Implementing Basel II and Beyond Michael Barak SVP, Basel Capital - - PowerPoint PPT Presentation
Implementing Basel II and Beyond Michael Barak SVP, Basel Capital Manager October 16, 2012 *Views expressed here are my own and do not represent those of Union Bank Agenda Union Bank Overview Current Status Union Bank Solution
*Views expressed here are my own and do not represent those of Union Bank
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Source: SNL, 2Q12, end of period
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Validation, Oversight and Governance Data Integrity and Management
Pillar 1 Capital Requirement Pillar 2 Capital Adequacy Pillar 3 Market Discipline
Pillar 2 – Capital Adequacy
– Stress Testing – Concentration Analysis – Economic Capital
Pillar 3 – Market Discipline
Public disclosure of capital requirement for publicly traded companies and additional regulatory schedules for all Basel II companies
Pillar 1 – Capital Requirement
Calculate capital for:
– Establish Rating Philosophy – Advanced Internal Ratings Based Approach – Retail exposure segmentation – Wholesale scorecards
– Value at Risk modeling
– Advanced Measurements Approach – Internal and External Loss Data – Business Environment & Internal Control Factors – Scenario Analysis
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as the basis for entering parallel
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Deliverable Business Solution Documentation Deliverable Regulatory Gap Documentation Deliverable Business Requirements Documentation Deliverable Data Requirements Documentation Deliverable Key Data Elements
Objectives Deliverables Using the Basel II Pillar I Advanced Approach, calculate the Bank’s RWA across all exposures
Deliverable Policies and Procedures
Implement a vendor supported risk-weighted asset and economic capital engine and data model Integrate the risk-weighted assets results with the required Regulatory Reports Integrate the economic capital results within Performance Reporting Define and execute a monthly process where the results are timely and accurate (Attestation)
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Source: Basel II FP&A Process Documentation
Wholesale excl . Trading
Systems and Data Sources
Data Warehouse SAS Limits Management System Excel Direct Input
Retail excl . SAS General Ledger Retail Trading ( Credit ) Securitized Assets Equities / Funds Wholesale Securities GL Adjustments ARC Counterparty Impairment Wholesale Impairment Fronting Committed Unissued LC’s Wholesale Impairment Credit Default Swaps (CDS) Total Return Swaps (TRS) FDIC Indem. Asset
RWA Calculator
Basel II Reporting
FFIEC 101
Electronic Submission
FFIEC 101
Other Reporting
FFIEC 031 & FR Y - 9 C Management Reporting
Moody’s
Operational Risk Acquisition
Data Quality, Data Management, Data Governance Program
tool from Moody’s is used for the RWA calculation, FFIEC 101 reports and the electronic submission.
Acquired Loan Data Mart
FDIC Acquisitions Market Risk
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Exposure Category
A Exposure at Default ($M) B Wt Avg PD (%) C Wt Avg LGD (%) D Wt Avg Maturity (Years) E RWA ($M) F RWA / EAD (%) Wholesale Exposures Corporate / Bank / Sovereign
1,463 0.2 (0.6) (0.3) 554
Real Estate: IPRE & HVCRE
299 1.8 (0.9) (0.0) (146)
Securities
(3,880) 0.0 (0.1) 0.1 (389) 0%
Counterparty (Derivatives)
(2) 0.1 (1.6) 0.4 93 6%
Retail Exposures Mortgage - First Lien
751 (0.2) (0.8) (486)
Mortgage - Junior Lien
(1) 0.1 (1.6) (41)
Other Retail Exposures
513 0.0 (6.4) 188
Securitization Exposures
123 (0.0) (71)
Equity Exposures
(15) (315)
Other Assets
(1,801) (32) 13%
Acquisition
(2,041) (529) 38%
Excess Credit Reserves
(25)
Market Risk Assets
41
Operational Risk
(781)
TOTAL
(4,592) (1,889) 1%
Higher PDs due to integration of acquired assets; otherwise lower. June sales of securities drive decrease in wholesale borrowings; proceeds fund repayment of short-term debt Decrease in Equity RWA driven mainly by continued fund sales due to Volcker Rule Completed integration of acquired exposures into Basel II AIRB Annual scenario analysis resulted in increased alignment with AMA model, thus less additional capital required HPI decrease results in lower LTVs, and thus decreased PD and LGD
>10% change, benefit to RWA 5%-10% change, benefit to RWA >10% change, detriment to RWA 5%-10% change, detriment to RWA <5% change, minimal RWA impact
Legend
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Total of Business Unit Capital Consumption is greater than Allocable Capital Pool.
Risk Based Capital
segment assets
RWA)
Other EC Components
pension risk, business risk, management buffer, less diversification benefit
Minimum 5% TCE floor applied
bank-wide hurdle
benefit
Goodwill
privatization
GAAP Shareholder’s Equity
Strategic Capital
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Basel II End-to- End Controls Framework
3. Documentation
Process
Utilize for key decisions, policy and procedures, executive milestones and result review Process for testing Basel II as a whole covering key functionality, IT infrastructure, data sets and complete data Defining business and data requirements; defining solution design and desktop procedures Examines completeness, validity, consistency, timeliness and accuracy of data as it moves from source to target Ensures on-going security, integrity and continuity of systems and data; incorporates change management Process that requires business users to sign-off completeness, accuracy and timeliness of data;
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Executive Steering Committee
Banking Vice Chair
Co-Chair
Basel II PMO
Workstream Leads
Assets
Reporting
Risk
RWA Steering Committee
Board of Directors
and project execution.
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Moody’s Calculator Testing RWA Engine & FFIEC 101 Testing Testing By Portfolio Entire Portfolio Testing
5 Months 4 Months 7 Months 3 Months
calculations
project requirements
and RWA implementation
major exposure type
cases
critical data quality issues
risk
process and make necessary adjustments
installed
to the RWA calculator
customization are performed
elements are identified.
variances are explained
projects are finished
provisioning is complete
participants are trained; RWA data sources are in production
interfaces and management reporting is complete
and Retail
Securitization & Equity exposures
portfolio data
data with 1 month being quarter end
Objective Benefits Data & Environment Dependencies
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Exposure Class Parameters Tested Results Tested # of Test Cases # of Variances Commercial
and non-defaulted exposures
131 Trading – OTC Derivatives
97 14 Trading – Repo Style Transactions 65 65 Retail
30 11 Securitization
352 Equity
9 Other Exposures
10 1 Retail/Wholesale Boundary
11 4 Wholesale + Retail
10 3
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reporting and input
source to target mapping and coding
requirements are integrated into the comprehensive Basel II solution
procedures and controls for executing the quarterly process and producing the regulatory reports and executive presentations
Business Requirements Data Requirements Solution Design Gap Analysis Objectives Deliverables Desktop Procedures
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Priority Criteria Key Components Examples
1 Data elements that impact the RWA calculation and asset classification RWA calculation drivers Asset Classification Performing Status Specific Allowances Responsibility Center PD, LGD, M, EAD, External Agency Ratings Sovereign, Bank, Corporate, Residential Mortgage Default Expected Loss Holding Company vs. Bank 2 Data elements that impact the economic capital calculation and both regulatory and management reporting Regulatory reporting Economic Capital Management reporting LTV, Lien Position, FICO Score ZIP, Collateral type, Owner Occupied Flag Chart of Account 3 Data elements that impact internal analysis Internal Analysis Obligation Name, Data Source, Originating Responsibility Center, Purpose code
The process to identify the RWA data element priorities was based on the overall impact that the data elements have on the calculation and reporting functions, categorized as follows:
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Gather Data Verify Data Prepare Feed Load Data in FDM Manual Data Entry Run DQ Checks Prepare & Load GL ID Non- Matl & Other Exposures Perform GL Recon Adjust Calculate RWA Analyze, Enter OTT
Attest Prepare Regulatory Reports Analyze Rerun, Attest and Submit Investigate Communicate and Disclose
Completeness
Support
Line of Business ITG ITG Finance & Reg. Reporting Finance & Regulatory Reporting Regulatory Reporting Finance & Regulatory Reporting
Key Process Primary Process Owner
Source: Basel II FP&A Process Documentation
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Deliverable KDE Quality Tracking & Reporting Deliverable Data Governance Policy Deliverable Key Data Elements Inventory Deliverable End-to-End Data Process Maps Deliverable Roles & Responsibilities for Data & Controls
Objectives Deliverables
Deliverable Policies and Procedures
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Data for RWA
Provisioning
issues
Completeness
Inquiry Support
Source: Basel II FP&A Process Documentation
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Finance
change
Controllers Regulatory Reporting
communications
Credit Risk
(e.g. probability of default (PD) risk rating scale, loss given default (LGD) risk rating scale, and default flags)
Data Integrity
resolutions
Line of Business
Information Technology Group
Moody’s Support
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Business Units FP&A
Gather securitizations and equity data for electronic transfer load
Regulatory Reporting
Manually input over the top entries, capital adjustments and intercompany eliminations
KEY CONTROLS Business units attest to accuracy and completeness of source data. Additional controls are currently being developed and put in place. POINTS OF CONTACT Wholesale Retail Traded Products Securities Securitizations and Equities KEY CONTROLS 1. Conduct attestation meetings with BUs that certify to the accuracy and completeness of source data 2. Review and analyze data integrity and proxy issues 3. Reconcile GL to RWA exposures 4. Perform RWA variance analysis 5. Provide attestation to RWA calculation to Regulatory Reporting 6. Present results to governance committees for review KEY CONTROLS 1. Review all workpapers and schedules by 2 levels of managers 2. Reconcile FFIEC 101 to FRY9C 3. Obtain certifications from all BUs that provide data 4. Resolve all data validation checks 5. Prepare reports in accordance with regulatory instructions 6. Perform variance analysis of all line items
Submit FFIEC 101 to regulators through IESUB Manually input Market Risk, Operational Risk , and acquisition information Develop and maintain source data Coordinate resolution of data integrity and exposure completeness issues Generate FFIEC 101 reports, including Capital and RWA
Data Management Office
Gather data for input to data models
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The challenges outlined below are by no means unique to UB. These are challenges that have had to be addressed by all Basel II banks whether domestic or international
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Management 101
finalizing business & data requirements
control
communication
with subject matter expertise
testing / quality assurance
Data Analyst / bridge between IT and Business
knowledge
change / lack of bureaucracy
initial planning and design
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Basel I general risk-based approach Basel II advanced approach
Standardized Approach
Current regulatory environment Future regulatory environment
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