing credit risk and market volitility: further impact expected credit loss, reserves and
capital
2
Copyright © SAS Inst i tute Inc. Al l r ights reserv ed.
#SASFPT17
• Geopolitical changes
• Emerging technologies (e.g, ML, AI, Block
Chain)
• Digitization and industrialization
• Accounting standards (IFRS 9, CECL)
• Stress testing (CCAR, DFAST, EBA)
• Capital requirements for the trading book
(FRTB)
• Cost reduction, efficiency, repeatability
• Risk adjusted view integrated with finance
• Leveraging risk investments for business
• Disparate, fragmented systems
• Insufficient data quality and coverage
• Siloed, patchwork of data and
processes
• Inefficient infrastructure and
execution
• Resource intensive – lack of
automation
• High maintenance costs
• Redundant investments
• Lack of appropriate controls
• Limited or incomplete analyses
3
Key Drivers Key Challenges
Bu
sin
ess
Re
gu
lato
r
yM
ark
et
Copyright © SAS Inst i tute Inc. Al l r ights reserv ed.
4
To properly account for
potential loses and ensure that
the appropriate reserves are
held, risk and finance must
coordinate their activities: risk
to estimate credit losses and
finance to determine the right
level of provisions on the
balance sheet, the IFRS9
standard guidelines state the
allowances for credit losses in
the Balance Sheet should be
based on the estimation of
Credit Losses, creating a direct
link and dependency between
the two functions
Risk Management
Risk enjoys the
freedom needed to
properly estimate
various types of
financial risk
Financial Management
Finance operates
within the well-defined
and structured rules of
accounting needed for
standardized reporting
Risk & Finance
To protect the assets of the institution and ensure its
ongoing solvency
what Can happen what Has happen
Copyright © SAS Inst i tute Inc. Al l r ights reserv ed.
SAS RISK FOCUS AREAS
Enterprise
Stress TestingCCAR/DFAST/EBA
Credit Scoring
PD/LGD/EAD
Regulatory Risk
ManagementRWA/FRTB/IRRBB
Expected Credit
Loss IFRS9/CECL
Model Risk
ManagementTRIM/SR 11-7
6
Copyr i g ht © 2016, SAS Ins t i tu t e Inc . A l l r ights reser ve d .
•Requirements•Calculation of Expected Credit Loss (ECL) for all financial instruments at position level
•Updated ECL in each reporting period to reflect changes
•Consideration of future events including macroeconomic data
•Required: period-based probabilities of default as well as expected loss calculation over the
entire duration and thus time-dependent models
•Challenges•Increased volumes of data through detailed and periodic assessment
•Increased number of models by extending additional (macroeconomic) parameters
•Calculation of different scenarios due to the interpretation margin
•Governance, auditability, traceability
The IFRS 9 requirements and challenges require the implementation of a modern risk
infrastructure
IFRS9 AS EXAMPLE OF RISK AND FINANCE INTEGRATION
Context: Changes to the IAS 39 approach: a call to action for banks
Copyr i g ht © 2016, SAS Ins t i tu t e Inc . A l l r ights reser ve d .
KEY CHALLENGES
• Significant methodological challenges
• New models for expected loss components
• Forecasting
• Integration of large amount of risk and finance data
• More automation and better performance of risk and finance systems
• More granular disclosure
More Analytics, more data to feed them, better systems to
execute and report
Copyright © SAS Inst i tute Inc. Al l r ights reserv ed.
8
The risk function must provide models and methodology to
estimate values such as probability of default (PD), cash
flows, and loss given default (LGD) over time and subject to
multiple economic scenarios.
Finance, on the other hand, must process those model-
based results into useful financial information, populating a
variety of managerial and regulatory reports, while
maintaining the required level of governance and control
demanded by both the internal and external audit functions
End-to-End Business Process flow
Risk & Finance Data
Model Library
Risk Measures Calculator
Management Reporting
GL Posting
Regulatory Disclosures
Stage Allocation
Review and Challenge
Sign-offData Check & Augment
Economic Scenario
Copyright © SAS Inst itute Inc. A l l r ights reserved.
OpenIn-memoryDistributed
Common, Integrated Platform
Reporting & Analytics
Business Content
SAS Platform
Computation Engine
Governance & Workflow
Model Implementation
SAS F&R Portfolio
Deployment On-premise Hosted Cloud RaaS
Enterprise Stress Testing
Expected Credit Loss
Regulatory Risk
Model Risk Management
Credit Scoring
Copyr i g ht © 2016, SAS Ins t i tu t e Inc . A l l r ights reser ve d .
KEY CHALLENGES
• Significant methodological challenges
• New models for expected loss components
• Forecasting
• Integration of large amount of risk and finance data
• More automation and better performance of risk and finance systems
• More granular disclosure
More Analytics, more data to feed them, better systems to
execute and report
Copyr i g ht © 2016, SAS Ins t i tu t e Inc . A l l r ights reser ve d .
#SASFPT17
Review & Analyze
Results
Model Execution Environment
Quickly Create &
Test New Scenarios
ECL MODELLING
𝑬𝑪𝑳 𝑪𝒂𝒍𝒄𝒖𝒍𝒂𝒕𝒊𝒐𝒏 𝒕𝒂𝒔𝒌 𝒅𝒆𝒇 =
𝑰𝒏𝒑𝒖𝒕 𝑷𝒐𝒓𝒕𝒇𝒐𝒍𝒊𝒐,𝑺𝒄𝒆𝒏𝒂𝒓𝒊𝒐𝒔,
𝑴𝒐𝒅𝒆𝒍 𝑮𝒓𝒐𝒖𝒑𝒔,𝑪𝒂𝒍𝒄𝒖𝒍𝒂𝒕𝒊𝒐𝒏 𝑴𝒆𝒕𝒉𝒐𝒅𝒔,
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝒂𝒓𝒔
Input Output
Portfolio Engine
Copyright © SAS Inst itute Inc. A l l r ights reserved.
OpenIn-memoryDistributed
Common, Integrated Platform
Reporting & Analytics
Business Content
SAS Platform
Computation Engine
Governance & Workflow
Model Implementation
SAS Risk Management
7
Deployment On-premise Hosted Cloud RaaS
Enterprise Stress Testing
Expected Credit Loss
Regulatory Risk
Model Risk Management
Credit Scoring
Copyright © SAS Inst itute Inc. A l l r ights reserved.
Scenario Management
EXPLORER DESIGNER
Define/Load scenario
Scenario library
Change scenarios
Scenario Enrichment, model Risk Factors from Base Scenarios
Export scenarios
Copyright © SAS Inst itute Inc. A l l r ights reserved.
Define model assemblage logic
Group ModelsSpecify model group templates or user defined logic (UDL)Select models for the templates or UDLDefine output variables and transformations
Copyright © SAS Inst itute Inc. A l l r ights reserved.
Run analysis with the models choosen
Associate model with data and productsDefine running parameters
Copyr i g ht © 2016, SAS Ins t i tu t e Inc . A l l r ights reser ve d .
KEY CHALLENGES
• Significant methodological challenges
• New models for expected loss components
• Forecasting
• Integration of large amount of risk and finance data
• More automation and better performance of risk and finance systems
• More granular disclosure
More Analytics, more data to feed them, better systems to
execute and report
Copyright © SAS Inst itute Inc. A l l r ights reserved.
OpenIn-memoryDistributed
Common, Integrated Platform
Reporting & Analytics
Business Content
SAS Platform
Computation Engine
Governance & Workflow
Model Implementation
SAS Risk Management
7
Deployment On-premise Hosted Cloud RaaS
Enterprise Stress Testing
Expected Credit Loss
Regulatory Risk
Model Risk Management
Credit Scoring
Copyright © SAS Inst itute Inc. A l l r ights reserved.
Agregate ResultsSlice and DiceLoan Level Calculations Reconcile
Consolidate Results
Copyr i g ht © 2016, SAS Ins t i tu t e Inc . A l l r ights reser ve d .
#SASFPT17
CONSOLIDATE RESULTS - BUSINESS RULES MANAGER
Stage
Allocation rules
Copyr i g ht © 2016, SAS Ins t i tu t e Inc . A l l r ights reser ve d .
#SASFPT17
ORCHESTRATION AND COORDINATION FOR MODEL USAGE
Organize workflow
Select Model from model
library
Group models
Copyright © SAS Inst itute Inc. A l l r ights reserved.
Agregate, review, adjust, commentReview and Challenge
Risk & Finance Workbench:Manual UpdatesSign-offAudit tracking
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Review and sign-off
Risk and Finance Workbench:Sign-offUpdates logAudit tracking
Copyright © SAS Inst itute Inc. A l l r ights reserved.
Sample artifacts and scripts included
Management Reporting and Workflow
Copyright © SAS Inst itute Inc. A l l r ights reserved.
Some Reports available in SAS for ECL content
• Credit Analysis• A.1.a - Credit Quality Analysis
• A.2.a - Collateral Analysis Summary
• A.3.a - LTV Ratio Analysis by Product Category
• A.4.a - Credit Concentrations by Product
• A.5.a - Past Due Analysis
• A.6.a - Vintage Analysis
• C.1.a - ECL Scenario Attribution Report
• Movement and Reconciliation• B.1.a - Movement in Expected Credit Loss
Allowance (Banks)
• B.1.b - Movement in Expected Credit Loss Allowance (Banks)
• B.1.c - Movement in Expected Credit Loss
Allowance (FVOCI)
• B.1.d - Movement in Expected Credit Loss Allowance (Banks)
• B.1.e - Movement in Expected Credit Loss Allowance (Held to Maturity)
• B.1.f - Movement in Expected Credit Loss Allowance (Financial Guarantees)
• B.1.g - Movement in Expected Credit Loss Allowance (Financial Guarantees)
• B.1.h - Movement in Expected Credit Loss Allowance (Leases)
• B.2.a - Classification of Financial Assets and Liabilities
• B.3.a - Financial Assets and Liabilities -Carrying Amount Reconciliation
Regulatory Reporting
Copyright © SAS Inst itute Inc. A l l r ights reserved.
OpenIn-memoryDistributed
Common, Integrated Platform
Reporting & Analytics
Business Content
SAS Platform
Computation Engine
Governance & Workflow
Model Implementation
SAS Risk Management
7
Deployment On-premise Hosted Cloud RaaS
Enterprise Stress Testing
Expected Credit Loss
Regulatory Risk
Model Risk Management
Credit Scoring
Copyright © SAS Inst itute Inc. A l l r ights reserved.
SAS IRM – Infrastructure for Risk ManagementJob Flows and Calculation traceability
Contextual Documentation
Copyright © SAS Inst itute Inc. A l l r ights reserved.
Platform must provide a set of services
Open standards
Content as Open Source
Framework for "Regulator Ready" documentation
Objectives of the platform
Anyone can develop apps / content for the platform (SAS,
partner, customer)
Agile development process
Total Test Automation
Regulatory changes:New Release in days / weeks
(SLA)Update by capability
Update as in Appstore
Use modern hardware to be super fast (runs in seconds /
minutes range)
In-Memory und Paralell Processing
IRM is the materialization of these requirements
Regulatory processes as BPMN flows
Apps as Opensource (SAS Code, Java, R, ...)
Code = Documentation, Integration withDoxygen
Continuos Integration, Up to daily Releases
Integrated test framework
In-Memory Layer / Scheduler for SAS Code
Self Service
Versioning
Any code, data, changes are automatically versioned. Each version is executable.
SAS IRM – Infrastructure for Risk Management• The platform meets all the requirements of a modern risk infrastructure.
Copyright © SAS Inst itute Inc. A l l r ights reserved.
30
Traditionally risk and finance groups within a bank operate separately.
Challenge of the new IFRS 9 and CECL regulation, however, requires the two groups to collaborate much more closely.
Risk and finance traditionally use separate and dedicated IT applications
In order to efficiently manage the IFRS9 and CECL process both functions should share the same IT application.
Banks need a solution that provides an integrated, scalable, and controlled risk and finance platform to enable those collaborations.
Even more, these two groups can work together easily to see how different business assumptions might affect a bank’s financials and create the best strategy for the bank.