Dear,
A former colleague asked me last week if Bank Analyzer would be useful for the current Comprehensive Capital Assessment Review and Stress Tests that US Banks have passed recently.
You can find some information here
http://www.federalreserve.gov/newsevents/press/bcreg/ccar_20140326.pdf
This is, and it’s going to be, a very hot topic for all the Banks, and it’s important we all know the Bank Analyzer capabilities in this area.
Since 2008 Financial Crisis impacted the entire U.S. economy (actually the world’s economy), banks’ capital requirements have been the top’s priority for the regulators
Basel III, Dodd-Frank and EMIR, amongst other regulations, have increased significantly the Capital Requirements of the Financial System players; with the intention, at least theoretical, of preventing another collapse.
Determining the Capital Requirements of a Bank is a quite sensitive matter, low capital requirements incentive banks executives to take risks and increase the short term banks results, and too high capital requirements would reduce available capital to invest, impacting the bank’s results and economic growth.
The main objective on the determination of the Capital Requirements of a Bank is the calculation of its Risk Weighted Assets; remember that the Capital Requirements are defined as a percentage of the Risk Weighted Assets.
Determining the risk weighted assets is a challenging activity; there’re several accepted approaches (standardized, Foundation IRB, Advanced IRB) and the banks also have some flexibility in their implementation.
Determining the Risk Weighted Assets also require determining the Probability of Default and Rating of the counterpart.
And for making it a little bit more complicated; we also have to consider that the rating of a counterpart is a dynamic magnitude, which depends on the economic environment, and how it affects the business segment that the counterpart belongs to.
Determining the evolution of the rating of the counterpart means looking at the future, and as we don’t know the future, we have to create simulated “stressed” scenarios, and estimating the rating of the counterparts on those stressed scenarios.
Bank Analyzer has very powerful tools for calculating the rating of the counterparts on basis and stressed scenarios.
Typically, we have the Historical Database in which we can model the bank’s internal statistic models for estimating the current and future Probability of Default of the counterparts, by classifying them in business segments and looking at the past performance of those business segments.
Building integrated scenarios also requires a holistic vision of the risks and risk hedging strategies of our portfolio, and this is a very important value proposition of SAP Bank Analyzer.
In general, Banks are far from having a centralized and holistic repository of their risk exposures; on the contrary, their information systems have been built as a collection of silo-style systems with very poor, if any, integration.
Typically Banks have several repositories of risk; for retail banking, consumer loans, home loans, corporate banking, derivatives, etc.; all of them sustained by different technologies, with non-consolidated and non-homogenous master and transactional data.
Expecting an accurate determination of the Bank’s Risk Weighted Assets on these conditions requires a big deal of optimism.
On the contrary, Bank Analyzer has been built on the Integrated Financial and Risk Architecture, which is capable of managing holistically, all the Credit Risk Exposures of a Bank, and it’s meant to be capable of managing all the Bank’s risk and its accounting implications.
But I run out of space with this post, I’ll continue next week.
Looking forward to read your opinions.
K. Regards,
Ferran.
A former colleague asked me last week if Bank Analyzer would be useful for the current Comprehensive Capital Assessment Review and Stress Tests that US Banks have passed recently.
You can find some information here
http://www.federalreserve.gov/newsevents/press/bcreg/ccar_20140326.pdf
This is, and it’s going to be, a very hot topic for all the Banks, and it’s important we all know the Bank Analyzer capabilities in this area.
Since 2008 Financial Crisis impacted the entire U.S. economy (actually the world’s economy), banks’ capital requirements have been the top’s priority for the regulators
Basel III, Dodd-Frank and EMIR, amongst other regulations, have increased significantly the Capital Requirements of the Financial System players; with the intention, at least theoretical, of preventing another collapse.
Determining the Capital Requirements of a Bank is a quite sensitive matter, low capital requirements incentive banks executives to take risks and increase the short term banks results, and too high capital requirements would reduce available capital to invest, impacting the bank’s results and economic growth.
The main objective on the determination of the Capital Requirements of a Bank is the calculation of its Risk Weighted Assets; remember that the Capital Requirements are defined as a percentage of the Risk Weighted Assets.
Determining the risk weighted assets is a challenging activity; there’re several accepted approaches (standardized, Foundation IRB, Advanced IRB) and the banks also have some flexibility in their implementation.
Determining the Risk Weighted Assets also require determining the Probability of Default and Rating of the counterpart.
And for making it a little bit more complicated; we also have to consider that the rating of a counterpart is a dynamic magnitude, which depends on the economic environment, and how it affects the business segment that the counterpart belongs to.
Determining the evolution of the rating of the counterpart means looking at the future, and as we don’t know the future, we have to create simulated “stressed” scenarios, and estimating the rating of the counterparts on those stressed scenarios.
Bank Analyzer has very powerful tools for calculating the rating of the counterparts on basis and stressed scenarios.
Typically, we have the Historical Database in which we can model the bank’s internal statistic models for estimating the current and future Probability of Default of the counterparts, by classifying them in business segments and looking at the past performance of those business segments.
Building integrated scenarios also requires a holistic vision of the risks and risk hedging strategies of our portfolio, and this is a very important value proposition of SAP Bank Analyzer.
In general, Banks are far from having a centralized and holistic repository of their risk exposures; on the contrary, their information systems have been built as a collection of silo-style systems with very poor, if any, integration.
Typically Banks have several repositories of risk; for retail banking, consumer loans, home loans, corporate banking, derivatives, etc.; all of them sustained by different technologies, with non-consolidated and non-homogenous master and transactional data.
Expecting an accurate determination of the Bank’s Risk Weighted Assets on these conditions requires a big deal of optimism.
On the contrary, Bank Analyzer has been built on the Integrated Financial and Risk Architecture, which is capable of managing holistically, all the Credit Risk Exposures of a Bank, and it’s meant to be capable of managing all the Bank’s risk and its accounting implications.
But I run out of space with this post, I’ll continue next week.
Looking forward to read your opinions.
K. Regards,
Ferran.
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