Ensuring Portfolio Management as a Core Moodys Analytics Competence - PowerPoint PPT Presentation

Ensuring Portfolio Management as a Core Moody’s Analytics Competence within Enterprise Risk Risk Practitioner Conference Management October 15-17, 2012 Chicago Marcia Banks Associate Director, IACPM Charles Stewart Senior Director, Moody’s Analytics 1

Agenda 1. The need for investment in ERM capability 2. The business case for change 3. PM: an evolving discipline across the enterprise 4. PM models in practice 5. Future challenges 6. Q & A 2

What is ERM in Practice? • Aligning the entity's risk appetite and strategies; • Enhancing the rigor of the entity's risk-response decisions; • Reducing the frequency and severity of operational surprises and losses; • Identifying and managing multiple and cross-enterprise risks; • Proactively seizing on the opportunities presented to the entity; • Improving the effectiveness of the entity's capital deployment. -- Susan Bies, Federal Reserve Board Governor, speech 1/11/07 3

What is ERM in Practice?  “… a process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” -- Enterprise Risk Management – Integrated Framework, Committee of Sponsoring Organizations of the Treadway Commission, 2004 4

Evolution of PM – a little history  PM started to become a “mainstream” function within banks some 15 (or so) years ago, the result of: —Credit concentrations in large corporate loan portfolios —Economic environment and stresses  Drivers for establishing the PM function/discipline separate from credit or market professionals: —New tools to measure credit risk —New markets to manage concentrations —New function needed to integrate analytic skills, portfolio data, credit views and market execution 5

Evolution of PM: a little history  Core competencies in PM: —Portfolio data —Quantitative analytics —Research and credit views —Market knowledge and execution  No single organizational model – firms adapted to reflect: —Composition of portfolio —Liquid vs illiquid assets —Risk culture of the organization 6

Evolution of PM Today: Firms Apply PM to Different Asset Mixes Corporate Loan X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Book (C&I) Leveraged Loan X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Book Real Estate/ X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X CRE SME/ X X X X X X X X X X X X X X X X X X X X X X X X Middle Market Trading Counterparty X X X X X X X X X X X X X X X X X X X Exposure Municipal Credit X X X X X X X X X X X X X X X X X X X Risk Retail/ X X X X X X X X X X X X X X Consumer Workouts X X X X X X X X Other Source: IACPM 2011 Principles & Practices in CPM Survey 7

Not involved Evolution of PM Today: Firms Build Advisory role Co- responsibility Full and sole responsibility Unique CPM Organizations Does not apply Origination Function Transaction origination and vetting 3 3 3 2 2 2 3 1 1 1 1 2 2 1 3 2 2 2 2 2 1 2 2 4 2 4 2 2 3 2 2 2 3 2 2 2 1 2 2 1 2 1 3 1 1 1 1 2 1 2 1 1 (e.g., pricing, hold amount, approval) Limit and Policy Setting 4 2 2 3 2 4 1 1 3 1 1 2 1 1 3 3 2 2 2 2 1 1 2 2 2 2 2 2 2 4 3 2 1 3 4 2 3 2 4 1 3 1 3 1 4 1 2 2 3 2 2 2 Transfer pricing of assets from 4 4 3 2 4 4 1 2 2 4 3 4 2 1 4 2 1 1 3 1 1 1 2 1 2 1 1 1 1 1 1 1 1 origination function to portfolio function Market Tools Portfolio CDS hedging 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3 3 3 3 2 2 2 2 2 2 2 1 1 1 1 1 1 1 Portfolio securitization 4 4 4 4 4 4 4 4 4 3 3 3 3 4 4 4 4 1 4 4 3 3 3 4 3 4 3 3 2 4 3 1 3 2 2 2 2 2 4 2 1 1 1 1 1 1 2 4 Investing in a “long book” to create 4 4 4 4 4 4 4 1 1 4 4 4 4 1 1 4 4 1 2 4 3 3 1 4 3 2 1 1 2 1 1 1 2 1 1 1 4 1 1 diversification balance Portfolio Secondary sales 4 4 4 3 3 2 1 4 3 4 4 4 4 4 3 3 4 2 3 3 4 2 2 4 4 2 2 3 3 3 3 3 1 3 2 2 1 2 4 2 1 1 1 1 3 1 2 2 Supporting Functions CPM research (dedicated sector/ name 4 4 4 4 4 4 4 4 4 4 4 4 4 3 3 3 3 3 2 1 1 1 1 4 3 3 3 3 2 1 1 4 4 3 2 2 2 1 4 3 3 2 2 1 1 4 4 4 2 1 research within CPM) Portfolio Reporting and Data Analysis 4 4 3 4 4 3 3 3 3 3 3 4 3 1 4 3 3 3 1 1 4 3 4 4 1 3 4 3 3 3 2 1 3 4 3 3 2 3 1 4 3 3 4 2 2 2 4 3 4 3 3 2 Quantitative modeling and analytics 4 3 3 3 2 2 2 4 2 3 2 3 1 1 4 1 2 2 2 1 1 2 1 1 3 1 2 2 3 3 3 2 2 2 4 3 1 4 2 1 3 4 3 3 4 2 2 2 4 3 3 3 1 Problem loan management 4 3 1 1 2 1 1 3 1 1 2 1 2 1 2 1 4 1 1 1 3 2 2 4 2 2 1 1 2 2 1 1 2 1 1 1 1 1 1 1 2 1 3 1 2 1 1 2 1 1 Liquidity Management 3 3 1 1 3 1 1 1 2 3 1 2 2 1 3 1 2 2 3 1 1 4 2 1 2 1 1 1 3 2 1 1 1 1 1 2 1 1 1 1 1 1 2 2 1 2 1 1 3 Source: IACPM 2011 Principles & Practices in CPM Survey 8

Evolution of PM Today: Mandate Can Vary By Firm Source: IACPM 2011 Principles & Practices in CPM Survey 9

Evolution of PM Today: ERM and Liquidity Impact on organizational structure Importance of activities to CPM • Funding liquidity risk is directly Pre-crisis impacting organizational structure Now with a closer working relationship In 12 months with treasury. Funding • 52% of respondents think their liquidity risk management business model will change in response to FLR requirements. Managing Managing return on liquidity Main drivers capital portfolio(s) • Improvement to risk management (25%) • Coordination role between Capital Liquidity business areas (22%) management stress testing • Cost (22%) • Meeting regulatory requirements Market 1 = least important (16%) liquidity risk 5 = most important management Source: IACPM/ KPMG funding liquidity risk management survey 10

Evolution of PM Today: PMs see Future Expansion of ERM Linkages Interactions - Group Treasury change now Interactions - Divisional Treasury Systems enhancements change 6m+ Other business model changes Modelling enhancements Interactions - Credit Risk New/revision of policies Increased budget New roles and requirements Mandate Public/private divide Roles/requirements expanded CPM reporting line Interactions - Finance Cost/profit centre change Interactions - Group Risk Interaction - other teams Source: IACPM/ KPMG funding liquidity risk management survey 11

PM Models in Practice: Union Bank Source: Union Bank 12

PM Models in Practice: Union Bank 13

PM Models in Practice: Union Bank Source: Union Bank 14

PM Models in Practice: Bank of America  Elevated Portfolio Strategies unit to Enterprise Level within the organization  Impact: —Expanded asset class coverage: e.g., retail —Facilitates effective asset allocation discussions through the cycle —Promotes management of risk on an integrated basis:  Credit, operational, market 15

Future Challenges  Organizational —Where to locate within the organization —Functional ownership and “fit” with committees, etc —Moving beyond the past  Infrastructure —Data and validation (which version of the “truth”) —Communication  Cultural —Ownership and authority —Evolving away from CPM P&L —Linking credit, market, operational risk management 16

Q&A 17