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Making Sense of the Regulatory Challenges Facing Banks Today and Tomorrow

Making Sense of the Regulatory Challenges Facing Banks Today and Tomorrow. Subin Paul Master Principal Consultant. Program Agenda. Financial Services Regulatory Landscape Addressing the Challenges with OFSAA Lessons Learned Capital Planning Client Examples. Regulation 2013.

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Making Sense of the Regulatory Challenges Facing Banks Today and Tomorrow

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  1. Making Sense of the Regulatory Challenges Facing Banks Today and Tomorrow Subin PaulMaster Principal Consultant

  2. Program Agenda • Financial Services Regulatory Landscape • Addressing the Challenges with OFSAA • Lessons Learned • Capital Planning • Client Examples

  3. Regulation 2013 The Evolving Financial Services Regulatory Landscape

  4. Regulation 2013 The Evolving Financial Services Regulatory Landscape (continued)

  5. Regulation 2013 The Evolving Financial Services Regulatory Landscape (continued)

  6. Regulation (Simplified) 2013Key Regulatory Demands & Institutional Objectives Supervisory Review Governance & Infrastructure Reporting Practices Data Aggregation

  7. Enterprise Risk & Finance ManagementAligning with Institutional Objectives • Accurate financial reporting and efficient periodic book-close • Comprehensive management reporting & analysis • Ability to analyse risk and performance together • Timely availability of information for financial and management reporting • Reconciliation between GL and product-processor balance figures • Information at fine-grained detail • Seamless, repeatable, automated process that can be configured to meet changing demands

  8. Addressing the ChallengesOracle Reference Architecture for Enterprise Risk & Finance Common Staging General Ledger Analysis & Reporting Financial Management Accounting Hub Source Systems Accounting Flow GL Balances Ledger Consolidation Detailed Balances Billing and Revenue Data Structures Customer Account Transactions Ledger … Financial Close & Disclosure Daily Average Balances Accounting Rules Dashboards, Reports, Ad Hoc CRM Balances Balances Financial Adjustments Core Banking Systems Enterprise Dimensions Oracle Engines Common Results Common Processing OLAP Analysis Other Bank Systems (Channel etc.) Enterprise Finance (Profitability, FTP, ALM) Data Quality Finance, Treasury & Risk Flow Core Reference RAPM Data Repairs Enterprise Risk (Credit, Market, Operational, Liquidity) Financial Recon Market Data Alerts & Exception- Management Other Finance & Risk Engines Adjustments Risk / Treasury Engines Finance Engines Org Structure Master Data Management Engineered Systems (Software / Hardware)

  9. Addressing the ChallengesInformation Flow for Accounting & Reconciliation Common Staging General Ledger Analysis & Reporting Financial Management Accounting Hub Source Systems Transactions Balances Journals Ledgers Events GL Balances Ledger Consolidation Detailed Balances Billing and Revenue Data Structures Customer Account Transactions Ledger … Financial Close & Disclosure Daily Average Balances Accounting Rules Dashboards, Reports, Ad Hoc CRM Balances Balances Reference Balances Financial Adjustments Core Banking Systems Enterprise Dimensions Oracle Engines Common Results Common Processing OLAP Analysis Other Bank Systems (Channel etc.) Enterprise Finance (Profitability, FTP, ALM) Data Quality Core Reference RAPM Data Repairs Enterprise Risk (Credit, Market, Operational, Liquidity) Financial Recon Market Data Alerts & Exception- Management Other Finance & Risk Engines Adjustments Risk / Treasury Engines Finance Engines Org Structure Master Data Management Engineered Systems (Software / Hardware)

  10. Oracle Financial Services Analytical Applications Financial Services Data Foundation

  11. Enterprise Risk ManagementLaying the Foundation with the Oracle Suite

  12. Enterprise Risk Management Key Capabilities Rendered by the Oracle Suite Efficient, accurate accounting rules processing, journal postings and ledge maintenance Accounting Bringing together of multiple ledgers, accommodating inter-company eliminations and group adjustments Consolidation Management of tasks around close of books and preparation of information content for disclosure Close and Disclosure Reporting of core financial statements including balance sheet, P&L and income statements Oracle Suite Financial Reporting Accurate balance-figures with additional reference data and other details, down to contract and position levels Detailed Balances Balances at account and contract/ position levels reconciled with those in the GL /other ledgers Reconciliation • Quantification of risk, performance and risk-adjusted performance figures RAPM • Fast, timely visualization of detailed information, in synchronization with financial reporting Management Reporting

  13. The New NormCapital Planning Employing Scenarios / Stress-Testing • ALLL • Valuation • Gaps, duration, convexity • Liquidity gaps • Allocations, NII, NIM • Transfer price • Hedge effectiveness • Credit risk Economic Capital • Market risk VaR • Operational risk Risk VaR • Liquidity • Capital • P&L • Balance Sheet • Credit, Market & Operational Risks • Governance • ICAAP by Scenario • Variables • Variable Forecasts • Models • Rule Changes • Sequences • Correlations

  14. The New NormThe Case for Capital Planning Employing Scenarios / Stress-Testing

  15. Previous Exercises Lessons Learned from Previous EBA, US Fed & Other Initiatives • Huge time, effort and cost investment • Scope, supporting data, techniques, tools, personnel • Reconciliation to regulatory filings • Using results in key capital decisions (e.g. dividend and capital buyback programs) • Capturing the interaction between financial planning processes, capital projection and scenarios / stress-testing is difficult • Credible and consistent set of business and financial assumptions (revenue, cost, loss estimates and balance sheet) under various scenarios • Alignment of financial and risk information • Quality of ICAAP and financial planning processes make a difference • ICAAP process leveraged in stress-testing and capital planning • Ability to integrate capital and liquidity stress testing with contingency plans

  16. Previous ExercisesKey Regulatory Feedback

  17. Capital Planning with Stress-TestingA Practicable Process Flow Input Data Baseline Calculations Stress Calculations Reporting Data Quality Checks, GL Reconciliation, Adjustments Stress Liability Balance Wholesale/ Retail Exposures Asset Balance Forecast Baseline P&L &Balance Sheet Stress Asset Balance Common Hierarchies – LOB, Asset Class etc Stress Credit Loss Liability Balance Forecast Stress NIM GL Data Baseline Capital Adequacy Stress Trading and Counterparty losses Cash-flow NIM / PPNR Mitigant Information Stress Capital Requirement Stress Provisions Asset Correlation Info Credit Loss Pro-Forma Stress Balance Sheet Stress P&L and Balance Sheet Other Common Tasks Risk Factor Data Pro-Forma Stress P&L Reserves / Provisions Capital Plan Document Other Historical Data Stress Capital Adequacy Valuations Retained Earnings Stress Scenario PD, LGD, Rating Migration matrix Variables Variable Forecasts Trading and Counterparty Losses Customer Info Risk Appetite Monitoring Shocks Scenarios Market data Capital Adequacy Model Risk Assessment Models and Methods Trade data Model Information and Model Risk Assessment Action Plan Securitized Exposures Risk Appetite Definition and Monitoring Data Foundation

  18. S1 S2 S3 S4 Capital Planning ProcessEmploying Scenarios Variables Forecasts / Shocks Scenarios (Concurrent) Execution Reporting Baseline Output Economic Downturn Unemployment Rate Unemployment Rate With Baseline Figures +3.2% +4.1% Balance Sheet Housing Price Index • Plan • Stress • RWA • NII, NFI • ALL +5.2% +2% Capital Regional Recession Leverage Ratio Inflation Rate NFI, NII, ALL LTV Ratio -4.2 sd - 5.1 sd Stress Output Rating Downgrade - 7.4 sd - 5.4 sd With Stress Figures Credit Rating Balance Sheet S1 • Plan • Stress • RWA • NII, NFI • ALL GDP Growth GDP Growth Rate S2 Capital -1.2 +2.4 S4 Index of Industrial Production NFI, NII, ALL +0.8 -1.5 S3

  19. Capital Planning ProcessAddressing Stochastic Modeling Idea Practice

  20. Capital Planning ProcessIntegrating Stress Testing Functions Idea Practice

  21. Capital Planning ProcessKey Stress-testing Functions & Capabilities

  22. Capital Planning with Stress TestingHallmarks of Successful Programs • Builds Management Insight • Has Comprehensive Coverage • Enables Sound Capital Planning • Lends Flexibility and Scalability • Provides accurate, actionable insight enabling informed, timely, non-HiPPO decision making • Facilitates multi-jurisdictional, multi-currency reporting across multiple legal entities and scenarios • Assesses impact over a comprehensive set of risk, treasury, finance and capital functions • Covers mandates from multiple key regulators (and legislators) – EBA, FSA, US Fed and APRA • Facilitates proactive projection and comparison of capital figures against multiple scenarios • Lends consistency to the capital planning process by projecting profit and loss, income, balance sheet and capital figures • Has the flexibility to perform and manage change when needed • Enables business users to easily and flexibly engage in the process • Is scalable as frequency of information disclosure and degree of detail involved increases

  23. Analytical Transformation in Financial Services • Large multi-national bank • Had recently acquired another large institution • Government takes stake in the bank as a result of recent financial crisis • Customer Example DEMAND STRATEGY • Unification of their risk and finance processes to gain greater transparency and consistency within the bank • Need to present a coherent picture to the regulators across its risk & finance numbers • Must reduce the financial close and regulatory reporting process from 20 days to 5 days • Break down the silos between risk, finance, accounting and compliance • Leverage an single platform capable of running large volume financial processes in a fraction of the time previously required • An improved data architecture to help bring consistency between financial close and management reporting processes • An automated means of reconciling outputs to the general ledger

  24. Analytical Transformation in Financial Services • Large financial institution in North America • CRO lacking unified view of the bank’s exposures • Struggling to turn around stress test results responsively • Customer Example DEMAND STRATEGY • An enterprise risk data Infrastructure • A unified view of exposures across the bank • Improved stress testing responsiveness • Able to address future risk, treasury, finance use cases • Trustworthy, cleaned and reconciled data • Common understanding of risk across LOB’s • Break down silos between risk, finance and compliance • Single platform capable of running stress tests and the supporting applications in a fraction of the time previously thought possible • Improved data architecture to help address cross functional data and what-if needs • Automated means of reconciling outputs to the general ledger • A common stress testing framework that ensures shocks and scenarios are consistently applied

  25. OFSAA at OpenWorld • Monday, September 23 • 2:30-3:30 Making Sense of the Regulatory Challenges Facing Banks Today & Tomorrow • Tuesday, September 24 • 10:30-11:30 Driving Business Growth by Unlocking Rich Customer Insights • 5:15-6:15 Advanced Analytics for Insurance • Wednesday, September 25 • 10:15-11:45 Big Data in Financial Services • 4:15-5:15 Use-Case Driven Approach to Using OFS Data Foundation for Data Management Needs

  26. Graphic Section Divider

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