It provides dashboards for a host of risk factors including the following critical three:
With the loan origination dashboard, banks can see at-a-glance the volume and characteristics of new loan originations, such as credit scores and loan-to-value calculations throughout the portfolio. With this information in hand, companies can assess if they are taking on too much risk in certain business units, and find out if they are too heavily weighted in certain geographies or on specific products.
Once they understand the risk involved in loan originations, the bank can then create sales and marketing strategies to target different areas and emphasize different products.
Central to a bank's profitability is the ability to manage cash flow and credit quality by monitoring delinquencies, roll rates, and vintage information spanning credit cards, mortgages, consumer loans and a host of other products. Equally important is to have perspective that spans multiple business units and geographies. With IBM Cognos Credit Risk Performance, banks see this information in 30-day buckets and can better assess seriously late 60-to 90-day delinquencies, dig deeper to find details about problem areas in the portfolio and set a plan for getting them current. Failing that, the bank can then move into debt-collection efforts.
Banks also need to look at the natural lending cycle from start to finish. They need deep insight into progressions from delinquencies to charge-offs. By looking at charge-offs from a host of dimensions including regions, products and circumstances— such as foreclosures or repossessions— they can understand the "why" behind losses and create meaningful strategies to avoid them in the future.
They can also look at charge offs from the perspective of gross charge-offs versus net charge-offs to understand the real losses involved.
The Basel II Capital Accord ties a bank's capital more closely with its economic risks. The Accord, a refinement of earlier international regulation, strives to stabilize the banking industry by ensuring consistency and competitiveness among banks.The concept is simple: the more sophisticated a banks' risk management approach and, perhaps more importantly, its ability to demonstrate it, the less capital it must set aside to cover losses such as defaults. This minimum capital requirement is the
first of the three pillars of Basel II, the second being internal controls and the third, market discipline and external disclosure.
Banks rarely have a shortage of risk management expertise, technology, or data. The issue lies in consolidating and communicating it, within the company and externally to regulators and to the market. IBM Cognos software unifies data from disparate systems into a single, consistent repository optimized for the risk analysis and reporting the later stages demand. A single metadata layer and conformed dimensions help you ensure the data quality and accuracy that regulators will require. Banks can also model capital requirements to optimize their mix of products, regions, and customers for maximum profits.
With IBM Cognos software, banks can get a full picture of key metrics associated with Basel II, including:
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Probability of Default – Classify the portfolio into a series of ranges that indicates each loan's likelihood of default.•
Exposure at Default (EAD) – Indicate total exposure a bank can expect if a loan goes into default.•
Loss Given Default – Understand percentage of exposure at default that wouldn't be recovered (net loss). Compare with types of loans that have higher chance of default ratios (e.g., credit cards).•
Expected Loss – Measure loss that your bank can expect.•
Capital Ratios – Monitor capital in reserve (percentage of loan revenue) and the liquid assets available to protect from a financial downturn.By monitoring risk more closely, financial institutions can not only meet regulatory demands, but also minimize the required amount of reserve capital, thus maximizing their profitability. To properly monitor enterprise risk, firms must take into account the entire scope of business activity, throughout all business units and functions. They must define and track multiple credit, market, and operational risk metrics commonly known as key risk indicators (KRIs). To generate the risk metrics, they must collect, aggregate and analyze vast amounts of data in multiple transactional and historical systems. And as exceptions occur, alerts must be sent out quickly so that immediate corrective action can be taken and losses minimized.
Unfortunately, many of today's controls are based on stale information and data latencies, leaving banks open to fines from regulatory agencies and huge financial exposure. Instead of waiting weeks for information that reveals suspicious activity, banks must be able to monitor daily transaction activity in real time so they can react appropriately and immediately to problematic situations.
Operational dashboards provide visibility into the financial process and present CFOs, risk managers and compliance officers with the information required to act when specific risk events or suspicious behavior occur. With IBM Cognos operational dashboards, you can monitor key risk metrics such as Value at Risk, portfolio allocation and market data. You can also monitor key business events such as orders, wire transfers, account modifications and trading behavior changes, and relate those events to historical information, alerting your people to exception conditions as they occur. You can also look at IT risk, for example, the risk of failure of core systems or Web sites, which could cost a bank millions per day.
With operational risk management you can:
• Monitor broker activities for compliance and fraud.
• Discover and report unauthorized IPO allocations.
• Monitor continuous activity and call volume at customer call centers to discover and prevent potential customer service problems.
• Assure that the trade being settled is the trade that was made.
• Minimize penalties by ensuring that all transactions are settled in the required timeframe.
• Comply with Basel II risk management profiling and compliance.
• Aggregate trading positions and desk-level risk management systems to provide a single holistic view of the firm's risk profile.
• Integrate continuous market and trade activity information to analyze risk of exposure in real time.
• Improve hedge positions by linking continuous rate lock information with portfolio positions for funds management and investment decisions.
Market risks occur when assets and liabilities change value due to changes in market factors. These risks include:
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Equity risk – The risk that equity prices will change.•
Interest rate risk – The risk that interest rates will vary.•
Currency risk – The risk that the currency exchange rate will change.•
Commodity risk – The risk of price fluctuations for commodities such as metals, oil, agricultural products, etc.The key issue is not simply to identify market risk factors, but to quantify the risk and develop approaches or strategies to address them. One common valuation methodology is Value at Risk, which looks at the likelihood an asset's value will decrease over a period of time. Others include shortfall probability, downside risk (semivariance) and volatility. Risk management executives will need to be aware of the inherent strengths, weaknesses and sensitivities associated with each method.
It may also be useful to compare market risk with other risks to understand various risk priorities. For example, how does market risk compare with specific industry risk, which measures industry changes rather than systemic market risk?
Whatever the method, managers who have access to better information on market detail and segmentation will be better equipped to identify and mitigate risk. Only by clearly understanding the various business streams and positions can managers implement an effective risk management strategy. The increasing trend towards market specialization has led many banks to redefine their business strategies and focus on core capability and, by extension, core risk competencies.
For example, many banks will actively hedge their portfolio risk to immunize against asset/liability mismatches. Others will focus on building an asset portfolio, which is then securitized and managed by specialists. Depending on its strategy, a bank can now more effectively decide what market risk it wishes to manage or assume. Risks that fall outside these parameters are avoided by transferring them to a third party.
With IBM Cognos software, risk managers can get full insight into equity, interest rate, currency, and commodity risk along with metrics for:
• Market Value at Risk (VaR) of all exchange traded, debt and OTC instruments.
• Annual average assets.
• Total funds under management.
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BI CENTRE
http://bicentre.blogspot.com
