SAS CRMS Laboratory Environment in the Basel II project within Unicredit Group

Umberto FossatiChief of Credit and Mgmt Systems Unicredit Global Information Services

Stockolm, May 2007

Lucia GhezziHead of Credit Risk Technologies UnitUnicredit Group

2

Agenda

Overview of Basel II project within Unicredit Group

Italian Regulator’s Requirements

Basel II laboratory environment

Integration project of SAS CRMS suite with existing infrastructure

Final findings

3

The new Unicredit Group

The new combined Unicredit Group was born in November 2005 after the merger between the former UnicreditoItaliano Group and HVB-BACA Group and includes about 230 legal entities located in 19 countries

Within the new combined Group there are 3 IT Factories which manage the IT services required by all the legal entities

Unicredit Global Information Services(UGIS) provides the Italian legal entities, Pekao Bank (Poland) and ZinvostenskaBank (Czech Republic)

Countries of Unicredit Group presence

4

Objectives of Basel II Group-wide project

Re-organize all the on-going Basel II projects running in each legal entity in a unique and better coordinated program

Develop a unique group-wide Basel II program to define:

Basel II level approach

Required resources

Master plan

to reach the compliance

Develop a unique communication stream with all National Regulators

Define the Basel II target architecture on IT side

After the merger, a group-wide Basel II project started to reach the following:

5

Agenda

Overview of Basel II project within Unicredit Group

Italian Regulator’s Requirements

Basel II laboratory environment

Integration project of SAS CRMS suite with existing infrastructure

Final findings

6

Italian Regulator’s requirements

Titolo I

Titolo II

Titolo III

Titolo IV

Titolo V

Pillar 1

Pillar 2

Pillar 3

OrganizationalRequirements

(Section III)

Three levels of controlson the Internal Rating:

• First Level: rating assignment control

• Second Level: validation• Process• Model• IT and Data Quality

• Third Level: internal audit

Requirement Detail

Model documentation

sheet(Scheda Modello Annex D)

• 1 – 14 sections

• Detailed description of all core aspects related to:

•Target portfolio•Rating model definition path•Data quality and data storage

IT and Data Quality

(Annex A)

• Data quality standards & levels• Consistency between development

and production environment• Replicability of rating• Integration among systems

IRB approach

Credit Risk

7

Unicredit addressing of organizational requirements on internal rating controls

SecondLevel

Control

First Level

Control

ThirdLevel

Control

Methodological Validation

Validation Framework

Process Validation

IT Validation

8

- Data integration and aggregation- Data collection and storing- Model collection and storing- Repeatability of rating calculation

Data and RatingModel

Management

- Quality data policy- Organization structure & review- Execution of Control - Data Tracking and Logging – focused on quality controls

Data QualityManagement

Systems

IT Management

- IT Governance- IT Process- IT Application architecture- IT Technology infrastructure- IT Security- IT Resource Management - IT Knowledge Management- IT Third part management (Contract Management)

Main Areas Key Principles

The IT Validation Framework defines the key principles to be checked in order to validate the IT systems supporting IRB models life cycle

IT Validation Framework in Unicredit

9

Model Sheet – Banca d’Italia

Model Sheet structure describing a rating model:

1. Model Description

2. Portfolio Description

3. Default Definition

4. Characteristics of Estimation

Sample

5. Input data

6. Factors selection process

7. Rating assignment with

judgemental approach

8. Statistic model estimation

9. Rating classes construction

and rules to assign

counterparties to rating class

10. Calculation of PD associated to

rating classes (calibration)

11. Rating changes based on

analyst evaluation (override)

12. Dynamic properties of ratings

and PDs

13. Data Storage

14. Rating and PD usage

10

Agenda

Overview of Basel II project within Unicredit Group

Italian Regulator’s Requirements

Basel II laboratory environment

Integration project of SAS CRMS suite with existing infrastructure

Final findings

11

Laboratory Environment components

Data

Functionalities

Processes

The Basel II Laboratory Environment is an application used to develop/validate risk parameter models and it is composed by:

Availability/Usage of historical data in order to:Develop risk indicator models (default rates, Credit Conversion factors, recovery rates….) and risk parameter models (PD, EAD, LGD e M)

Calibrate/validate IRB models already in place to verify their performance

Perform stress-testing and back-testing

Use of:

Functionalities to perform data cleaning and the definition of samples

Statistical functionalities

Functionalities to generate (semi) automatic documentation

Implementation of a workflow to:

Define standards and rules to use the laboratory environment

Define the validation phases of each IRB model and each Bank

Guarantee high-level IT security

- Component - - Main functionality and objectives -

12

Previous situation

In the first half of 2006 an assessment on the current Basel II laboratory environment functionalities has been conducted with regard to the Italian legal entities. The assessment, both functional and technical, has highlighted some enhancements that later have been spotted also by Bank of Italy during the pre-validation visit in June 2006

- Functionality - - Description -

1. Customization and consequently, bank independence for the model development

2. Data feeding

3. Data sampling and sample handling

4. Exhaustiveness of the stat utilities of the suite

5. Support for the preparation of documentation

6. Model Versioning

7. Sample\data Versioning

8. Security and Controls

Possibility for each L.E. to customize the product to its own requirements even using (as a start) standard\pre-build modules

Automatic data feeding from various data sources using different formats

Possibility for users to build several data samples and share them with other users

Availability of several stat utilities for development of estimation models

Possibility to update automatically the documentation on model development

Possibility to manage model versioning and flow diagrams

Possibility to manage input\sample data versioning

Possibility to control developments on build code and set security rules in order to ensure data back up

- Current Lab. Env - - Gap identified -

Absence of pre-build modules

No different file formats can be loaded automatically (manual file load performed by UGIS as per users’ request)

No stat functions/utilities available in the solution

Documentation delivery depends on the policy rules and adopted standard

Versioning is ensured by the standard UGIS PVCS tool, which is not integrated

Sample Versioning is not available (SW versioning for the sample extraction is available as the security criteria ensure the source data integrity)

Information Security is covered by UGIS

13

The decision on SAS CRMS suite

SAS suite CRMS actually bought in UGIS

• process automation that supports the model deployment in production

• complete auditability of the rating system through the identification of the scoring model with a unique identification code

• automatic reporting for the monitoring of the model predictive performance

• alert system for the analysts in case model predictive indicators overcome significance thresholds

• back testing reporting on credit data for the analysts

- Main functionalities -

In August 2006, it was decided to buy the Credit Risk Management Solution suite in order to allow the Italian Legal Entities to develop risk parameters models in a more structured laboratory environment

14

Agenda

Overview of Basel II project within Unicredit Group

Italian Regulator’s Requirements

Basel II Laboratory Environment

Integration project of SAS CRMS suite with existing infrastructure

Final findings

15

Integration project of SAS CRMS with the existing infrastructure

The integration of SAS has been performed by UGIS under some guidelines:

SAS CRMS had to close all the gap functionalities previously identified, had to support the development/review of IRB models performed by all the Italian legal entities (Holding included) with regards both to Group-wide models (i.e. Sovereign, Banks, Multinationals, Insurance…) and local models (e.g. RIC, RISB, RIP…..)

The system integration activities should not interrupt users’ development of risk parameters models and therefore it should not interfere with the achievement of the Basel II compliance in 2008: all the Italian Legal Entities could continue to use the current laboratory environment until SAS CRMS will be totally integrated in the Basel II Italian architecture

The integration of SAS CRMS within the Basel II Italian architecture represents a pilot:an assessment is in progress to evaluate the extension to all the legal entities within the Unicredit Group

SAS CRMS laboratory environment should replicate and assure the implementation of UGIS IT Standards previously defined with the users (i.e. environment components, process and security rules, etc.)

16

According to UGIS Standards, the laboratory environment should include a ‘development’ and a ‘validation’ environment with different security rules (environment components)…

R= Read only; W= Write only; RW= Read & Write

Integration project of SAS CRMS with the existing infrastructure

- Development - - Validation -

17

…and has set a logical path for the stakeholders to be fulfilled (process rules)

Integration project of SAS CRMS with the existing infrastructure

Model life cycle

Ongoing MonitoringIT DeploymentInitial ValidationDevelopment

Legal Entity

UGIS

Legal Entity

UGIS

Legal Entity

Legal Entity

UGIS

UGIS

Legal Entity

Legal Entity

1. Data extraction request

2. Data loading

3. Data validation

4. Lab. Environment definition

5. Model development

6. Model check

7. Model functional analysis

8. IT implementation

9. User acceptance test

10. Deployment in production

Player

18

Integration project of SAS CRMS with the existing infrastructure

Activity

existing models

•Inclusion

•Validation

Coverage of Requirements

REPLICABILITY

DOCUMENTATION

new models

• First Development

REPLICABILITY

DOCUMENTATION

CONSISTENCY

Tool

•SAS Model monitoring tool

•SAS DI Studio

•SAS Credit ScoringEM

Methodology

•Inclusionmethodology withinSAS CRMS

•Model ValidationGuidelines (BIS WP 14)

SAS CRMS usageguide lines:

•Data management and samplepreparation

•Model Development and estimation

19

2) Users’ training

4) Suite CRMS Users’ support per LE

4.1) Inclusion of existing models

4.2) Development of new models

• Users’ requirement analysis

• Metadata environments definition

• DataMarts deployment

1) Suite CRMS deployment

ResourcesPhase

3) ETL deployment (per LE)

SAS UGIS

SASUGISUCI HoldingLegal Entities

SAS(UGIS)UCI HoldingLegal Entities

SASUCI HoldingLegal Entities

1/04/071/10/06 1/11/06 1/12/06 1/01/07 1/02/07 1/03/07

.

CRMS lab. available

Integration project of SAS CRMS with the existing infrastructure

1/07/071/05/07 1/06/07 1/08/07

2nd phase1st phase

20

Agenda

Overview of Basel II project within Unicredit Group

Italian Regulator’s Requirements

Basel II Laboratory Environment

Integration project of SAS CRMS suite with existing infrastructure

Final findings

21

Final findings

SAS CRMS suite was deployed in the Italian legal entities of the Unicredit Group as they represent a pilot for the Basel II laboratory environment

The system integration project did not interfere with the development of IRB models performed by the business users in order to apply for the IRB approaches in 2008

In the next future, it is expected that the SAS CRMS solution will be deployed in the whole Group as a target application

SAS CRMS fully supports users’ activity in a robust IT environment compliant with local and international regulation

Umberto FossatiChief of Credit and Mgmt Systems Unicredit Global Information Services

Stockolm, May 2007

Lucia GhezziHead of Credit Risk Technologies UnitUnicredit Group

End of presentation