Risk & Compliance the way we see it
Risk and Finance Integration
A Practical Approach
Contents
1 Introduction 3
2 Data Management 5
2.1 Data Quality 5
3 Predictive Measuring 7
4 Governance 8
4.1 Alignment 8
4.2 Management Decision Making Processes 8
4.3 Data and Data Quality 8
5 Application Architecture 8
6 Management Information and Dashboards 9
7 In Practice 10
7.1 Risk and Finance Data Warehouse 10
7.2 Common Book Hierarchy – Risk and Finance Alignment 11
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Risk & Compliance the way we see it
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1 Introduction
The lack of integration between risk and finance has limited the effectiveness of
decision making around risk versus return, capital management and regulatory
charge optimization. For many banks, the siloed approach to these two functions
has resulted in:
■ Data discrepancies that require significant reconciliation effort between risk
and finance
■ Data being aggregated and accumulated at different levels which causes
difficulties in cross reporting
■ Integration efforts occurring at end-of-day processes making predictive analytics
across the two functions nearly impossible
■ Difficulty in computing risk adjusted return for a business unit or portfolio
or customer
■ Inability to consider multiple facets of risk measures in business decisions
Exhibit 1: Reconciliation difficulties due to segmented finance and risk functions
| Financial Services
In collaboration with
The information contained in this presentation is proprietary. 2
Copyright ©2011 Capgemini. All rights reserved.
Recent regulation dictates further capital adequacy which will make funds for
front office trading scarcer, resulting in a need for tighter and more predictive
return, risk, capital, and liquidity management.
The integration of risk and finance will help overcome data reconciliation issues,
relate risk and return parameters with ease and improve predictability as well as
reduce overall infrastructure costs, provide a robust and scalable platform and
enable enhanced control and quality to ultimately provide a greater return on
investment through better risk and financial management.
Risk and Finance Integration 3
Risk & Compliance the way we see it
Exhibit 2: Example of an integrated risk and finance architecture
| Financial Services
In collaboration with
The information contained in this presentation is proprietary. 1
Copyright ©2011 Capgemini. All rights reserved.
The awareness and benefits of the integration of the two functions is well known.
But still many banks have not started the integration journey or have concentrated
on tactical technology integration without putting in place foundation steps.
Furthermore, the integration of the two functions must be enterprise-wide and any
management decisions—whether based on historic data or predictive analysis—
must include risk versus return profiling with all profits and losses being equally
explained via risk metrics. To make the integration of the functions credible and
robust, banks must focus on:
■ Data management
■ Predictive measuring
■ Governance
■ Application architecture
■ Management information and dashboards
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Risk & Compliance the way we see it
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2 Data Management
The first and most fundamental step for risk and finance integration is the creation
of a common data repository that is populated with high quality, comprehensive
and up to-date data. The data repository must meet a variety of needs such as:
■ Store the risk aggregation and finance accumulation requirements that permit
alignment such as book and organizational hierarchies, netting, legal hierarchies
“
and economic capital;
Consolidated platforms and ■ Address the needs of all risk types including credit, market, liquidity and
data warehouses that employ
operational risk;
common taxonomies permit
■ Serve the complete needs of finance including financial and management
rapid and relatively seamless
data transfer, greatly facilitating accounting;
”
a firm-wide view of risk ■ Meet regulatory reporting needs;
■ Support risk versus return current and predictive measures;
Senior Supervisors Group ■ Ensure the sources of data are from strategic golden repositories where
(SSG) report appropriate;
December 2010
■ Satisfy the need of historical time-series data;
■ Get data in real-time and not just at end of day;
■ Source data from the source of capture rather than some multiple hand
warehouse; and
■ Use common business driven taxonomies.
2.1. Data Quality
Data quality is not only a necessity for optimising and having correct reported
figures but also a requirement of regulators. Typical data quality problems include:
■ Missing and incorrect data;
■ Data that is untrustworthy because it has not been regularly maintained or does
not have appropriate overrides;
■ Lack of data context; for example, is the Moody’s rating the long term or short
term view?
■ No identified owner for the data;
■ Lack of traceability; e.g., the source, data chain and modifications of the data are
not clear.
Risk and Finance Integration 5
Risk & Compliance the way we see it
Regulators require banks to demonstrate that these issues have been addressed.
While data quality has been a hot topic in the industry for years, operationalising
data quality—the implementation and governance of a data quality strategy across
departmental and/or organisational boundaries—continues to be a challenge
for many banks. Three key criteria must be used to determine data quality:
appropriateness, completeness and accuracy.
Exhibit 3: Three key criteria are used to determine data quality
1. Appropriateness Data is considered to be appropriate if it is suitable for the
intended purpose (e.g. the valuation of financial instruments,
setting of assumptions) and relevant to the portfolio of risks
being analysed (i.e. directly relates to the underlying risk drivers).
2. Completeness Data is considered to be complete if it allows for the
recognition of all the main homogeneous risk groups.
Thus, data is considered to be complete if it has sufficient
granularity to allow for the identification of trends and the full
understanding of the behaviour of the underlying risks.
3. Accuracy Data is considered to be accurate if it is free from material
mistakes, errors and omissions. Most of these will be caused
by human error or IT failures.
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3 Predictive Measuring
The ability to compute as well as predict risk versus return and calculate
forward looking measures will undoubtedly help eliminate reactive behaviour in
management and provide a significant competitive advantage. Analytics-driven
processes have remained a point of differentiation among financial institutions.
Analytics have been used to slice and dice historical data to analyse past
performance and forecast or predict future events.
Exhibit 4: Reactive versus proactive decision making
VALUE
Prediction
Forecasting
KNOWLEDGE Models
Monitoring
ANALYTICS Dashboards
Scorecards
INFORMATION
Analysis OLAP
Visualization
CONTEXT
DATA Reports Query
Search
The use of real-time data can support front office traders to help them accurately
predict key end-of-day regulatory charges, counterparty and product mix
optimisation; thereby, risk officers can proactively monitor existing exposures versus
return and regulatory charges.
Banks can take these analytical techniques one stage further at pre-deal stage using
real-time data. Front office traders will be able to accurately predict regulatory
charges, risk and return on given counterparty and product mixes to ensure the
optimal combination has been chosen. Furthermore, banks can avoid trades that
potentially exhibit wrong way risk or have known data issues. Models must be
developed using real-time data and an infrastructure that supports use in a front
office, pre-deal predictive capacity.
Today’s financial services landscape is a dynamic, fast moving industry where small
market data changes and downgrades can have a larger impact on the value and
return of a portfolio. Reactive, end-of-day approaches to monitoring such events
are often inadequate to capture major negative impacting events. The ability to
monitor and even predict such events as they occur and take immediate action is
undoubtedly a key advantage.
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Risk & Compliance the way we see it
4 Governance
Regulators have required that banks improve the governance of their risk and
finance functions. Internally, banks need to increase the credibility of programmes
with a buy-in from management and a top-down governance approach. A steering
committee must exist that has board representation and ensures governance around
the following key areas.
4.1. Alignment
Change programmes must be initiated to align risk and finance functions. Banks
should review data, processes, policy and technology within each function so that
all performance measures are assessed subject to the risk of a security or investment.
4.2. Management Decision Making Processes
All decisions regarding return or performance must be made with respect to the
risk taken. Governance must ensure the risk, return and indeed capital charge
consequences are inherent in every decision making process.
4.3. Data and Data Quality
The data used within the risk-finance function must be part of a bank’s overall data
quality and governance program. The data must be of quality, traceable, timely and
its context understood.
5 Application Architecture
An integrated IT platform is vital to support risk and finance integration. The IT
platform must seamlessly integrate:
■ Data that supports all risk types, scenarios, aggregation, financial and management
accounting. The data must be the same data used by other risk and finance
processes so no reconciliation issues occur;
■ Data quality metrics and traceability; and
■ Management information and dashboards
Tools must exist to allow efficient input and timely calculation of results.
Similarly, workflow to manage scenario review and force results to relevant
stakeholders must exist.
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64 Management Information
and Dashboards
One of the most important activities in any bank is reporting and analysing the
results of performance and return based upon the associated risks and feeding those
results into management decision making processes. Management information and
dashboard layers must have analytic capabilities and allow performance and return
based upon:
■ Various risk types; and
■ Results by product lines and geographical regions.
The table below outlines the typical reporting measures expected on Executive
Dashboards and the data challenges faced with delivery of such dashboards.
Exhibit 5: Typical Reporting Measures and Challenges
Business Capability Reporting Measures Challenges
1. Enterprise Risk Losses, Earnings at Multiple portfolio, legal entity
Appetite Monitoring Risk, Exposure hierarchies, diverse LoBs and
systems
2. Living Will, M&A Due EL, RC, EC, EBIT Hierarchies and asset groupings
Diligence that were previously undefined
3. Liquidity Risk Liquidity Coverage Relatively new metrics.
Calculations Ratio, Net Stable immaturity of many Treasury
Funding Ratio per data environments
Basel III.
4. Stress Testing/ Charge-Offs, VaR, EL, Expanded definition of model risk
“Model Risk” to include data processes and
quality in enterprise data systems
5. AML/FCC Monitoring # of SARS, Focal Cross-sector monitoring
Entity Rating
6. Marketing Analytics Cross Sell Ratio, Data quality issues with
Retention Rate, # of customer matching, establishing
New Accounts single customer view
7. Standard FFIEC Charge-Offs, NPAs, Additional scrutiny on data
Reporting NPL, REO, REPO quality and lineage of call
reporting, other FRB regulatory
reporting
8. Trade Surveillance Failed Settlements, Silo-based environments,
Order Execution standardizing data, multiple
(OMR) points of error in trade
processing cycle
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Risk & Compliance the way we see it
7 In Practice
7.1. Risk and Finance Data Warehouse
Our client needed to create a single and consistent data set to serve as the strategic
data and information target architecture for key functions such as credit risk, market
risk, finance, product control, regulatory control, collateral management, operations
and counterparty risk reporting. The data set would also be used to support end of
day signoff reporting and ad hoc reports.
Capgemini designed and implemented a data warehouse to store data for fixed
income, credit derivatives, futures trades, P&L, positions, cash flows, risk
sensitivities, book, counterparty and instrument data, and common reference data.
We created the data model, set up real-time and batch extract, load and transform
processes, and built the data quality layer and associated exceptions processing.
The warehouse is a platform that supports reporting needs including end-of-day
trader risk, P&L signoff reporting, and ad hoc reporting needs.
The Results
With the new data warehouse, our client achieved data consistency between front
office, risk and finance. They eliminated reconciliation differences across functions,
removed local overrides within finance, and increased the timeliness of data delivery
which lowered costs by streamlining processes and allowing associated processes to
begin earlier in the cycle.
Overall, our client experienced higher quality data which improved risk
metric calculations.
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Risk & Compliance the way we see it
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7.2. Common Book Hierarchy – Risk and Finance Alignment
Our client had multiple business hierarchies which involved multiple book
definitions, hierarchy attachment points, and book and hierarchy attributes. Due to
various manual book opening processes, our client experienced unknown attribute
owners and other data quality issues. These problems prevented our client from
performing risk/return reporting.
Capgemini created a common book hierarchy solution by rationalising the
information to build a common information model. We created data quality
dashboards to identify exception breaches and manage workflow for corrections.
We also provided tools to align book and organisational hierarchies and created
a common book definition to attach to the hierarchy. Overall, Capgemini helped
re-engineer our client’s book opening processes to clearly assign the ownership
and responsibility of book attributes and use a common, single store of book and
organisational hierarchy. This helped optimise the book opening workflow and
allowed the downstream adoption of book data.
The Results
Our client’s new book and organisational hierarchy solution provided one company-
wide view of book and organisational data. It helped our client align finance and
risk reporting hierarchy and provided common definitions and understandings for
book. We helped our client define and clarify the book opening workflow process
and provided real-time availability for book and organisational data.
Risk and Finance Integration 11
Risk & Compliance the way we see it
For more information:
Contact us at
[email protected] or
visit: www.capgemini.com/risk-regulation-and-compliance.
About Capgemini
With almost 145,000 people in over 40 countries, Capgemini is one of the
world’s foremost providers of consulting, technology and outsourcing
services. The Group reported 2014 global revenues of EUR 10.573 billion.
Together with its clients, Capgemini creates and delivers business and
technology solutions that fit their needs and drive the results they want.
A deeply multicultural organization, Capgemini has developed its own
way of working, the Collaborative Business Experience™, and draws on
Rightshore®, its worldwide delivery model.
Learn more about us at
www.capgemini.com.
The information contained in this document is proprietary. ©2015 Capgemini. All rights reserved.
Rightshore® is a trademark belonging to Capgemini.
