Dear,
On March the 4th 2015, the European Banking Authority (EBA) issued a discussion paper analysing the future of the Internal Rating Based Approach in which talked about “a lack of trust in the use of IRB models”.
For years, there has been a growing concern amongst the Banking supervisory authorities, regarding serious inconsistencies and high variability, in the capital requirements calculated by different bank’s internal models.
According to this paper, some of the main sources of differences in RWAs, that cannot be explained by the different risk management practices of the Financial Institutions, are the definition of Default, Probability of Default calibration and Loss Given Default calibration.
Consequently, in this paper, EBA set out an agenda for further improvements and clarifications in the regulatory framework for IRB models.
In February 2017, the ECB made public the ECB guide to internal models, with the objective of helping Banks to prepare the on-site inspections. The Guide presents the ECB’s proposal, on the supervisory practices, and how should be applied across the Euro area. Finally, the on-site assessments will be used to identify compliance gaps as against the standards and principles defined in the Guide.
The targeted review of internal models, or TRIM, is a project to assess whether the internal models currently used by banks, comply with regulatory requirements, and whether their results are reliable and comparable. Banks can use internal models to determine their Pillar 1 own funds requirements, i.e. the minimum amount of capital they must hold by law.
One major objective of TRIM is to reduce inconsistencies and unwarranted variability, when banks use internal models to calculate their own funds requirements.
TRIM will investigate if a bank meets the minimum requirements to use the internal model approach, and the on-site investigation will focus on the compliance of the model requirements, examine the portfolio on which the internal model is applied and examine the adequacy and adaptability of business processes related to the model.
TRIM presents important challenges to banks; in my opinion the main one is that most banks present heterogeneous and very low quality data, spread in different silos, lacking on tracking capabilities to the bank’s Operational Systems.
SAP Analytical Banking framework, including Credit Risk Analyzer, Financial Products Subledger and Financial Services Data Management, provides a set of tools for fulfilling the requirements of TRIM.
- 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.
- SAP Financial Services Data Management supports redundancies elimination by managing the bank's data, with a single-source-of-truth approach, through a unified data model.
- Reporting capabilities make it easier to reconcile results from different reports, because different reports use the same source data and the same data model for the business semantic.
- 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. On January 2013, the Bank for International Settlements published the standard 239 whose subject is: "Principles for effective risk data aggregation and risk reporting"
In April 2020, the Basel Committee on Banking Supervision published its latest progress report on banks' implementation of the Principles for effective risk data aggregation and reporting.
The main conclusion is that none of the banks are fully compliant with the Principles, in terms of building up the necessary data architecture and, for many, IT infrastructure remains difficult.
BCBS 239 demands coherency on the Risk Parameters Calculations and their Finance and Risk interpretations, and this requires an effective collaboration between Finance and Risk divisions of the banks.
In my experience, bank’s information systems lack 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 SAP S/4HANA for Financial Products Subledger.
Looking forward to reading your opinions.
K. Regards,
Ferran.
Join the SAP Banking Group at: https://www.linkedin.com/groups/92860
Visit my SAP Banking Blog at: http://sapbank.blogspot.com/
Let's connect on Twitter: @FerranFrancesGi
Ferran.frances@capitency.com
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