Dear all,
In December 2015 the European Central Bank decided that it would carry out a project to assess whether the internal models currently used by banks comply with regulatory requirements, and whether their results are reliable and comparable.
Since the 2008 Financial Crisis regulators have shown concerns about the use of internal models to determine Risk Weighted Assets and Regulatory Capital Requirements, mainly due to two reasons.
- Complexity of the Models which make difficult to asses whether risks are being mapped correctly and consistently.
- High variability and potential inconsistencies between the Risk Weighted Assets and Regulatory Capital Requirements calculated by different banks with similar portfolios when each one of them used their own internal models.
Basel II agreement trusted in the bank’s capacity for developing their own internal risk models for the calculation of credit, operational and market risk exposures and their correspondent calculation of the Capital Requirements. Unfortunately, in my experience, many banks rely in lightly formalized and difficult to audit risk models, including the use of desktop based spreadsheets.
On January 2013 the Basel Committee on Banking Supervision issued the Document "BCBS 239: Principles for effective risk data aggregation and risk reporting" establishing the 14 Principles for risk data aggregation that banks should follow.
To some extend, these 14 Principles established the generic guidelines that some years later have been formalized in TRIM.
I shared some details about it four years ago.
https://www.linkedin.com/
Another alert came from the European Banking Authority, that on March 2015 issued a consultation paper called "Future of the IRB Approach" which concluded that there are significant differences in the application of the IRB requirements in EU banks, and subsequently divergences in the risk estimates and capital requirements, that cannot be explained by the differences in risk profiles.
https://eba.europa.eu/
TRIM presents important challenges to banks.
Most banks present heterogeneous and very low quality data spread in different silos, lacking on tracking capabilities to the bank’s Operational Systems.
Although banks IT architects are trying to improve the situation with the building of Central Data Hubs, I am pessimistic about the final result.
Central Data Hubs are designed following the add-hoc/on-demand approach. Data architects collect data requirements from the data consumer systems, and design the data repository according to these requirements. And then, define the interfaces for collecting data from the source systems and populating the data in the destination systems.
To some extend, this approach implies reinventing the wheel, according to the bank’s own experience, and limited integration capabilities of the bank’s information architecture.
Additionally, regulation evolves, and new requirements force the data architects to enhance the multiple repository tables and in/out interfaces, compromising the integrity of the initial design.
You can find some details here.
https://www.linkedin.com/
SAP Bank Analyzer – Credit Risk provides an strong framework of tools for fulfilling the Targeted Review of Internal Models.
- The Source Data Layer provides a Central Repository of homogeneous Operational Data (Master and Transaction Data).
The Primary Data Objects of the Bank Analyzer Source Data Layer have been designed to cover the Analytical and Regulatory requirements, independently of the capacities/limitations of the Operational Banking System. Bank’s architects can take advantage of these standard templates as a basic reference, trusting that the regulatory requirements will be fulfilled, and performing a gap analysis which helps them to identify data inaccuracies and redundancies.
- The Extract, Transformation and Loading capabilities of SAP Smart Data Integration in Premise and in the Cloud, including the high-performing capabilities of SAP HANA for storing and managing very-high volumes of data, reducing intermediate tables and assuring the referential integrity of the database.
- The Historical Database provides the functions for Collecting Data from the Operational Banking Systems, Calculation of the Default Rates, Data Storage for the Calibration of the model and Audit and Historization capabilities.
- The Credit Exposure calculation determines the risk key figures for exposures and their collateral, meeting the requirements of the Basel III Accord.
At the same time that TRIM audits are taking place, other regulatory developments are happening, particularly implementing the IFRS9 accounting framework.
TRIM demands coherency on the result of the Expected Loss Calculations in Basel IV (Solvency) and IFRS 9 (Accounting) which require an effective collaboration between Finance and Risk divisions of the banks. In my experience, bank’s information systems lack on a common architecture and holistic data-model facilitating the reconciliation.
This is the foundation of the Integrated Financial and Risk Architecture of Bank Analyzer. And this integration has improved significantly with version 9 and Smart-Accounting.
This was just a short description, you can find more details about TRIM in the Guide issued by the ECB on February 2017, and we will talk about this topic again in future articles.
https://www.
In December 2015 the European Central Bank decided that it would carry out a project to assess whether the internal models currently used by banks comply with regulatory requirements, and whether their results are reliable and comparable.
Since the 2008 Financial Crisis regulators have shown concerns about the use of internal models to determine Risk Weighted Assets and Regulatory Capital Requirements, mainly due to two reasons.
- Complexity of the Models which make difficult to asses whether risks are being mapped correctly and consistently.
- High variability and potential inconsistencies between the Risk Weighted Assets and Regulatory Capital Requirements calculated by different banks with similar portfolios when each one of them used their own internal models.
Basel II agreement trusted in the bank’s capacity for developing their own internal risk models for the calculation of credit, operational and market risk exposures and their correspondent calculation of the Capital Requirements. Unfortunately, in my experience, many banks rely in lightly formalized and difficult to audit risk models, including the use of desktop based spreadsheets.
On January 2013 the Basel Committee on Banking Supervision issued the Document "BCBS 239: Principles for effective risk data aggregation and risk reporting" establishing the 14 Principles for risk data aggregation that banks should follow.
To some extend, these 14 Principles established the generic guidelines that some years later have been formalized in TRIM.
I shared some details about it four years ago.
https://www.linkedin.com/
Another alert came from the European Banking Authority, that on March 2015 issued a consultation paper called "Future of the IRB Approach" which concluded that there are significant differences in the application of the IRB requirements in EU banks, and subsequently divergences in the risk estimates and capital requirements, that cannot be explained by the differences in risk profiles.
https://eba.europa.eu/
TRIM presents important challenges to banks.
Most banks present heterogeneous and very low quality data spread in different silos, lacking on tracking capabilities to the bank’s Operational Systems.
Although banks IT architects are trying to improve the situation with the building of Central Data Hubs, I am pessimistic about the final result.
Central Data Hubs are designed following the add-hoc/on-demand approach. Data architects collect data requirements from the data consumer systems, and design the data repository according to these requirements. And then, define the interfaces for collecting data from the source systems and populating the data in the destination systems.
To some extend, this approach implies reinventing the wheel, according to the bank’s own experience, and limited integration capabilities of the bank’s information architecture.
Additionally, regulation evolves, and new requirements force the data architects to enhance the multiple repository tables and in/out interfaces, compromising the integrity of the initial design.
You can find some details here.
https://www.linkedin.com/
SAP Bank Analyzer – Credit Risk provides an strong framework of tools for fulfilling the Targeted Review of Internal Models.
- The Source Data Layer provides a Central Repository of homogeneous Operational Data (Master and Transaction Data).
The Primary Data Objects of the Bank Analyzer Source Data Layer have been designed to cover the Analytical and Regulatory requirements, independently of the capacities/limitations of the Operational Banking System. Bank’s architects can take advantage of these standard templates as a basic reference, trusting that the regulatory requirements will be fulfilled, and performing a gap analysis which helps them to identify data inaccuracies and redundancies.
- The Extract, Transformation and Loading capabilities of SAP Smart Data Integration in Premise and in the Cloud, including the high-performing capabilities of SAP HANA for storing and managing very-high volumes of data, reducing intermediate tables and assuring the referential integrity of the database.
- The Historical Database provides the functions for Collecting Data from the Operational Banking Systems, Calculation of the Default Rates, Data Storage for the Calibration of the model and Audit and Historization capabilities.
- The Credit Exposure calculation determines the risk key figures for exposures and their collateral, meeting the requirements of the Basel III Accord.
At the same time that TRIM audits are taking place, other regulatory developments are happening, particularly implementing the IFRS9 accounting framework.
TRIM demands coherency on the result of the Expected Loss Calculations in Basel IV (Solvency) and IFRS 9 (Accounting) which require an effective collaboration between Finance and Risk divisions of the banks. In my experience, bank’s information systems lack on a common architecture and holistic data-model facilitating the reconciliation.
This is the foundation of the Integrated Financial and Risk Architecture of Bank Analyzer. And this integration has improved significantly with version 9 and Smart-Accounting.
This was just a short description, you can find more details about TRIM in the Guide issued by the ECB on February 2017, and we will talk about this topic again in future articles.
https://www.
Looking forward to read your opinions.
K. Regards,
Ferran Frances.
www.capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
Join the SAP Banking Group at: https://www.linkedin.com/
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
