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De-Risking Financial Institutions In ‘The New Beginning’

by Vijayaraghavan Venkataraman,Global Head, BFSI Risk Management & Regulatory Compliance, CRO Initiative, TCS;

Ramesh Iyer,Partner, BFSI Europe, Risk Management & Regulatory Compliance, CRO Initiative, TCS and

Raghunandan M,Global GTM & Solutions, Risk Management & Regulatory Compliance, CRO Initiative, TCS

Background and key dimensions of pandemic impact

After the 2008 recession, financial institutions (FIs) & central banks

have been continuously building resilience against market shocks

to avoid resorting to public funded bail outs. Capital & liquidity

buffers have been maintained at a healthy level through the past

decade, that can now be used to mitigate the financial crisis

triggered by the current pandemic.

Moreover, in responding to the pandemic, global regulators have

come out with similar responses, by encouraging FIs to support

customers in surviving this crisis and gradually land on their feet.

To this purpose, many non-critical regulatory deadlines have been

postponed in order to reduce the operational burden to some

extent. In brief, the guidance has been:

An increased focus on protecting consumers and market integrity

in the short term, and remaining vigilant against financial crime

Continuation of liquidity injection into the markets to avoid any

ripple effect resulting into a systemic breakdown

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The present crisis has an impact on various dimensions of business

operations. These repercussions fall under four main buckets – Financial,

Operational, Customer and Regulatory – that can ultimately lead to

business disruption (see Figure 1).

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CRO / CCO response to pandemic impact to date

The impact of COVID-19 has dealt a dual blow creating supply chain

disruption and demand-side slowdown. The chief risk & compliance

officer (CRO/CCO) division plays a key role in the mitigation of rapidly

emerging risks and to lead recovery efforts into the new beginning. Two

primary focus areas are driving these efforts: client centricity and

operational resilience.

Disruption To Business Continuity

Stress On Capital Adequacy due to operational losses & reduced profitability

Increased NPLs

Impact on Revenue due to deferred payments, reduction in interest rates, waiving off late fees etc..

Expectation is to Keep providing financial support to hardest hit viable clients

Eased capital, liquidity constraints & stimulus package(s), to increase the ability of banks to

lend and absorb losses in this challenging environment

Compliances to Conduct, and FCRM normsTo continue to deliver customer outcome during stress scenarios

Deal with client challenges by delivering out of the box services & incentives

Increased Stress on continuity of services

Increased effort on external & internal Communication

Increased Cyber, Fraud & Money Laundering Risk

Unplanned Outages & stress on IT / Infrastructure & Inventories

Adverse Impact on Resource availability & Overall employee well being

Stress On Liquidity

FI (Bank)

Fina

ncial Operational

Custom

er

Regulatory

Figure 1: Dimensions of pandemic impact

Moreover, the risk & compliance leadership is using pandemic impact

(e.g. changed working practices), as a strong driver to accelerate their

digital adoption roadmap. The upcoming two quarters will prove

critical in determining the future course of the financial organization

and industry.

Operational resilience and customer centricity will become the overarching theme for CROs to deliver

confidence and continuity of services

Indicative regulatory focus

We are witnessing a two-way push across the regulatory spectrum, with

the focus increasing in some areas and easing out in others. Broad

categories across global regulators include:

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Efflux of Remote operations & change in operating model to ensure client safety and continuity of services

Focused analytics to sustain surge in call demand and agent supply, along with dedicated helplines and personalized services

Creative customer engagement & communication mechanisms

Minimize customer Complaints and drive positive conduct outcomes

Deal with client challenges by delivering out of the box services & customer centric risk management

EWI’s to effectively assess sectorial risks and drive mitigation

Identifying critical processes, staff and infrastructure to prioritize mitigation and deliver remote services

Re-calibration of financial risk models & streamlining model risk management frameworks

Deliver Capital optimization

Improvement in controls effectiveness across the enterprise with special focus on fin crime

Execute BCP & DR plans

Re-prioritize and right-size book of work

Client Centricity Operational Resilience

Focu

s A

rea

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Outcomes map in the New Beginning

With the rapid evolution of financial ecosystems, the risk and compliance

function is also constantly growing in coverage as the result of newer risk

types into the governance, risk and compliance (GRC) spectrum. The

pandemic has accelerated this change, and encouraged CROs to reassess

& reimagine their core capabilities and the corresponding expansion

possibilities in delivering incremental value, positioning CROs/CCOs as

potent catalysts in optimizing risk-return profiles

Furthermore, there is also an active focus on proactively developing

transformational capabilities toward delivering a competitive advantage

for the organization. The segregation of outcomes across core, adjacent

and transformational themes can be seen in Figure 2.

Enhanced reporting requirements for liquidity globally

UK & EU regulators have emphasized on, fair & flexible treatment of customers and transparency in communication

AFM (Dutch) calls for extra attention to diligent customer care in product development and evaluation

Restrictions on short selling in EU

European Insurance and Occupational Pension Authority (EIOPA) stated insurance companies should preserve their solvency capital positions

Reduction of the countercyclical buffer (CCyB) rate to 0% of banks’ exposures to UK & EU borrowers. Supplementary leverage ratio relaxed in US.

The PRA clarified on VAR backtesting breaches that have arisen as a result of market volatility. Firms will be allowed to offset increases due to new exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements. The approach will be reviewed after 6 months

Clarification on treatment of forbearance under IFRS 9 & CECL, and flexibility on classification of loans

Monitoring guidance on WFH arrangements, online data & services access to customers and employees globally

ESMA clarifies on MiFID II requirements of call recording and communication surveillance, to mitigate conduct risk due to increased remote working, & EBA emphasizes focus on financial crime mitigation

Monetary Authority of Singapore (MAS) has reminded financial institutions to adopt BCPs and appropriate control measures to guard against cyber threats

AUSTRAC & US Fed Issues new scenarios for financial crime risk monitoring during pandemic scenarios

Annual stress test – UK & EU have cancelled their annual stress tests but US hasn’t

BSBS postponed implementation of Basel 3.1 to 2023

EC (European Commission) postpones leverage ratio GSIB buffer

Australia Prudential Regulatory Authority (APRA) has suspended majority of its 2020 policy and supervision priorities in order to free up capacity

Increased Supervisory Push on Market Integrity & Consumer protection Relaxation Of Capital & Liquidity buffers

Increased Supervisory focus on Operational Resilience & Financial Crime

Relaxation on non critical regulatory submissions

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Role of emerging AI and ML technologies to re-imagine use cases

In a recent survey report conducted by TCS and Chartis across 166

relevant risk business & technology leaders, covering retail and

commercial banks, capital markets institutions, and insurance and wealth

management firms, we discussed the maturity of AI in their institutions,

and the potential for further uplifting these capabilities to deliver specific

outcomes. The next few sections list some of our key findings.

In enterprise resource management (ERM) the use of artificial

intelligence (AI) techniques is focused on non-regulated use cases, such as

the generation of early warning signs, and the analysis of what-if scenarios

instead of regulatory reporting projects. A representative of a large

universal bank proposed leveraging AI capabilities to construct a varied

and expansive stress and scenarios library. The bank could then scan tens

of thousands of benchmark results, and millions of market data points, to

pinpoint potential areas of concern.

How to Win

Wh

ere

to p

lay

Client & workforce safety Reputation management

Technology effectiveness

BCP & DR

Remote operations Capital & liquidity management

Cognitive fin crime & cyber management

Cognitive controls diagnosis and recommendations

Refine policies and procedures to reflect new normal & enable growth

Modelling emerging risks, revenue and cost scenarios

Fulfil capacity gaps and activate alternate channels to expand customer service

Increase digitization in credit risk, stress testing, operational risk andcompliance

Deliver ecosystem enabled competitive edge

Stress Testing As A Service Quantification frameworks for emerging risk

Proactively manage reputation risk factors

Optimization of omnichannel performance for growth

Behavioral analytics for conduct risk EWIs & strengthening risk culture

Monetizing risk data for insights & services

Cognitive risk intelligence to sense and identify future risk scenarios

User journey-driven risk management

Renewed rigor in cost optimization

Leverage emerging digital design patterns to drive growth

Cognitive regulatory compliance, impact assessment & reporting

Expanding capability into new horizons

Developing breakthroughsAdjacent Transformational

Optimizing existing business mandatesCore

Figure 2: Outcomes map across core, adjacent & transformational categories

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In regulatory reporting, AI has been used in managing and validating

data, validating results against predetermined criteria and monitoring

overall compliance. Representatives from several large banks explained

that they are now running elaborate data management and validation

programs using strong machine learning (ML) and related analytical

frameworks.

In financial crime risk management (FCRM), respondents see the

greatest benefits in anti-fraud, anti-money laundering (AML) and

cybersecurity applications, with KYC an area of growing interest. Client

screening using external risk factors and alert prioritization frameworks

for sanctions screening and transaction monitoring are providing greater

resiliency in the management of financial crime signals.

0 10 20 30 40 50 60

Others

Don't know /Prefer Not to Say

None of the above

Analytical Calculations

Compliance Monitoring

Data Validation

Data Preparatio/Mapping

Regulatory impact Management

Mapping Rules & Requirements to Business Process

0 10 20 30 40 50

OtherDon't Know/Perfer Not to Say

Not Generally ApplicableP & L Analytics

Reporting & VisualizationData Quality

Risk AggregationsCorporate Bond valuation

Portfolio StructureStatistical Calculations - Market Risk

Early Warning CapablitiesDefault Risk Calculations

Stress Testing

Source: Chartis & TCS research

Greatest perceived benefits for institutions in implementing AI tools for risk management, by area of enterprise risk management (%), n=101

12.9%

4.0%

5.0%

2.0%

4.0%

40.6%

7.9%

8.9%

3.0%

5.9%

0.0%4.0%

2.0%

30.7%

30.7%

31.7%

54.5%

35.6%

33.7%

3.0%

5.0%

1.0%

Source: Chartis & TCS research

Greatest perceived role for AI, by place in the regulatory chain (%), n=101, with 228 responses

0 5 10 15 20 25 30

Other

Don't know / Prefer Not to Say

None of the Above / Note Generally Applicable

KYC / Due Dillgence

Watchlist / Sancitions Monitoring

Communication Servelliance

Trade Survelliance

Anti-Money Launching

Anti Fraud

Cybersecurity /Cyber Risk Management

0 5 10 15 20 25 30

Other

Don't Know / Prefer Not to Say

None of the Above

Conduct Risk

IT Risk

Security / Cybersecurity Risk

Internal Audit

Third-Party Vendor Risk Management

Model Risk Management & Governance

Operational Risk

GRC

23.8%

23.8%

5.9%

4.0%

26.7%

5.9%

3.0%

0.0%

6.9%

0.0%

23.8%

20.8%

13.9%

11.9%

26.7%

25.7%

17.8%

15.8%

27.7%

12.9%

4.0%

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In operational risk, quantifying has traditionally been extremely

challenging. Standard statistical models have struggled with the

relative paucity of data and lack of deep statistical processes. However,

in our discussions with banks and other FIs, three key trends stood out:

Widespread digitalization has effectively solved the data paucity

problem

External and internal networks can now be monitored in much

greater detail

There are broad uses for AI in non-financial and operational risk

management contexts, although one quarter of respondents are

not engaged.

Source: Chartis & TCS research

Source: Chartis & TCS research

Usage of AI tools, by area of the non-financial and operational risk management (%), n=101 with 200

Greatest perceived benefits from implementing AI tools for risk management by area of financial crime risk management (%), n=101

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CROs’ evolving influence in a client-centric ecosystem to deliver growth and transformation

CROs are gradually moving toward a user journey-driven operational

model that’s focused upon client centricity. Initiatives like improvement of

customer data view, including hardships and dispute analytics, enable

insights for a more informed and empathetic decision making by the

frontline. This model also requires reimagination of business services and

processes to improve throughput and risk management efficiency.

Moreover, in the time of crisis, strengthening workforce availability and

effectiveness in forbearance, and restructuring cases and guidance on

alternate products is imperative to expand operational capacity and

ensure business continuity. CROs are looking at strengthening risk &

compliance capabilities to deliver insights and value-added services, like

ratings and hedging advisory for SME clients, and defensive measures like

improving customer data protection against cyber-attacks and financial

crime, to create competitive advantage in the marketplace.

These factors, coupled with an expanding profile of a CRO, necessitate a

larger ecosystem to mitigate the expanding risk profile of financial

institutions. Figure 3 shows different enablers participating together in

a conducive ecosystem:

Accountability of Prudent Risk Management at the board level

Shared Utilities & Services across FIs

Cross Industry Data Sets for Fin

Crime Mitigation

Customer at the centre of Investments

FinTech’s

Alt Data Sources

IT Services

Academics, Analysts &

Think Tanks Regulatory Convergence

Personalized Services

ReputationManagement

Digital Enterprise

Artificial Intelligence

Agile

Cyber, Data & Analytics

IOT

Blockchain

RPA

Cloud

RelationshipFocus

CROs Sphere Of Influence to

Differentiate & Deliver

Expanding CROs role in delivering competitive advantage by Monetizing Risk Data / Insights, &

enabling business decisions

Drive Continuous Cost Reduction via digitization of core & extended functions

Deliver Forward Looking Operational Resilience

Protect the organization by proactively managing reputation risk

Drive a risk culture of promoting value creation in close partnership with business

Figure 3: Risk ecosystem view

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Horizon for CRO initiatives (6 to 8 quarters)

We are witnessing a sudden surge in risk clusters and their interplay,

which has never been observed before in recent history. While we have

had pandemics in the past, the potential impact of a pandemic has

increased exponentially, due to the sheer size of today’s global banking

system, and an ever increasing reliance on the infrastructure to conduct

day-to-day transactions. In such an environment, prioritizing remediation

initiatives is proving very challenging for CROs. Figure 4 visually

represents this horizon of prioritized initiatives.

In summary, the pandemic presents unique challenges and opportunities

for the FIs in adapting to a new normal of delivering business continuity

in a remote operation’s dominant setup. Risk & compliance organizations

have so far responded well, in delivering client centricity and operational

resilience, wherein FIs are going above and beyond their traditional

mandates, with value-added services for customers while continuously

adopting newer design patterns. Capability uplifts in areas like conduct

risk mitigation, reputational risk management & early warnings for

shifting left, are emerging as priorities, with a customer centric use

journey approach, to deliver client protection and enablement.

_____________________________________________________________iTCS, “The State of AI in Risk Management: Developing an AI roadmap for risk and compli-ance in the finance industry,” 2019, https://www.tcs.com/content/dam/tcs/pdf/Indus-tries/Banking%20and%20Financial%20Services/State-of-AI-in-Risk-Management.pdf

Mitigate Prepare for the new normal

Stra

teg

icO

per

atio

nal

Now 3 months

Recalibrate mitigation plans, Ensure proactive communication of sameDesign proactive and configurable reports

Digitize Compliance Activities Ensure Data readiness for regulatory reporting

Identify new risks, Update Risk Appetite Statements

Improve Controls diagnosis, effectiveness & Indexing

Re-Imagine Credit - rating models & approval

RWA Optimization

Improve AML effectiveness & Anti-Fraud Capability

Embed BCP/DR into GRC

Re-Calibrate Scenarios & Models across risk typesContinue Improving on Climate risk quantification & mitigation

Real time Credit Monitoring

Cyber Risk Quantification (CRQ) & Digital Forensics

Track data, collate and classify gaps across key risk types

Behavioral Analytics for proactive mitigation of operational risk

AR / VR adoption for compliance & customer experience

12 months 24 months

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