Oracle Financial Services Analytical Applications: Improving sustainability in banks through liquidity and capital management Austin Trippensee Financial.

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Oracle Financial Services Analytical Applications: Improving sustainability in banks through liquidity and capital management

Austin TrippenseeFinancial Services Analytical Applications

Asian Banker SummitHong Kong

April 7, 2011

The following is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions.The development, release, and timing of any features or functionality described for Oracle’s products remains at the sole discretion of Oracle.

© 2011 Oracle Corporation – Proprietary and Confidential

What did you know?

• 5 years ago– What was your worst-case stress scenario for the U.S.

Financial Markets?– Did you know who Barack Obama was?

• 3 years ago– Did you think oil would go above USD 140/bbl?– Would you have bought gold at USD 1,400/ounce?

• 1 year ago– How did your stress tests include Egypt or Libya? – Do your stress tests include natural disasters?• Japan, Haiti, Iceland, etc

Liquidity Risk Management ChallengesBasel III Regulations – Going Beyond Liquidity Gaps

• 2 Liquidity risk measures to be calculated based on detailed prescriptive guidelines on how to treat inflows and outflows:• Liquidity Coverage Ratio – identifies the amount of high

liquid assets that need to be maintained to withstand a supervisor specified stress scenario

• Net Stable Funding ratio – measures the amount of stable long-term funding that needs to be maintained

Liquidity Risk Measures

• Increased focus on intra-day liquidity• Liquidity Reporting to cover – contractual mismatch, funding

concentration, Unencumbered Assets , Market Related Monitoring

Monitoring & Reporting

• In addition banks need to comply with the qualitative guidelines issued on liquidity management

Qualitative Guidelines

5© 2011 Oracle Corporation

Liquidity Risk Management ChallengesCurrent Situation

• Liquidity Risk management gets significant attention with reinforced principles and prescriptions from regulators (BIS, FSA, FDIC, APRA, OSFI, etc)

• Liquidity Stress Testing highlighted as a key industry-wide weakness

Increasing Regulatory Pressures

• Liquidity Risk becomes an Enterprise concern which highlight disconnects with other risks and company-wide business practices

• Inter-relationships between Credit, Market and Liquidity Risks not understood

Inadequacy of “Silo’d” Approach to Risk Management

• Stress testing carried out as a standalone exercise and the results not used in the strategic decision making process of the institution

• Stress Scenarios are not uniformly applied and additionally do not cater to severe liquidity events across all risk silos

• Liquidity management process limited to estimation of liquidity gaps

Weakness in Current Liquidity Risk Stress Testing Practices

• Current management, analytical and resolution approaches to Liquidity Risk are not transparent, responsive or flexible

• Materiality Assessment of Liquidity Risk non-existing

Liquidity Risk Management Process an inflexible “Black Box”

6© 2011 Oracle Corporation

Liquidity Risk Management Challenges“To meet these challenges, I need to…”

• Ability to respond on an intra-day and on-demand basis to regulatory requirements and marketplace events

• Build comprehensive library of stress scenarios that are consistent with enterprise use and reflect regulator needs catering to market-wide and idiosyncratic requirements

Meet all Regulatory Compliance Requirements in a Timely Manner

• Adopt a simple and transparent solution that allows regulators to understand the defined Stress Scenario, the impact on underlying data and the calculation process

• Enterprise wide involvement to effectively assess liquidity profile and • Cross-functional team that is able to understand and model inter-relationships across risk

categories

Create a Transparent and Auditable Stress Testing Program

• Develop funding strategies based on anticipated market conditions and associate those with stress scenarios

• Identify net exposure after mitigating strategies and manage the institutions risk appetite

Develop Multiple Alternative Counterbalancing Strategies

• Develop a process of timely availability of Liquidity reporting and dashboarding• Provide a means for management, board and supervisors to be well satisfied with

“explanatory detail” for critical issues

Establish Supervisory & Management Dashboards

7© 2011 Oracle Corporation

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Liquidity Risk Management Process Flow

Define Liquidity Time Buckets•Near Term Buckets for Operational purposes

•Long Term Buckets for Strategic Decision making

Execute Contractual Run •Contractual data from bank’s systems

•Contractual gaps without overlaying assumptions

•Highlights liquidity concentration on the balance sheet

Define Baseline Assumptions using Baseline Rules•By business user•BAU assumptions on roll-over, run-offs, delinquencies, margin requirements due to market movements,

Execute Baseline Run•Compute business-as-usual cash flows and gaps based on BAU behaviour assumption

•Compute liquidity ratios under BAU

Define Stress Scenarios• Idiosyncratic and systemic scenarios•Worsening of BAU assumptions •Regulatory and internally modeled •Stress varies by dimensions such as Legal Entity, Currency, Etc

Execute Stress Scenarios•Assess cash flows, gaps and ratios under stress scenarios

• Intra-day assessment•Assessment under multiple scenarios

Counterbalancing•Define credible counterbalancing strategies – asset sale, repo rollover, new repos

•Assess gaps under each counterbalancing strategy

•Maintain audit trail of results

Materiality Assessment & Action Planning•Liquidity profile based on qualitative and quantitative assessment

• Identify and manage liquidity hotspots on an operational and strategic level

Advanced Reports•Regulatory reports in pre-specified templates

•Management reports and dashboards on gaps, ratios and counterbalancing results

•Heat maps

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Stress Testing Challenges“To meet these challenges, I need to…”

• Behavioral Assumptions• Bring together the entire portfolio.

Define Base Case

• At the individual risk factor level• Groups of risk faScenario, the impact on underlying data and the calculation

process• Enterprise wide involvement to effectively assess liquidity profile and • Cross-functional team that is able to understand and model inter-relationships across risk

categories

Define Shocks

• Develop funding strategies based on anticipated market conditions and associate those with stress scenarios

• Identify net exposure after mitigating strategies and manage the institutions risk appetite

Develop Multiple Alternative Counterbalancing Strategies

• Develop a process of timely availability of Liquidity reporting and dashboarding• Provide a means for management, board and supervisors to be well satisfied with

“explanatory detail” for critical issues

Establish Supervisory & Management Dashboards

9© 2011 Oracle Corporation

Reporting Cycle Event

Day 10: 9:00 AM Monthly reports due in 2 days

Day 10: 9:15 AM Regulator requests modification to submission

Day 10: 9:22 AM Economic event happens

Day 10: 9:26 AM CFO wants revised profitability estimates

Day 10: 9:27 AM CRO requests new stress run to assess impact

A Day in the Life: Day 10 of Monthly Reporting Cycle

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Monthly Cycle Event

Day 10: 9:00 AM Monthly reports due in 2 days

Day 10: 9:15 AM Regulator requests modification to submission

Day 10: 9:22 AM Economic event happens

Day 10: 9:26 AM CFO wants revised profitability estimates

Day 10: 9:27 AM CRO requests new stress run to assess impact

Day 10: 9:30 AM Regulatory capital run submitted with regulator modifications

Day 10: 11:00 AM Regulatory run completed (1:29:21)

Day 10: 11:00 AM Profitability run submitted per new specifications

Day 10: 12:46 PM Profitability run completed (1:46:00)

Day 10: 12:46 PM New stress liquidity run submitted

Day 10: 12:56 PM Stress run completed (0:10:06)

A Day in the Life:OFSAA with Exadata Changes the Game

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A Day in the Life:Enterprise Risk Dashboards

© 2011 Oracle Corporation 12

Summary

• Liquidity risk management should leverage organizational excellence across all risk areas• Models continue to evolve to address micro & macro

economic factors across all risk types• Organizations will need flexibility to adapt to changing

conditions• Systems need to manage libraries of scenarios and

be able to support intraday analytics• Must support risk culture across entire organization

© 2011 Oracle Corporation – Proprietary and Confidential 13