Data Problems, Requirements and Risk Management

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Data Problems and Requirements:Transparency Across Products, Markets, and Legal Entities

American Association for Budget and Program Analysis

Thomas Day

Managing Director, Risk and Policy, SunGard Ambit Financial Solutions

18-May-2010

Broad Bank and Bank Supervisory Trends

Major consolidation over the course of the last twenty years Since 1990, the number of banks have declined by 7,146 institutions Since 2001, the number of banks have declined by 1,735

Total assets have increased From approximately ~$4.0 trillion as of FYE-1991 to a FYE-09 level of

$13.1 trillion

Supervisory staff have declined FDIC staff only: A 1991 level of 22,586 to a 2009 level of 6,558

(~+1,500 from 2008/2009), or approximately $2,000 million per employee versus 1991 level of ~$177 million per employee

Financial Mega-Trends and Issues

The 1990’s saw a rapid increase in: Use of Derivatives Structured Products Increased Use of Securitization Disintermediation of deposits (more wholesale $’s) Rapid Increase in Technological Advances

Increases in productivity Wider distributions of risk across geographies and investor type

Increased use of models in order to “sell” complexity Wider bid/ask spreads

Greater faith in financial engineering Stability v. instability Period of relative calm and steady growth

Much greater belief in the “fine tuning” of our economy

The Decade of “The” Bubble

Beginning in 2000 and continuing through 2004, a rapid decline in O/N funds rate

Well communicated increase (and slow) increase in rates.

2000-012001-012002-012003-012004-012005-012006-012007-012008-012009-012010-010

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To Recap

We saw a significant increase in the use of technology to increase efficiencies over the last two decades Banks got bigger, risk-taking got more “scientific” Funding liquidity seemed endless Products became more complex Competition, globally, became more intense

Economies-of-scale seemed to “rule” and “diseconomies” of scale were “inconceivable” in banking

My experience: Multiple source systems Legacy data problems Inability to pull current position balance sheets together Inability to evaluate, plan and budget over such a large book Governance by volume and performance, not by risk

The Crisis: Decision-Makers Were Flying Blind

As the 2008 crisis unfolded key government decision makers were in the dark – despite all of the data that is currently collected - as to exactly what was happening.

1. Lehman Bros. was allowed to collapse without data on how the vast counterparty network would be affected

2. Treasury Secretary was unaware of AIG’s CDS book until the Lehman failure

3. Government caught by surprise by a 21st century “bank run”

No one had the data to see the interconnectedness between financial firms and how the collapse of Lehman Bros. could bring the world to the brink of a second Great Depression

We live in a 21st century world without 21st century data-management expectations

This will change. There are already some excellent examples.

Systemic Risk

Monitoring one-bank at a time is necessary, but not sufficient Horizontal reviews of risk are necessary Image/idea:

The entire country’s financial system as a series of cash flows, some more volatile to macro- and micro-shocks that others

The SCAP stress-test was a good, albeit painful, proxy for this “idea” Comptroller Dugan:

“Bank information systems are not designed to aggregate information in this way on a regular basis. Much improvement is needed in these systems…but until strides are made, comprehensive stress-testing will remain very difficult.””…the issues I’ve just mentioned make me reluctant to begin conducting such tests routinely as the cornerstone of our supervision.” (also stressed PFRs shouldn’t disclose the results)

– April 15, 2010 at the Richmond FRB

Stress-Test Result: Similar to Evaluating Loss Coverage in a Securitization

Data Needs

Lessons Learned: Data quality at our large, systemically important financial institutions is largely

in need of vast improvement

The modeling issues confronting the supervisory teams (economists and examiners) during the stress-test should not be “rare” or “unique”

Enterprise-wide stress testing should be common and ubiquitous

Large firms should be able to defend their stress-tests and the supervisors need adequate tools to assess the inherent quality and robustness of internal tests

A “debate and confirm” atmosphere would be healthy

FDIC fees should have a relationship to the potential volatility of DI assets

We live in a 21st century world without 21st century data-management expectations

This has to change. There are already some excellent examples.

Data Requirements

Standards Flexibility Scalability Practicality Portability

Thanks to Mark Flood, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=924618

See also:

http://www.ce-nif.org/about-us

The NIF/OFR needs to proceed to ensure sustained improvement in EWRM at our TBTF institutions

You can’t manage what you can’t measure …and you don’t get improved data standards without a

standard setter

Regulatory Change: Liquidity and Capital

Liquidity Risk Management BCBS, SSG, IIF and Domestic Regulators Key areas of focus will be:

The forgotten “dark art”: asset liquidity = “counterbalancing capacity” = liquidity buffer

Cash-flow based stress-testing (forward looking) Contingency funding plans

Capital Adequacy What is capital? The “definition of capital” work-stream at the

international level is a top priority. Are you prepared? Counter-cyclical rather than pro-cyclical capital International convergence on a “leverage” ratio standard

Regulatory Change: Transparency and Disclosure

Transparency The Office of Financial Research (OFR)

CMSA IRP, ALERT, FpML, Project RESTART as examples The EDM Council and various types of mark-up languages

SEC proposed rule AB Covers all private label 144-A transactions Loan-level (collateral) detail Computer code for the waterfall registered and available “No more secrets”

The return of the “3-6-3” “2-5-2” rule?

Conclusion

Thank You

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Data Problems and Requirements:Transparency Across Products, Markets, and Legal Entities