OneSumX Risk
Solution
About Wolters Kluwer
A global information
services company that
provides information,
software, and services
to professionals in four
main areas: law, tax,
finance and healthcare.
Key Figures
1836
Founded in the Netherlands
Market-leading global
information services company
With
19,000 employees
Serving customers in
180 countries
Revenues in 2017
€4.4 Billion
Our Organization
The Right Solutions for All Your Critical Challenges
Risk Compliance Finance Performance
▪ ALM ▪ Regulatory Update ▪ IFRS Accounting ▪ Risk Adjusted
Service (RUS) Performance
▪ Liquidity risk ▪ Accounting Generator
▪ Transaction Reporting ▪ Cost Allocation
▪ Market risk ▪ Sub Ledger
(AnaCredit, Mifid II, …)
▪ Profitability
▪ Credit risk ▪ General Ledger
▪ Validation & Electronic
▪ Budgeting
▪ Economic capital Delivery ▪ Trading Ledger
▪ FTP
▪ Operational risk ▪ Local Country Reg. ▪ Consolidation
Reporting ▪ P&L Explain
▪ Concentration risk
▪ Basel III ▪ FINREP
▪ CVA ▪ COREP
Consulting & Professional Services
Introduction
Integrated Risk Solution
PERFORMANCE & PROFITABILITY ECONOMIC CAPITAL
▪ Rates assignment & calculation ▪ Market VaR : Parametric, Historical & MC
▪ Margin analysis per BU, product, etc. ▪ Credit VaR : Factor-based approach
▪ Spread definition & calculation ▪ Full simulation : Market + Credit VaR
▪ Simulation & stress testing ▪ Expected Shortfall
▪ Risk contributions
CAPITAL ADEQUACY CREDIT RISK
▪ Standard approach ▪ Current Exposure
▪ IRB Foundation ▪ Potential Exposure
▪ IRB Advanced ▪ Credit Risk mitigation
▪ Partial Use ▪ Expected loss
▪ Simulation & stress testing ▪ Simulation & stress testing
ALM / MARKET RISK LIQUIDITY RISK
▪ Sensitivity / Repricing gap analysis ▪ Liquidity & contingency gap analysis
▪ NPV, Duration, Convexity, Greeks ▪ Repo / collateral analysis
▪ FX / Index / Commoditiy exposures ▪ LCR / NSFR ratios
▪ Earning@Risk & NPV@Risk ▪ Liquidity@Risk
▪ Simulation & stress testing ▪ Simulation & stress testing
Integrated Risk Solution
SOURCE ONESUMX RISK SOLUTION
SYSTEMS
DATA LAYER MODELLING – STRESS TESTING - SIMULATION USER EXPERIENCE
MARKET
OBSERVATIONS
ALM LIQUIDITY RISK
OLAP CUBE
POSITIONS / FIN. (INTEGRATED
INSTRUMENTS REPORTING)
CREDIT RISK MARKET RISK
COUNTERPARTIES BUSINESS
INTELLIGENCE &
BASEL III ECONOMIC CAPITAL DASHBOARDING
RATINGS /
PD & LGD
RESULT ETL
FTP PERFORMANCE (RESULT DATA
REFERENCE DATA
MANAGEMENT)
Concepts - Contract Centric Approach
STRESS &
MARKET CREDIT BEHAVIOUR STRATEGY
CHANGES
INPUT
CONTRACT
FINANCIAL EVENTS E1 E2 E3 E4 E5 EN T
RISK WEIGHTED
LIQUIDITY VALUE EXPECTED LOSS
ASSETS (RWA)
OUTPUT INCOME SENSITIVITY
CAPITAL
L@R E@R V@R PROVISIONS
REQUIREMENTS
Step 1: Data
MARKET CREDIT BEHAVIOUR STRATEGY
INPUT
CONTRACT
Step 2: Financial events
MARKET CREDIT BEHAVIOUR STRATEGY
INPUT
CONTRACT
FINANCIAL EVENTS E1 E2 E3 E4 E5 EN T
Step 3: Risk analytics
MARKET CREDIT BEHAVIOUR STRATEGY
INPUT
CONTRACT
FINANCIAL EVENTS E1 E2 E3 E4 E5 EN T
RISK WEIGHTED
LIQUIDITY VALUE EXPECTED LOSS
ASSETS (RWA)
OUTPUT INCOME SENSITIVITY
CAPITAL
L@R E@R V@R PROVISIONS
REQUIREMENTS
Step 4: Stress testing
STRESS &
MARKET CREDIT BEHAVIOUR STRATEGY
CHANGES
INPUT
CONTRACT
FINANCIAL EVENTS E1 E2 E3 E4 E5 EN T
RISK WEIGHTED
LIQUIDITY VALUE EXPECTED LOSS
ASSETS (RWA)
OUTPUT INCOME SENSITIVITY
CAPITAL
L@R E@R V@R PROVISIONS
REQUIREMENTS
Step 5: Management actions
STRESS &
MARKET CREDIT BEHAVIOUR STRATEGY
CHANGES
INPUT
CONTRACT
FINANCIAL EVENTS E1 E2 E3 E4 E5 EN T
RISK WEIGHTED
LIQUIDITY VALUE EXPECTED LOSS
ASSETS (RWA)
OUTPUT INCOME SENSITIVITY
CAPITAL
L@R E@R V@R PROVISIONS
REQUIREMENTS
Selected overview of management actions
Business
Strategy
model
Raise
Dividend
capital
Higher
Pricing qualify
capital
Dynamic Simulation
Dynamic Simulation
Assets Financial events are derived from:
New business ▪ Financial contracts
▪ Financial environment
Existing business from
assets/portfolios
Existing deposits Time
Any financial reporting is derived from financial
New deposits events
Liabilities
t0
Financial reporting is a combination of:
▪ Liquidity
▪ Value (market / credit)
P&L
▪ Sensitivity
▪ Income
▪ Risk
Dynamic Simulation based on Forecast
Stress Testing
What is Stress Testing?
▪ A stress test is an analysis or simulation designed to determine
the ability of a given financial instrument or financial institution
to deal with an economic crisis
▪ Example of stress tests:
▪ What happens if unemployment rate rises to 15% in a specific
year ?
▪ What happens if GDP falls by 1% in a given year ?
▪ What happens if interest rates go up by at least 200bps ?
▪ What if half the instruments in the portfolio terminate their
contracts in the fifth year ?
▪ What happens if oil prices rise by 200% ?
Entreprise Wide Stress Testing
Stress testing framework
▪ Data quality & integrity
Risk Appetite ▪ Traceability
▪ Growth strategies, business plan, ▪ Reporting & delivery process
stakeholder expectations RISK APPETITE
▪ Holistic view of the business
▪ Risk limits Strategic planning & forecasting
▪ Capital allocation LIQUIDITY STRATEGIC ▪ Regulatory & internal driven
STRESS
▪ Perfomance optimization PLANNING & PLANNING &
TESTING scenarios
MANAGEMENT FORECASTING
▪ Planning & forecasting
Liquidity planning &
management ▪ Dynamic simulation incl. what-if
scenarios
▪ LCR / NSFR simulation & CAPITAL
forecasting PLANNING & ▪ Advanced stochastic simulation
ICAAP
▪ Liquidity stress testing ▪ Risk adjusted ratios & KPI
framework
▪ Funding projections Capital planning & ICAAP
▪ Liquidity sources & ▪ Enhanced stress testing & scenarios
strategies ▪ Capital & strategic planning reconciliation
▪ Capital planning in line with risk-return profile
▪ Integrated risk model (regulatory & economic view)
Stress Testing Framework and Parameters
Customer Specific (Look-up / reference table)
▪ Macro models
Stress Testing Framework
Risk factors combination
▪ Market risk shocks/variation
▪ Credit risk shocks/variation
▪ Behavioral models
Scenario Modeling
▪ Unlimited number of scenarios
▪ Combined market, credit & behavioral
stress
Dynamic Simulation
▪ Forecasting, budgeting & planning
▪ Growth & reinvestment
▪ Characteristics of simulated positions
ALM
ALM – Business Background
▪ Asset & Liability management entered common usage from the mid
1970’s onwards.
▪ ALM was defined in terms of four key concepts:
1. Term Structure of Interest Rates
2. Maturity Profile of the book
3. Interest Rate Risk
4. Liquidity
▪ Strategic ALM – Proactive balance sheet management that seeks to
integrate origination principles for both assets and liabilities.
Shareholder
Regulator Customer
Organization – Analytical Framework
Strategy /
Policy (Risk
appetite,
Limits)
Analytical
framework Earnings at
Technology Risk
(Analytical
measures)
Value at Risk
analysis
Tier 1
ALM Income simulation
(Dynamic What-if
analysis)
Tier 2
Stress testing
Controlling MIS /
Tier 3
framework Reporting Value / Exposure analysis
(Profitability framework (Duration)
Tier 4
analysis) (KPI, KRI)
Gap analysis
Regulatory
compliance
Asset & Liability Management Solution
Sensitivity Gap Analysis Scenario Modeling
▪ Marginal, cumulative & residual ▪ Unlimited number of scenarios
Repricing gap analysis ▪ Combined market, credit & behavioral stress
Key rate analysis
Fixing date gap analysis
NPV, Duration, Convexity, Greeks
▪ NPV and its sensitivities (Greeks for options)
Exposure Analysis
Replication Portfolio
▪ Replication of non-maturing contracts
Dynamic Simulation
▪ Forecasting, budgeting & planning
NPV & Sensitivities
Impacts of stress tests versus
baseline scenario
Sensitivity Gap Analysis
Decomposition per risk factors & scenario
Time series and other dimensions are fully configurable
through the integrated OLAP cube
Net Interest Income
Scenario sensitivity
EVE, NII and Gap Reports
Examples
ALCO reports
Example
Liquidity Risk Solution
Liquidity Gap Analysis Scenario Modeling
▪ Marginal, cumulative & residual ▪ Unlimited number of scenarios
▪ Funding & market liquidity risk ▪ Combination market, credit & behavioral stress
Contingent Gap Analysis
▪ Segregation according to the source:
contract determined, prepayments, etc
Repo Analysis
Dynamic Gap Analysis
▪ Inclusion of new production & rollovers
Liquidity Ratios
▪ Liquidity Coverage Ratio (LCR)
▪ Net Stable Funding Ratio (NSFR)
▪ Concentration & diversification ratios
Results on Liquidity Risk Financial Analysis
Survival Period Report under Normal Conditions
Marginal Liquidity Gap
display all inflow & outflow cash flows
Cumulative Liquidity Gap
under normal conditions
(benchmark scenario)
Scenario Impacts on Survival Period
Financial Crisis scenario
Bank Reputation Loss
scenario
Contingent gap
Categorizing cash flows by their contingency is of crucial importance to
the liquidity forecasting process
Fund Transfer Pricing
The basic mechanics of FTP
External risk origination through Internal Risk Transfer through External risk mitigation ▪ Liquidity Risk from
payout obligations
customer business (de-central fictitious hedge (independent of through actual hedge
(here: loan today,
branch/desk decision) actually realized external hedge!) (central Treasury decision) deposit in 2Y)
▪ Market Risk from
change in P&L drivers
(here: Interest rates,
€ 80 mn Business Unit € 80 mn FX rates)
Loan to
Customer A Riskless Margin
Fix 2% for 6Y
Fix 3% for 6Y (1% for 6Y)
Treasury
Capital
Risky Position Market
(mismatch)
Business Unit
Deposit from € 40 mn € 40 mn
Customer B Riskless Margin
3mLibor+0.4% 3mLibor+1%
for 2Y (0.6% for 2 Y) for 2Y
FTP is used for: Pricing Profit Management Risk Management
FTP works in 3 dimension
Pricing Profit Management Risk Management
➢ What is the ‘correct’ internal ➢ How did the deals originated ➢ Which liquidity- and market
hurdle rate for the external last month by business unit A/ risks arise from our bank’s
customer rate that is being Branch B/ manager c customer business?
negotiated for an imminent contribute to our banks NII?
new deal. ➢ Given that these risk’s are
➢ Which part of our bank’s NII is typically originated de-
➢ How would an imminent deal due to ‘solid’ sales efforts and centrally on branch- or desk
contribute to our bank’s NII if customer franchise, and which level, how can these risk be
the external customer rate part is due to taking ‘risky’ efficiently managed and
were contractually fixed at x%? mismatch positions limited?
Pre-calculation of customer deals Post-calculation of management Risk-Transfer and ALM of overall
(by Sales and Treasury) units (by Sales and Finance) business (by Treasury and Risk_
Funds Transfer Pricing Solution
Margin/profitability analysis by
▪ business unit,
▪ product or
▪ customer
Transfer funding rate assignment
Usage of liquidity, credit risk, treasury and other specific spreads
Analysis of new business and spreads
FTP methods supported:
▪ Average Life Matched
▪ Duration Matched
▪ Principal Weighted Cash Flow (Strip Funding)
How are rates/spreads assigned?
▪ Various rate assignment methods
▪ Determination of the Pricing Curve at analysis level
▪ User-defined rule possible
▪ Contract level definition
▪ Spread definition on top of the assigned rate
▪ Various spread definitions associated with expected
behaviour
How much margin was set on the products?
Drilldown Functionality
Breakout Reporting: Income by Business Unit
Breakout Report: Spreads per Loan Officer
Do higher-risk loans have greater spreads?
Dynamic FTP Analysis: Simulation of Potential Rates and
Margins including a Future Date Analysis
Excel integration
Credit Risk
Credit Risk Solution
Credit Risk Analysis Scenario Modeling
▪ Current exposure ▪ Unlimited number of scenarios
▪ Concentration risk ▪ Combination market, credit & behavioral stress
▪ Credit liquidity impacts
▪ Potential Future Exposure
▪ Credit VaR / Expected shortfall
▪ Economic Capital: Credit + Market VaR / Expected Shortfall
ECL & Recovery Analysis
▪ Different methods (parametric, EAD based & stochastic)
▪ IFRS9 compliant (1Y and lifetime PDs)
Segmentation by user-defined dimensions
▪ Country, ratings, etc
Credit risk mitigation & credit enhancement analysis
Credit Risk – Default definition
▪ Credit risk is the risk of financial
loss due to an unexpected
RECOVERY
deterioration of a counterparty’s DEFAULT
credit quality
▪ Credit default or downgrade
disrupts or changes cash flows and
thus impacts a firm’s income and CF EVENTS
E1 E2 E3 ECE E4 E5 EN T
liquidity
LIQUIDITY VALUE
INCOME
Architecture of Credit Risk Solution
CREDIT RISK
Settings Calculations
RISK
COUNTERPARTY
MEASUREMENTS
RATINGS LOSS DISTRIBUTION
PDS
EXPECTED LOSS
MIGRATIONS UNEXPECTED / EXTREME
LOSSES
RISK MITIGATION
(CREDIT EXPOSURES
ENHANCEMENTS]
COUNTERPARTY BASED EAD
ASSET BASED ADJUSTMENTS / CVA
Expected Loss
▪ Expected Loss (EL): average loss up to the maturity date of the contract(s) or up to
a given time horizon
▪ Banks are expected to hold reserves against expected credit losses which are
considered a cost of doing business
▪ The most basic model of expected loss considers two outcomes: default and non-
default.
▪ not in default: ECL = sum of discounted expected exposures times the probabilities of
default over all time intervals.
▪ is in default: ECL = the gross exposure minus the forthcoming enhancements and
recovery
▪ Simplified approach EL = LGD x EAD x PD
▪ The total expected loss of a portfolio is the sum of expected losses of individual
assets
Unexpected Loss
▪ The unexpected loss is the average total loss over and above the mean loss. It
is calculated as a standard deviation from the mean at a certain confidence
level
▪ Measures “how much will I lose on a bad year (1 – 100 years @ 99%
confidence)?”
▪ A business will safeguard itself from unexpected losses by allocating capital
▪ Related to economic and regulatory capital
▪ If the 99% VaR level is $200m and the expected portfolio loss is $50, then the
unexpected loss will be $150m.
▪ Measures:
▪ VaR: maximum potential loss of a given position (or business area) within a
specified time horizon and confidence level α
▪ Expected shorfall: the average size of losses exceeding VaR
EL, UL & Capital
Economic Capital: maximum amount
of unexpected losses potentially
arising from all sources that could be
absorbed while remaining solvent,
with a given level of confidence over
Portfolio Loss Distribution
a given time horizon.
Regulatory capital 99.9%
Regulatory Capital: maximum
Economic capital 99.97% amount of unexpected losses that
could be absorbed without any loss
to depositors (or their insurer), for a
given level of confidence over a
given time horizon
Expected Loss Value at Risk Expected Shortfall
Expected and Unexpected Loss Uses
EL is used for UL is used for
▪ Pricing ▪ Reduce and optimize portfolio
▪ Decision-making tool credit risk
▪ Credit monitoring ▪ Prioritize risk reducing actions
▪ Liquidity risk management ▪ Revaluate obligors contributing
▪ Provisions the largest absolute amount of
risk
▪ Calculate credit risk limits
▪ Assess economic capital
Expected Credit Gain Loss (ECGL) Calculation
Non-Default Case at t0
Documentation available
Potential Exposure
▪ Expected Positive Exposure : Time-weighted sum of all
Expected Exposures over the valuation time horizon
▪ Effective Expected Positive Exposure : Time-weighted sum of
all Effective Expected Exposure over the valuation time horizon
▪ Expected Exposure: Average of distribution of exposures
considering credit risk netting
▪ Effective Expected Exposure: Maximum of Expected Exposures
over all previous dates
▪ Peak Exposure: Exposure at a given confidence level given a
distribution of exposures considering credit risk netting
ICAAP
Addressing ICAAP
Principles
▪ The Internal Capital Adequacy Assessment Process (ICAAP) is an internal instrument,
which shall allow institutions to hold the internal capital and liquidity adequacy they
deem appropriate in order to cover all the risks to which they are or could be exposed
▪ Strategies and processes on an ongoing basis to cover the nature and level of the risks to
which they are or might be exposed for business as usual and stressed conditions
▪ Maintain healthy capital ratios in line with its business strategy and overall risk appetite in
order to support its business expansion and contribute to shareholders’ value
Comprehensive and forward-looking!
▪ Adapted to the scale, diversity and complexity of the institution’s activities
RWA in a Risk Management Environment
▪ Build up of capital through modelling assumptions
Dynamic Capital Adequacy Simulation
▪ Forward-looking analysis with integrated stress testing
