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1 Robotics in Stress Testing

Robotics in Stress Testing: An opportunity for Stress Testing 2 Introduction 3 Advantages & Enablers 4 Automation Opportunity 5-6 Steps to Progress 7 Target Process Candidates 8 A different Future with business owned and IT supported Digital Workforce 9 Inhibitors 10 Further thoughts 11

Contents


Robotics: An Opportunity for Stress Testing – more for less

Deloitte University Press: Global risk management survey, 10th edition, Mar 17 “In the current low-revenue environment for financial institutions, there is pressure to reduce risk management costs .....

Robotics process automation (RPA), such as automated workflow and decisioning tools triggered by a robot function, is also being used to reduce costs and improve quality by automating routine tasks like fully automated compliance testing by leveraging these RPA technologies.”

McKinsey: The future of bank risk management, July 2016 “After exhausting traditional cost-cutting approaches such as zero-based budgeting and outsourcing, banks will find that the most effective remaining measures left are simplification, standardization, and digitization.

As the pressure to reduce costs will persist, the risk function will need to find further cost-savings opportunities in digitization and automation while delivering much more for much less.”

"You can see the computer age everywhere but in the productivity statistics” - Robert Solow, 1987

Why didn't electricity immediately change manufacturing? Tim Harford, BBC World Service, 21 August 2017 http://www.bbc.co.uk/news/business-40673694 “In 1881, Edison built electricity generating stations at Pearl Street in Manhattan and Holborn in London. By 1900, less than 5% of mechanical drive power in American factories was coming from electric motors. Some factory owners did replace steam engines with electric motors, given the huge investment this involved, they were often disappointed with the savings. Why? Because to take advantage of electricity, factory owners had to think in a very different way. Steam-powered factories had to be arranged on the logic of the driveshaft. Electricity meant you could organise factories on the logic of a production line. As more factory owners figured out how to make the most of electric motors, new ideas about manufacturing spread. Come the 1920s, productivity in American manufacturing soared in a way never seen before or since. The economic historian Paul David gives much of the credit to the fact that manufacturers had finally figured out how to use technology that was nearly 50 years old. Which puts Robert Solow's quip in a new light. In Autumn 2000 two economists, Eric Brynjolfsson and Lorin Hitt, published research* showing that many companies had invested in computers for little or no reward while others had reaped big benefits. What explained the difference was whether the companies had been willing to reorganise to take advantage of what computers had to offer. You couldn't just take your old systems and add better computers. You needed to do things differently.” • Journal of Economic Perspectives—Volume 14, Number 4—Fall 2000—Pages 23–48

https://www.finextra.com/newsarticle/31034/deutsche-bank-boss-says-big-number-will-be-replaced-by-robots?utm_medium=newsflash&utm_source=2017-9-6 “John Cryan, chief executive of Deutsche Bank, has told an audience of bankers in Frankfurt that he expects a "big number" of his current staff to be replaced by robots. Cryan said that it was important for the bank to embrace a "revolutionary spirit" and warned that this would mean an end to an era where accountants acted like abacuses - "We have to find new ways of employing people and maybe people need to find new ways of spending their time.... In our banks we have people behaving like robots doing mechanical things, tomorrow we’re going to have robots behaving like people... added that the use of new technology and robots would not always be a direct replacement for human staff. Instead some staff would be "up-skilled" and given more interesting work as the more commoditised tasks were entrusted to automation and robots.“”


Robotics & Stress Testing Introduction

What is Robotic Process Automation (RPA)? !  RPA is software algorithms created to do manual activities and interact

with existing applications in the same way as a person would – hence we see the concept of virtual FTEs and articles “Robots taking jobs”

!  RPA software mimics the desktop based key strokes and activities of people who perform manual processes on spreadsheets & EUCs

!  The manual handling, validating and reconciling, generating issues, tagging (for example) of data can be run by the robot

!  RPA is complementary to process workflow and applicable to anything that is high volume, repetitive and manual

!  RPA targets quick win automation, non-invasive integration for improving processes with current, legacy systems presentation layers

Why RPA in stress testing and in bridging risk : finance gaps?

!  Stress testing has and will continue to generate tactical data processes reflecting that risk & finance will not “overnight” integrate and seamlessly communicate data consistently – these are manual, repetitive, high volume processes currently run by expensive resources

!  Maintaining and manually running these processes over a prolonged period is unsustainable and costly

!  Robotics delivers increased accuracy and control by standardising repeatable, manual or semi automated tasks, while enabling more analytical work

!  Increasing controls and consistency of execution reduces costs (we get to results and underlying problems faster)

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Robotics & Stress Testing Advantages & Enablers

Advantages of RPA (in stress testing) !  Installing a robot doesn’t require sophisticated programming. Software

is workflow, script and parameter-driven so can be business lead & owned

!  So called “edge” cases continue to be run manually

!  Implementations are inexpensive when compared to large scale (risk & finance) IT transformation projects

!  Helps to progress towards regulatory expectations on qualitative improvements including removing manual processes

!  Robotics undertakes tasks at high speed and provides a uniformly high level of quality so aids in review & challenge and control automation

How to enable RPA?

!  Teams to identify and / or devise processes that are “robot ready”

!  Instead of automating existing processes, there could be some process

re-engineering or re-imagining, or alternatively, robotics can automate

“clumsy” processes

!  Identify duplications or inefficient processes as targets for RPA

!  Be brave!

!  Steps to progress follows...

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•  People with automation tools

•  Systems undertake repetitive tasks

Artificial Intelligence Advanced Simple

Robotics & Stress Testing Automation Spectrum (fear gauge)

•  Augmenting People with Robots

•  Workflow removing manual intervention

•  Software with self learning capability

•  Not truly a “software robot”

•  Predictive analytics

“Forrester forecasts that cognitive technologies such as robots, artificial intelligence (AI), machine learning, and automation will replace 7% of US jobs by 2025.”

https://www.theguardian.com/business/2015/aug/17/technology-created-more-jobs-than-destroyed-140-years-data-census

https://www.cnbc.com/2017/07/27/robert-shiller-fear-of-robots-is-driving-the-market-rally.html

https://www.theguardian.com/technology/2014/oct/27/elon-musk-artificial-intelligence-ai-biggest-existential-threat

https://www.bizjournals.com/sanjose/news/2017/07/17/tesla-elon-musk-ai-fundamental-risk-civilization.html

https://www.cnbc.com/2017/07/25/elon-musk-mark-zuckerberg-ai-knowledge-limited.html

Opportunities for Stress Testing Process Efficiency Opportunities for Stress Testing Advanced Analytics


Artificial Intelligence Advanced Simple

Robotics & Stress Testing Automation Spectrum

Opportunities for Stress Testing Process Efficiency Opportunities for Stress Testing Advanced Analytics

•  Simple: !  Improved workflow capability to bring together business processes across multiple

functions (e.g. Risk, Finance, Treasury, Review & Challenge, Governance, Operations)

•  Simple to Advanced: !  Existing applications deployed in smarter ways with triggered automation !  RPA integrating system to system, data to data, and replicating the tasks of a person !  Edge case identification

•  Advanced to Artificial Intelligence !  Software is running that has the ability to learn by observing (recording) the interactions

people make with software !  Develop Insights via applying learning from multiple sources of data and systems !  Recommend [management] actions, projections (e.g. PDs, LGDs, FTP, NII)

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•  There are a number of RPA tools available at differing levels of sophistication. Fusion and Open Span in use but don’t offer the same capabilities and ease of adoption as Blue Prism

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Robotics & Stress Testing Automation Spectrum


!  BoE 2017 Exploratory Scenario challenged firms:

!  Low growth, low rates, low productivity ~ lower revenues

!  Increased competition, traditional and modern

!  Expected costs on technology to increase

!  Sought responses linked to automation

!  Questions on “Fintech” (positives / negatives)

!  What would firms do differently to survive the low and slow

scenario – current model is not generating returns

!  Stress Testing cost vs. benefit – RPA :

!  Potential benefits of improved risk understanding vs. very

real, tangible and growing costs of running the stress test

!  Operational issues overtaking analysts ability to analyse

!  Regulatory expectations of operational processes vs. physical

reality on the ground

!  Stress Testing fatigue

!  Timeline pressures

!  Simple models vs. complex, long tailed AI delivery

Robotics & Stress Testing BoE 2017 & Cost vs. Benefit

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Robotics & Stress Testing Steps to Progress

Steps to Progress on RPA? !  Identify candidate processes and start (be brave and have a mandate with authority to

innovate)

!  Identify basic success targets : headcount reduction or capacity to free up

!  Define your business case – will be different for each firm, function however cost reduction is likely to be common

Candidate Process Identification:

!  Processes that will not materially change in the next 12 months

!  Processes where we insert people into a process to manhandle repetitive tasks

!  Co-located process with Robotics “Centre of Excellence” with dedicated RPA BAs and RPA software dev’ team (ideally if possible)

!  Focus on end to end rather than “bits of a process” (there are exceptions)

Business & RPA “Centre of Excellence” Next Steps !  Agree candidate process(es) for RPA Proof of Concept PoC

!  Robotics Centre of Excellence (RCofE) supply Business Analyst (BA) to capture processes upstream & downstream and stitch together for robotic software development

!  Business self fund approach with no Group IT process (business funded ~ small outlay)

!  RCofE leverage existing RPA modules deployed elsewhere in the institution

!  Run a time boxed RPA Proof of Concept (PoC) with [relatively small, low] success criteria

!  Integrate RPA into IT strategy – alongside rather than as an after thought

!  Software dev’ team determine solution software (BluePrism – targeted at higher cost resource release) or OpenSpan (lower cost resource release)

!  Success of PoC move to full business case or expanded PoC

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Stress Testing: An use case for Robotics A different Future with business owned and IT supported Digital Workforce

Operating Cost

Reduction

Operational Risk

Reduction

Quantitative Accuracy

Qualitative Assurance

Stress testing can reveal a lot about business models, planning assumptions, pricing and profits.

To use stress test results in the business we need to be confident that the stress test process itself is sufficiently robust and numbers reliable

Regulators moving from stress testing as crisis management tool to crisis prevention, regulatory focus is shifting from capital levels to process controls and capabilities around IT, data collection and quality

Business Engaged

Improved Business

Risk Based Decisions

P&L

Collaboration between the business units and “group” crucial to success of three lines of defence model

Removing repeat, manual, spreadsheet intensive processes from highly skilled staff to re-engage them in intelligent business, risk & revenue analysis

Lower cost than large scale IT, remove productivity

waste

Keep the focus on balance sheet but also bring in the P&L and business model risk

Establish a bank wide glossary

Shared understanding on basis of prep’ between Risk: Finance: Treasury

Re-engineer processes to enable automation

Centralise change control process supported by RPA BAs Run (for example) Reconciliations & Validations Automatically and Constantly

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B/S Decisions


Robotics & Stress Testing Target Process Candidates (simplified & common across industry examples)

RPA PoC can target Simple, Moderate or Complex processes and / or target those with greatest reward

Four candidates below.

1.  PRA Query Log (Simple) o  Process from receipt of PRA Log daily to issuing out and responses tends to be manual, repetitive and generic

o  Minimal exceptions to standard process

o  Strong candidate for RPA

2.  BoE Unstructured Questions (Moderate) o  Process for initial preparation and compiling of BoE ST Unstructured data is very manual, largely repetitive and requires little subject matter knowledge (the

insight and value can be refocused on improving, adding additional, interrogating and so on).

o  Good candidate for RPA however not a silver bullet

3.  Operational Control Monitoring (Moderate) o  Often cited as target process for RPA with numerous successful implementations in industry

o  Potential to roll-out widely in Stress Testing means reward could be exponential

4.  Reconciliations & Validations (Complex) o  Requires more intensive process re-engineering – an immediate candidate for RPA and focus on data entry between systems, people and systems

o  To make the most of RPA need to go upstream to CDO and Front & Middle Office IT

o  STDF templates from source to PRA submission with automated error reporting and machine to machine process – removing human intervention

o  Benefit in bringing visibility of data lineage - transformations, process break points, adjustments, overrides, data pathways

o  Benefit in reducing the substantial effort spent on spreadsheet data entry and reconciliations (FTE +++)

o  Would be transferable to future XBRL style submissions

5.  Forecasting & Projections (Artificial Intelligence) o  Historical profiled behavioural data on (for example) to project FTP, NII, NFI

o  Replace model validation with AI validation


!  Process breakdowns – RPA benefits materially from Lean / Six Sigma

!  IT Governance

!  Hub IT costs (RPA is about eliminating activities not maintaining in perpetuity)

!  Risk of Desktop Robot EUCs (c/f Desktop Excel EUCs)

!  Fear of integration (misplaced)

!  Ongoing maintenance and license costs – vendor dependency

!  Business change (e.g. operating model)

!  Major IT change underway

!  Fear of Cyber

!  Risk Appetite (IT)

!  Business mandate, authority

!  Luddites

Robotics & Stress Testing Inhibitors

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