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

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Moody’s Analytics Risk Practitioner Conference October 15-17, 2012 Chicago Ensuring Portfolio Management as a Core Competence within Enterprise Risk Management

Marcia Banks Associate Director, IACPM Charles Stewart Senior Director, Moody’s Analytics

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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

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

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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

• bjectives.”
• - Enterprise Risk Management – Integrated Framework, Committee of

Sponsoring Organizations of the Treadway Commission, 2004

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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

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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

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Evolution of PM Today: Firms Apply PM to Different Asset Mixes

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Source: IACPM 2011 Principles & Practices in CPM Survey

Corporate Loan Book (C&I)

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

Leveraged Loan Book

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

Real Estate/ CRE

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

SME/ Middle Market

X X X X X X X X X X X X X X X X X X X X X X X X

Trading Counterparty Exposure

X X X X X X X X X X X X X X X X X X X

Municipal Credit Risk

X X X X X X X X X X X X X X X X X X X

Retail/ Consumer

X X X X X X X X X X X X X X

Workouts

X X X X X X X X

Other

Evolution of PM Today: Firms Build Unique CPM Organizations

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Source: IACPM 2011 Principles & Practices in CPM Survey

Not involved Advisory role Co- responsibility Full and sole responsibility Does not apply

Origination Function

Transaction origination and vetting (e.g., pricing, hold amount, approval)

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Limit and Policy Setting

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Transfer pricing of assets from

• rigination function to portfolio function

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Market Tools

Portfolio CDS hedging

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Portfolio securitization

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Investing in a “long book” to create diversification balance

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Portfolio Secondary sales

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Supporting Functions

CPM research (dedicated sector/ name research within CPM)

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Portfolio Reporting and Data Analysis

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Quantitative modeling and analytics

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Problem loan management

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Liquidity Management

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Evolution of PM Today: Mandate Can Vary By Firm

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Source: IACPM 2011 Principles & Practices in CPM Survey

Importance of activities to CPM Impact on organizational structure

• Funding liquidity risk is directly

impacting organizational structure with a closer working relationship with treasury.

• 52% of respondents think their

business model will change in response to FLR requirements.

Funding liquidity risk management Managing liquidity portfolio(s) Liquidity stress testing Market liquidity risk management Capital management Managing return on capital

Pre-crisis Now In 12 months

1 = least important 5 = most important

Main drivers

• Improvement to risk management

(25%)

• Coordination role between

business areas (22%)

• Cost (22%)
• Meeting regulatory requirements

(16%)

Evolution of PM Today: ERM and Liquidity

Source: IACPM/ KPMG funding liquidity risk management survey

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Evolution of PM Today: PMs see Future Expansion of ERM Linkages

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

PM Models in Practice: Union Bank

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Source: Union Bank

PM Models in Practice: Union Bank

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PM Models in Practice: Union Bank

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Source: Union Bank

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

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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

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Q&A

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