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Author's profile photo Dan Everett

BI for Banking: Enterprise Risk Reporting

Analysis of the financial institutions that performed best during the 2008 financial crisis show four common characteristics that enabled them to adjust their business strategy, risk management practices and exposure promptly and proactively in response to changing market conditions.

 

1)      Shared quantitative and qualitative information across the organization enabling them to identify the significant sources of risk sooner, and coordinate plans to reduce exposure or hedge risks while it was still practical and not prohibitively expensive.

2)      Developed in house capabilities to assess the credit quality of assets underlying complex securities instead of relying on rating agencies, enabling them to test valuation estimates by observing market prices or disputes over the value of collateral and improve the accuracy of exposures estimates in their own and their counterparties’ positions.

3)      Aligned treasury functions with risk management processes, incorporating information from all businesses in global liquidity planning, enabling them to actively monitor and manage the consolidated organization’s balance sheet, liquidity and capital positions.

4)      Implemented dynamic risk measurement processes and systems that could utilize a wide range of risk measures and rapidly alter underlying assumptions to reflect current circumstances, enabling them to create forward looking scenarios that incorporated basis and correlation risks, notional amounts of gross and net positions as well as profit and loss information to get broader visibility and deeper insight on exposure.

 

For me the key take away of this analysis is that risk management should not be merely complying with regulatory measures such as Basel II or Sarbanes Oxley, but should be a management process that integrates risk, return, market volatility and liquidity analysis to provide a framework for decisions regarding the allocation of capital to a strategy or line of business.

 

Business intelligence can help firms get a holistic view of risk that shows interdependencies across instruments, portfolios and markets, by integrating data from multiple sources and centralizing it for decision making, which increases trust in, and agreement about decisions made based on the data. And it can simplify access and make it easier for people to use and understand. Some examples of the wide range of reporting and analysis for enterprise risk reporting that BI can enable include;

 

Regulatory Compliance

  • Balance Sheet Classified Approach
  • Balance Sheet Order of Liquidity Approach
  • Balance Sheet Net Assets Approach
  • Balance Sheet Portfolio Basis Approach
  • Cash Flow Direct/Indirect
  • Cash Flow Direct/Indirect Financial Institution
  • Income Statement by Function/Nature/FI
  • Statement of Changes in Equity
  • Sarbanes Oxley Act Analysis
  • Sarbanes Oxley Act Balance Sheet Analysis

 

Risk

  • Securitization Analysis
  • Collections Analysis
  • Credit Risk Analysis
  • Customer Credit Risk Profile
  • Debt Restructure Analysis
  • Interest Rate Risk Analysis
  • Involved Party Exposure
  • Liquidity Risk
  • Non Performing Loan Analysis
  • Operational Risk Assessment

 

Relationship Marketing

  • Campaign Analysis
  • Cross Sell Analysis
  • Customer Attrition
  • Customer Behavior
  • Customer Delinquency
  • Customer Loyalty
  • Individual Customer Profile
  • Lead Analysis
  • Market Analysis
  • Wallet Share Analysis

 

Profitability

  • Activity Based Costing
  • Channel Profitability
  • Customer Lifetime Value Analysis
  • Customer Profitability
  • Investment Arrangement Analysis
  • Location Profitability
  • Organization Unit Profitability
  • Product Analysis
  • Profitability Analysis
  • Transaction Profitability Analysis

 

Asset & Liability Management

  • Capital Allocation
  • Credit Loss Allowance
  • Equity Position
  • Financial Management Accounting
  • Funds Maturity
  • Income Analysis
  • Interest Rate Sensitivity
  • Net Interest Margin Variance
  • Short Term Funding Management
  • Structured Finance 

 

The following screenshots are from an Enterprise Risk Reporting solution for Banking developed by SAP BusinessObjects.

 

 

This high level summary could serve a Chief Risk Officer and/or board member of the bank. The KPI panel (upper left) incorporates Risk Adjusted Return on Capital (RAROC) as well as all risk types to which a firm is exposed. Interdependencies are typically determined by using pre-set correlations between the risk types or by using dependency modeling based on the bank’s internal models. Selecting a specific KPI will automatically update the trend chart (upper right), business unit comparison (lower left) and detail table (lower right).

 

 

By centralized data, calculations and KPIs information can be easily shared across the organization and the breadth and detail tailored to specific roles and responsibilities. This particular dashboard might be used by the Credit Risk Controlling department. It contains greater detail such as Exposure at Default (EAD) and Loss Given Default (LGD) KPIs, loss concentration by geography (lower left), and top exposure by counterparties (lower right).

In the navigation panel at the far left the information can be filtered by Business Unit, Region, and Industry. From the navigation panel you can also get to detailed reports or perform ad-hoc exploration to determine the root cause of problems.

 

 

While dashboards are great for monitoring KPIs and identify trends and variances at a glance, they can’t answer every question you might have. You also need the ability to perform ad-hoc analysis, through iterations of asking a question, getting and answer and asking more questions based on the results. By exploring and visualizing the relationships between KPIs and across dimensions of the business, you can get a deeper understanding of how they are impacting risk.

This screenshot shows distribution of EAD, RWA (Risk Weighted Assets) after Mitigation, and Regulatory Capital Requirements across countries in EMEA. However, a business person could easily analyze risk based on Product Class (On-Balance, Off-Balance, Derivative), Portfolio (Retail, Bank, Sovereign, Corporate) and sub-portfolio, Rating and Rating Model (Moody, S&P, Internal), Counterparty, etc.

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      Author's profile photo Former Member
      Former Member
      Hi,

      I agree that Business Analytics can analyze the risks across virtually any dimesion we want.  It is also important to analyze the interdependicies of risks and as an organization it is important to have consistent enterprise wide risk management policies which is where currently many organizations are lacking.  In fact there are many who don't understand the importance of risk management and just go by the norms required by BASEL II or any regulatory body.  There is a clear underlying importance in forming these policies and it is important for an organization to understand them and adopt it according to their requirements. 

      This can be achieved only by powerful analysis tools which SAP Business Analytics definitely is.  Risk management is not just an implementation of policy but a continous ongoing improvement process.  For example, the Capital adequacy Ratio as mentioned by the regulatory body might be 10% (minimum threshold)but depending on the kind of market it is dealing with, it might need to be increased.  Also there are many areas where the framework does not touch upon but it is important to analyze from a risk management perspective.

      It is great to see SAP coming up with so many important features in Financial services side and now SAP is definitely a full fledged product in this space.  Now it is important to keep up the momemtum and keep improving the product capabilities to be a definite diffentiator.

      I would definitely want SAP to be a full end to end product for banks and financial institutions for which there is currently some gaps which I think is defintely currently worked upon.
      Regards,
      Ravi

      Author's profile photo Dan Everett
      Dan Everett
      Blog Post Author
      Hi Ravi,
      Thanks for reading my blog and posting a response.

      I agree having comprehensive processes, policies, and controls beyond just regulatory requirements is critical. It sounds like you have some experience in risk management.

      Have you done some implementations and if so where?

      Also what are the gaps you see in the SAP portfolio?
      Regards,
      Dan