Make Smarter Decisions Faster
Analytical Decision Support for Banking – the
New ‘Normal’ Context
Abigail Gammie
IBM UKI
© 2012 IBM Corporation
Context – Tough Economic times set to continue and may worsen
 Here we are 4 years in to the ‘crisis’ with no real end in sight. How is this likely to play out and
what are the implications for the global banking industry?
 The Eurozone continues to experience problems and there is no apparent solution
– Growth is stagnant and access to capital markets constrained
– More countries may require external assistance
 Interest rates in the UK are effectively reset at a historically low new ‘normal’ - a Japanese
scenario that is likely to persist
– Lower interest margins and old hedges roll off reducing margins further
– Reduced lending volumes due to sluggish economy and lack of consumer confidence –
house prices and jobs
 Funding difficulties for banks continue across the region – constraining growth in mortgage
lending and adding to damper on HPI
 To cap it all – increased capital ratios and liquidity buffers
Banks cannot grow their way to happiness but must leverage their existing
balance sheet – as well as reduce costs
© 2012 IBM Corporation
Our client’s challenge:
Top of mind Risk and Regulatory Compliance business issues
What’s keeping executives up at night?
 Aligning risk exposure with
business objectives
 Risk management across
market, credit, operational
domains
 Ensuring adequate regulatory
and economic capital and
liquidity
 Quantifying risk exposure
 Avoiding unexpected loss
 Establishing risk appetite
 Risk culture and policy
CRO
 Risk adjusted forecasting
and risk-based resource
allocation
 Better financial risk
management (e.g. market,
credit, liquidity, stress
testing)
 Regulatory requirements
 Financial reporting (e.g.
SOX, IFRS, FSA)
 Fulfilling compliance
obligations (e.g. BSA / AML,
SEC, FINRA, FSA, BaFin)
CFO
 Reducing risk exposure
 Ensuring regulatory
compliance
 Reducing control testing and
internal audit burden
 Reporting on risk exposure
against business
objectives and IT KRIs
 Preparing for internal and
external audits and RCSAs
 Business continuity risk
 Vendor Risk
 Employee Fraud and Security
Monitoring
CIO / CISO
 Ensuring regulatory
compliance
 Managing through
regulatory change
 Managing regulatory
exams, audits and
requests (e.g. FFIEC)
 Reducing cost for
policy and control
management
 Adherence to policy and
procedures
 Lower AML and Fraud
false positives, analyst
efficiency
CCO
© 2012 IBM Corporation
Market forces are driving increased focus on enterprise risk
management and compliance capabilities
Net Margin
Pressures
Capital and
Liquidity
Requirements
Capital Allocation
1.
Where is capital used?
2.
Where is the bank
profitable
3.
Where do we create
Value?
4.
How can we do better?
5.
What could happen
next?
6.
How we comply with
Regulation?
Accountability
and Trust
Transparency
Requirements
Changing
Regulatory
Requirements
© 2012 IBM Corporation
Lets spend some time on the regulation of the industry – which has
grown more challenging and more onerous but has yet to prove its
not merely shutting the stable door….
 At the heart of the system is the CPP (Core Prudential Programme)
 The CPP is aimed at identifying and intervening earlier to head off
emerging “big picture” or “life threatening” matters before they can
crystallise in any of the largest and most systemic retail and
commercial banking groups in the UK (“A* banks”).
 CPP is designed to be more granular in its focus than current Close &
Continuous (C&C) model and Arrow work, i.e. the FSA will look more
deeply into the underlying businesses and asset portfolios based on:
– Additional in-depth reviews for assessing the sustainability of
business models and strategies; the effectiveness of
governance, risk management and control; the capital
robustness of firms under stressed conditions; and the
adequacy of firms’ liquidity.
– Enhanced baseline monitoring of liquidity (largely in place
already).
– Enhanced C&C monitoring for governance through a more
structured review across the Board, Committees, executive
management skills and MI, budgeting and risk appetite. It is a
continuous process with findings collated formally once a year.
– CPP is designed for the top nine high-impact deposit taking 
groups, .
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CPP Modules
Business model module
In-depth assessment of a firm’s business model to
understand its risk appetite better and challenge its
sustainability using a proposed new conceptual model
and supervisory toolkit to identify material vulnerabilities.
Governance module
Informed by the knowledge gained across CPP, a
continuous process of assessment through an enhanced
C&C programme together with a more in-depth case
study, which will apply a structured methodology to drive
an annual formal assessment ahead of the next
scheduled Arrow.
Risk management and control module
A more structured, in-depth review of a firm’s risk
management and control effectiveness to assist in
identifying where conditions exist in which lifethreatening issues may occur.
Capital module
A structured integrated framework to stress test the
capital robustness of the firms, using consistent central
case and stressed case scenario prescribed and applied
by both firms and the FSA.
Liquidity module
•
An enhanced rolling programme of in-depth liquidity
reviews to complement the proposals under the Liquidity
Programme for enhanced baseline supervision and C&C
monitoring
The new CPP is designed to be a comprehensive review of the firms
business model and to identify key weaknesses that could compromise
its viability under stress situations
© 2012 IBM Corporation
Business Model Sustainability Assessment
Framework
Establish whether the firm
has a credible and
sustainable customer
proposition in material areas
of operation which will
ensure that it can continue
to develop its business and
attract customers
Assess the track record of
management to deliver the
strategy and the strength of
its franchises to underpin
the delivery of its proposed
strategy
Business Model Sustainability Assessment Framework
1
Challenge the firm’s key
resources including funding
sources and drivers of
profitability across all
business and regions at a
product level and company
level and explore
vulnerabilities
Challenge each of the 8
Elements both quantitatively
and qualitatively to
determine if the business
presents a viable, coherent
story of a sustainable
business
Business Model
8
2
4
Business mix
Elements
Customer Value
Proposition
Business
Strategy
and underlying
assumptions
5
Franchise and
management
strength
6
Incentives, KPI,
metrics and
targets
7
Key processes
and
infrastructure
Operating Model
3
Profit and
Funding Model
Returns
and
risk appetite
Review the firm’s incentives,
metrics, KPIs and targets
used to steer and measure
its strategic, operational and
competitive position
Understand whether the firm
has a sound fundamental
operating architecture which
can sustain the current and
future business
Element specific challenge
Assessment
Approaches
Assess whether the firm’s
strategy raises potential risk,
which is not sustainable in
line with the risk appetite of
the FSA
Assess the business mix of
the firm along product,
customer and geographical
lines to establish whether it
is potentially under or over
diversified, and/or placing
undue reliance on a
vulnerable area of activity
Peer group and market analysis for themes, outliers and herds
Value chain analysis
Macroeconomic analysis
Incorporate information
about peers and the
marketplace to challenge or
validate risky elements in
the business model
Map the firm’s model
against an FSA standard
(per sub-sector) to identify
issues, dependencies or
links that may challenge a
firm’s sustainability
Overlay macroeconomic
trends and data to challenge
the robustness of the model
and input assumptions
underlying a firms strategy
Overall assessment of the
acceptability of the
risk/reward balance inherent
within the strategy and
business model
© 2012 IBM Corporation
Governance and Risk management & control framework
In reviewing governance of a firm FSA will be
assessing whether appropriate structures and
processes are in place to enable the firm’s Board
and Executive to interface effectively such that
there is an appropriately agreed strategy, a clear
appreciation of the related risk appetite such that
the Executive is able to operationalise strategy
with that risk appetite subject to effective
oversight and challenge by the Board.
Governance module
Establish goals &
objectives
Risk management &
controls module
Assess risks and
performance
against strategy
and risk appetite
Key enablers
Assurance over
risk management
Effective Boards, Committees
& Structures
Develop
strategies to
manage risks
within appetite
These structures and processes must be
supported by appropriate management
information to enable decision making and
monitoring, and operated by the right people
incentivised in the right way and within an
appropriate culture. They should also be subject
to independent challenge by the risk and internal
audit functions.
Management information
and data
Incentivisation, people
and culture
Monitoring &
enhancing risk
control processes
Design &
Implement risk
control processes
In reviewing Risk Management and Control for
the purposes the FSA will be assessing the way
the Executive implements strategy within the
agreed risk appetite and implements effective risk
management and operational controls to assure
this risk appetite is not exceeded.
© 2012 IBM Corporation
So Having reviewed the regulatory framework and the history
what are the main responses that we are seeing?
 Focus on improving profitability sustainably by looking at cost across the board
– Unit labour costs
– Efficiency savings (BPM)
– Legacy IT simplification and spend reduction
– Focus on RoE and RoRWA to drive share price – this is good for the taxpayer!
– Balance sheet optimisation
 Closer engagement with the customer to re-build trust
– Here data and analytics are key
 Increased spend in the risk space
– 50% of consulting spend is in this area
– Stress testing and compliance
 Infrastructure renewal – payments in particular although core banking remains an issue that
is not addressed it must be eventually
 Cost of compliance – how do we make it cheaper?
© 2012 IBM Corporation
How Optimisation helps resolve the complex problems
Optimization helps businesses make complex decisions and trade-offs
about limited resources
– Discover previously unknown options or approaches
Automatically evaluate millions of choices
– Automate and streamline decisions
Compliance with business policies and regulations
Free up planners and operations managers so that they can leverage
their expertise across a wider set of challenges
– Explore more scenarios and alternatives
Understand trade-offs and sensitivities to various changes
Gain insights into input data
View results in new ways
© 2012 IBM Corporation