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Building a Smarter Planet Enhancing Risk Management and Regulatory Compliance Sam Mukhopadhyay 18-Nov-2010 Hanoi
Building a Smarter PlanetEnhancing Risk Management and Regulatory Compliance
Sam Mukhopadhyay
18-Nov-2010 Hanoi
How can IBM help – effective execution
Risk Management for a Smarter Planet – the environment and the drivers
2
Risk Transformation agenda for your organization –Risk and Performance alignment
Business Analytics and Risk Analytics – the Risk enabled enterprise
A new wave of financial services regulation – raising questions about current operating modelsA new wave of regulation is expected to
increase capital and liquidity requirements and transparency
Larger financial services firms may also be subject to market share restrictions or divestiture requirementsRegulation threatens to dramatically reduce
profitability and return on equity (ROE) To maintain historic performance levels, CEOs
with be compelled to consider radically revised operating models
“Regulation will be key. Globalization is a fact. There is no way to reverse it…”
CEO of a top Argentinean bank
“[We are] concerned about … potential over regulation that may hinder healthy competition among local banks. Significant costs are involved in meeting regulatory issues.…”
CEO of a leading Nordic bank“Regulation [will] impact capital allocation for [the] business and liquidity…”
CEO of a top French bank
“The greatest emerging risk for global banking is the size and scale of regulation…”
“Regulation is going to be tightened in the west which will drive investors from one market to the other …”
“The impact of regulatory concerns is so profound on the industry … We have to change, not just in terms of complying with regulations but in terms of change investing capital to generate new revenue returns … we need new revenue models…”
CEO of a top Australian bank
Chair of major Hong Kong financial institution
CEO of a leading European credit card business
Non Structural Reforms
Focus on size, scope, ‘systemic importance’ and “too big to fail” FIs
Key Regulatory changes and their impact
1. Separation of activities
2. Caps on size and concentration
3. Recovery and Resolution
4. Macro prudential regulation for failures
5. Consumer Protection Agency
6. Clearing House for derivatives trading
Structural Reforms
1. Increased capital requirements
2. Increased liquidity requirements
3. Accounting requirements
4. Taxation and stability fees1
5. Compensation
Impact on Banks
Focus on liquidity, capital, leverage Revenue
Profit
Taxes
Operating Cost
ROE
Cost of Capital
ROA
Source: IBM Global CIO Study 2009 – Special Banking/FM subset
Notes: Q14: full sample N = 2354, FM/banking N=372
High growthLow growth
PRIORITIES % OF RESPONDENTS
Business intelligence and analyticsVirtualization
Risk management and complianceMobility solutions
Customer and partner collaborationSelf-service portals
Application harmonizationBusiness process management (BPM)
SOA/Web servicesUnified communication
Technology-driven innovationService management frameworks
Collaboration and social networkingFlexible sourcing
Enterprise-wide human capital developmentGreen IT
Web 2.0 and mashupsCloud computing / software as service
Other
85% / 76%76% / 77%
81% / 74%72% / 61%
66% / 48%63% / 52%60% / 62%
79% / 78%72% / 66%
62% / 48%64% / 59%
69% / 52%41% / 31%
63% / 54%
58% / 40%49% / 33%
32% / 28%27% / 23%
7% / 4%
Top three priorities
Bank CIOs worldwide have identified Business Intelligence and Analytics, Risk Management and Compliance, and Business Process Management as priorities
Top 4 Core Focus Areas for Vietnamese banks● Data management, integration, and
business analytics – “managing proliferation of … under-utilized data”… “to help improve customer analytics, … and enhance decision making”
● eChannel initiatives (Internet and mobile banking)
● Cost containment and process improvements
● Risk management and regulatory compliance – “only just attempting to get up to speed on Risk and Regulatory Compliance issues”… “priority will be… to quickly fill in gaps in their Risk management capabilities as well as take on Risk best practices”
Source: IDC Financial Insights – Vietnamese Banking Roundtable, August 2010
How can IBM help – effective execution
Risk Management for a Smarter Planet – the environment and the drivers
7
Risk Transformation agenda for your organization –Risk and Performance alignment
Business Analytics and Risk Analytics – the Risk enabled enterprise
Example: Imagine If Your Bank Could …
Product Manager Branch ManagerLoan Officer On-line Channels Manager
…offer new customer, menu-selected
products, price and terms driven by
OPTIMAL criteria
…action (near) real-time PREDICTIVE
ANALYTICS, say, a large wire transfer
shows up as potential fraud?
…use ADAPTIVE RISK control at the
customer and transaction level?
…cross sell optimal product, right
customer, right time, for the right RETURNS?
Next generation of efficiencies will come from applying Risk and Customer Analytics to optimize decisions at every contact point.…made possible by
enabling pervasive, predictive real-time decisions at the point of impact
Risk Intelligence
Unified Risk Platform
Development of the Risk-Enabled Enterprise
Exposure Assessment
Business Decision Making
Risk Appetite Management
Value Based Management
value
progress over time
Truly Risk-Enableda
Know Your Risks
1Be sure of your
exposure : Generate timely, comprehensive
and trustable information
Take Risk-Informed Decisions
2Put risk information at the core of business
management: Connect human and automated
decision processes to risk information and analytics
Align Risk and
Performance3
Reward risk appropriately:Integrate Risk and Finance to maximize value creation
July 8 2010 Client Value Narrative for the Banking Smarter ROI Project | IBM Confidential
How can IBM help – effective execution
Risk Management for a Smarter Planet – the environment and the drivers
10
Risk Transformation agenda for your organization –Risk and Performance alignment
Business Analytics and Risk Analytics – the Risk Enabled Enterprise
Enablement through an integrated risk management framework
Enablement through an integrated risk management framework
Integrated Risk Management
Beyond regulatory reporting–integrated risk and compliance–Complete management
information
Beyond hierarchies–integrated across all functions
and across the organization
Beyond organization boundaries
–integrated across the banking ecosystem to take into account systemic and ‘fat tail’ risks
–Co-create financial architecture with government and regulators1
Integrated Risk Management
Beyond regulatory reporting–integrated risk and compliance–Complete management
information
Beyond hierarchies–integrated across all functions
and across the organization
Beyond organization boundaries
–integrated across the banking ecosystem to take into account systemic and ‘fat tail’ risks
–Co-create financial architecture with government and regulators1
Be smart in complying with regulations and build competitive positioning
Governance & Compliance
Intelligently anticipate and mitigate potential risk from failed internal processes, people or systems
OperationalRisk
Instrument the organization to detect and intercept financial crimes
FinancialCrimes
Interconnect various risk silos to understand the firm’s full set of risks and opportunities
FinancialRisk
Source: The Yin Yang of Financial Disruption, IBM IBV paper Q1 2009
An integrated framework is needed to overcome challenges and manage risk effectively
1Supply-side (Trusted Data) Consumption-side (Risk Optimized)
Substantial gains come from analytics of high quality dataRisk Insight: Information is a Strategic Asset
Data Integratio
n
ETLETL
Data Data QualityQuality
Source Systems
Data WarehouseBanking ModelsCubes, Views &
Marts
• Pervasive and quick access to audit quality data
• Completeness & accuracy of data for aggregation and calculation
• Single information source for stake holders
• Business Analytics - Generating value from the data
• Decision maker insight & optimization• Business processes automation and
integration
Integration
Analysis &
Reporting
Analytics, Calculators & Algorithms
Business Process & Applications
Information Governance & Common Business Metadata
OptimizedOptimized
2Risk Control: Risk-Informed Decision MakingEnterprise wide management of Risk across Risk classes, geographies, lines of business
3Risk Aggregation: Factors & Stress TestingFocus on valuations under acute conditions – i.e. stressed Value at Risk or threats to liquidity and capital adequacy.
FIRM – Solution Overview
151515
IBM Solution Accelerators
FIRM, Cognos Controller
FIRM Metrics Studio, TM1
FIRM (OpenPages)
TM1,XBRL(IBM / ISV)
FIRM (OpenPages)
FIRM,Risk ScenarioAnalytics Blueprint(IBM / ISV)
FIRM,Risk ScenarioAnalytics Blueprint(IBM / ISV)
FIRM,BRP-BankingRisk PerfApplication
FIRM – Finance and Integrated Risk Management•Management Reporting•Financial Reporting•Regulatory Reporting•Risk Planning•Risk “what if” Sandbox
KEY CAPABILITIES:•Scorecards•Dashboards•Ad-hoc•OLAP Analysis•Events/Alerts
End Users
C-Suite BOD Finance Risk Operations RegulatorsSales Marketing
RegulatoryReporting
Market Risk
Financial Reporting
Enterprise Risk
Regulatory Compliance
RetailCredit Risk
WholesaleCredit Risk
Operational/ IT Risk
Risk Metrics Summary Credit Risk Dashboard
Counterparty Credit Risk Operational Risk
FIRM: Sample Pre-Defined Risk Dashboard TemplatesReal Time Market Risk
Financial Reporting
How can IBM help – effective execution
Risk Management for a Smarter Planet – the environment and the drivers
17
Risk Transformation agenda for your organization –Risk and Performance alignment
Business Analytics and Risk Analytics – the Risk Enabled Enterprise
Where and How to start? Enterprise Risk Health Check
IBM GBS BAO team have developed an Enterprise Risk Health CheckA proven diagnostic approach for assessing a bank’s risk data environment and making recommendations for improvements
Do you have the necessary foundation of governance and quality?
Do you have the right information and is it
scaleable and flexible to meet the changing
demands?
How optimal are processes and organization for the
pace of change?
Information Access Analytics Integrity
and Business Insight
Data Quality and Governance of
Information
Process Improvement, Automation and Rationalization
Total Exposure Information Credit Risk Reporting Limits & Utilizations Overdrafts & Netting Collateral Management
Quality & Completeness of Source Data Linking Data to Common Client/Institution Recognition of Risk Management Needs
Key Risk Indicators Credit Limit Approval Process Credit Lending Process New Business Acceptance
Operational Risk Reporting Stress Testing Market Risk Reporting & Analytics Trending and Predictive
Capabilities
Siloed Initiatives Data Aggregation Data Lineage
Client Investment Agreements Multiple Risk Calculators Duplicate Functional Systems GL Reconciliations
Risk Health Check is a rapid workshop-based diagnostic
Current State Challenges
Current State Architecture
Target State Architecture
InterviewNotes
Initial FindingsAnd
Recommendations
Analyzed Initial Interview Pain
Points
Documented Current State Architecture
and Challenges
Finalized Roadmap to Implement the
Future Vision
The high-level roadmap provides the transitions from current to future state as well as the required initiatives needed to fully realize the strategic vision
Enterprise Risk Management Health Check
Interview Analysis
High-level RoadmapPotential Initiatives
Developed Target State Architecture and
Potential Initiatives
Key Finding Topic Analytics Solution Framework Theme
BI Reference Architecture Framework
Source:Interviewee
Name or Document
Summary Finding Key Finding/Comment Business Area
Pain Point Application Metadata 10.23.09 - George Malanga.doc
Lack of consistent business rules 6. Establish consistent netting capabilities for overdraftsa. No current capabilitiesb. Have a contractual right to net, but can’t report on that basis.c. All systems don’t have the same capabilities, separately managing netting rules is a problem.d. Marc – understand that there are different netting rules in different system, should there be a central place to put netting rules that each system can go to in order to understand the netting rules.e. George – not sure if it is better to have a central place or to fix the current systems
All
Pain Point Tools Access 10.23.09 - George Malanga.doc
Lack of reliable overdraft reporting i. FOCUS on “Establishing a reliable reporting over true overdrafts”
regardless of how it is donef. Want to roll up by client but also activities such as exceeded limits, largest over drafts, overdraft aging, Comments for risk mitigation activities as well to show which business activities are causing overdrafts.g. Want to look at exceptional activity by individual.
All
Opportunity Information/Data 10.23.09 - George Malanga.doc
5. Develop comprehensive enterprise credit exposure reporting (multiple components)a. Differentiation of high vs. low velocityb. Across multiple dimensions (industry, jurisdiction, asset class/maturity, client)c. Enterprise limits & overdraftsd. Trending and alerts
Credit Risk
Opportunity Application H/W & S/W Platforms 10.23.09 - George Malanga.doc
Improve credit rating system 8. Replace credit rating system (CRIS)a. CRIS is a problemb. CRIS doesn’t work very well, cumbersome, have tried to put “bandaids” on it
Credit Risk
Value CaseInitiative Overviews
Key Finding Topic Analytics Solution Framework Theme
BI Reference Architecture Framework
Source:Interviewee
Name or Document
Summary Finding Key Finding/Comment Business Area
Pain Point Application Metadata 10.23.09 - George Malanga.doc
Lack of consistent business rules 6. Establish consistent netting capabilities for overdraftsa. No current capabilitiesb. Have a contractual right to net, but can’t report on that basis.c. All systems don’t have the same capabilities, separately managing netting rules is a problem.d. Marc – understand that there are different netting rules in different system, should there be a central place to put netting rules that each system can go to in order to understand the netting rules.e. George – not sure if it is better to have a central place or to fix the current systems
All
Pain Point Tools Access 10.23.09 - George Malanga.doc
Lack of reliable overdraft reporting i. FOCUS on “Establishing a reliable reporting over true overdrafts”
regardless of how it is donef. Want to roll up by client but also activities such as exceeded limits, largest over drafts, overdraft aging, Comments for risk mitigation activities as well to show which business activities are causing overdrafts.g. Want to look at exceptional activity by individual.
All
Opportunity Information/Data 10.23.09 - George Malanga.doc
5. Develop comprehensive enterprise credit exposure reporting (multiple components)a. Differentiation of high vs. low velocityb. Across multiple dimensions (industry, jurisdiction, asset class/maturity, client)c. Enterprise limits & overdraftsd. Trending and alerts
Credit Risk
Opportunity Application H/W & S/W Platforms 10.23.09 - George Malanga.doc
Improve credit rating system 8. Replace credit rating system (CRIS)a. CRIS is a problemb. CRIS doesn’t work very well, cumbersome, have tried to put “bandaids” on it
Credit Risk
BASEL II IMPLEMENTATION
PROGRAM
CRDW TECHNICAL DESIGN SPECIFICATIONS
VERSION 4.0 APRIL 5, 2006
BASEL II IMPLEMENTATION
PROGRAM
CRDW TECHNICAL DESIGN SPECIFICATIONS
VERSION 4.0 APRIL 5, 2006
Client Artifacts
Initiative Prioritization
Industry Benchmarks
27© 2009 IBM Corporation
Marketing
General Management
Sales
Product Development & Mgmt
Customer Service
Operations and Production
Finance and Accounting
Information Technology
Human Resources
Procurement and Vendor Mgmt
High
Information GapLow High
Expected Benefit
On-par performing
Organizational performance relative to their peers
Over-performing
Opportunities vary considerably by function and organizational performance
Source: Business Analytics and Optimization for the Inte lligent Enterprise, Apri l 2009. http://www-935.ibm.com/services/us/gbs/bus/html/gbs-business-analytics-optimization.html
Contented
Thirsty for More
Non-Animated version of slide
BAO Benefit-Gap Investment Matrix
… Supported by Framework Assets and Accelerators
5© 2009 IBM Corporation
IBM Hypothesis Validation Framework – Business Hypothesis
IBM Hypotheses Validation Framework
3© 2009 IBM Corporation
Capability Maturity Model Framework
Business Analytics & Optimization - Customer-Centric Capability Model
Measure and Develop Value
Align Marketing Strategy With
Customer Value & Expectations
Manage the Experience
Integrate Across Functions, Segment, Product Lines and
Channels
Proactively Manage Field Force Relationships
Custo
mer S
ervic
ing
Mode
ling a
nd A
nalyt
ics
Offer
Man
agem
ent
Perfo
rman
ce an
d Rew
ards
Shar
ed S
ervic
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dard
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Leading
Optimizing
Aware
Developing
Practicing
Custo
mer V
aluati
on
View
of C
ustom
er an
d Hou
seho
ld Un
it
Targ
et M
anag
emen
t
Chan
nel S
trateg
y
Chan
nel M
anag
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t
Cons
isten
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erien
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Manage Information As a Strategic Asset
Data
Gathe
ring
Data
Stor
age
Data
Analy
tics
Data
Deplo
ymen
t
Custo
mer S
tewar
dship
Enter
prise
Foc
us
Integ
ratio
n & C
oord
inatio
n
Comm
on G
oals
Custo
mer F
ocus
Lead
Sha
ring a
nd M
anag
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t
Infor
matio
n Sha
ring
Target Maturity Profile
Custo
mer S
egme
ntatio
n
Stra
tegic
Deve
lopme
nt of
Marke
ting C
ampa
igns
Coor
dinate
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ketin
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vities
Current BaselineHigh Priority Target Medium Priority Target Low Priority Target
Custo
mer A
ccou
nt Op
ening
Comp
lianc
e, P
rivac
y and
Infor
matio
n Sec
urity
Sample
IBM Capability Maturity Model Diagnostic Framework
3© 2009 IBM Corporation3
Aggregated Opportunity Scores
Based on opportunity’s ability to help the company achieve its strategic goals
Degree of Confidence / Sustainability
Low
Low - relatively simple to implement and/or adopt
High - complex to implement and/or adopt
Medium
High business value, Complex Execution
Med
High
Bus
ines
s Va
lue
/ Str
ateg
ic A
lignm
ent
Based on the opportunity’s ability to be implemented and/or adopted
Low business value, Simple Execution
Low business value, Complex Execution
High business value, Simple Execution(AKA: Quick wins)
BAO Opportunity Prioritization Matrix
IBM Opportunity Prioritization Framework
SWG Information Management (IRM) Architecture Framework
27© 2009 IBM Corporation
IOD reference architecture
Web EnterprisePortals
Composite &CollaborativeApplications
MobileDevices &
Disconnected
LOB Applications
ProductivityApplications
Info
rmat
ion
Serv
ices
Tran
spor
t, D
eliv
ery
Data Sources
Analytical MetadataData
Domains
InformationDeliveryChannels
EnterpriseSearch
UnstructuredDataMaster DataOperational Se
curit
y, Pr
ivacy
and
Com
plian
ce
Infrastructure Network & Middleware
Systems Management & Administration Systems
Query &Reporting
BI & Performance Management
Dashboards& Visualization
Exploration &Analysis
OperationalIntelligence
Metrics &Scorecards
Planning, Budgeting, Forecasting
Information Integrity
Managed Trusted
Information
Information LifecycleManagement
HierarchyManagement
EventManagement
RecordsManagement
Content-centricBPM
Information Integration Balance & Controls
Data ManagementEnterpriseInformationFoundation
Metadata Management Content Management
Industry Models, Solution Templates, Analytical Applications
Mining
Orc
hest
ratio
n , C
olla
bora
tion
Storage
TrustedInformation
Web EnterprisePortals
Composite &CollaborativeApplications
MobileDevices &
Disconnected
LOB Applications
ProductivityApplications
Info
rmat
ion
Serv
ices
Tran
spor
t, D
eliv
ery
Data Sources
Analytical MetadataData
Domains
InformationDeliveryChannels
EnterpriseSearch
UnstructuredDataMaster DataOperational Se
curit
y, Pr
ivacy
and
Com
plian
ce
Infrastructure Network & Middleware
Systems Management & Administration Systems
Query &Reporting
BI & Performance Management
Dashboards& Visualization
Exploration &Analysis
OperationalIntelligence
Metrics &Scorecards
Planning, Budgeting, Forecasting
Information Integrity
Managed Trusted
Information
Information LifecycleManagement
HierarchyManagement
EventManagement
RecordsManagement
Content-centricBPM
Information Integration Balance & Controls
Data ManagementEnterpriseInformationFoundation
Metadata Management Content Management
Industry Models, Solution Templates, Analytical Applications
Mining
Orc
hest
ratio
n , C
olla
bora
tion
Storage
TrustedInformation
4© 2009 IBM Corporation
IBM Value Tree – Expression for the strategic business emphasisOur data landscape approach to direct cost saves will also help realize additional business value
Improve profitability, through optimized,
leveraged and targeted deployment of information
management
Acquire new customers & deepen current relationships
Improve productivity and operational efficiency
Reduce cost & complexity of the Information Management
(IM) Environment
Create product families that meet the needs of target customer segments
Increase innovative and flexible targeted product offerings
Utilize psychographic information & enhanced business intelligence to create prospect target segments
Improve customer experience, satisfaction, & lifetime value of customer
Single view of the customer
Improve Operational Efficiency and Effectiveness
Improve prospect/customer contact effectiveness
Manage costs through improved insight
Improve channel efficiency & effectiveness
Increase information to customers/merchants/partners
Increase access & reduce cost to analyze data
Reduce HW / SW Costs
Reduce Mainframe/Server Costs
Consolidate data environments
Reduce ETL complexity
Reduce IM Technology Related Costs
Improve Shared Service Efficiency
Eliminate Redundant Integration Methods/ Tools
Reduce/Eliminate Functional Silos
Improve Data Storage Utilization
Vision
Goals
Activities/Business Strategy
IBM Inventory of Obligations(Risk & Compliance)
Start small and grow with an Integrated Risk Management project
Financial Crimes
Operational & IT Risk
Governance & Compliance
Integrate disparate fraud platforms to move towards real-time and proactive monitoring and improve investigations
Leverage tools to identify fraudulent activity before it happens
Automate fraud prevention to reduce costs
Enable monitoring of internal processes, people and systems for improve operational risk management
Implement early warning systems, IT and crises management processes and business recovery planning
Improve your ability to respond to regulatory scrutiny
Accurately report risk exposure
Standardize and automate compliance processes
Get the flexibility to respond dynamically to changing regulatory requirements
Financial Risk
Connect market, credit counter-party and liquidity risk to business and finance information systems
Enable risk reporting across and at different levels of the enterprise to enable better risk decision-making
Potential Integrated Risk Management Project Areas
Thank You!
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