credit risk management in banca intesa - sascommunity · credit risk management in banca intesa...
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Credit Risk Managementin Banca IntesaMauro Senati
SAS Forum International 2006 - Geneva
18 May 2006
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Intesa Group: an overview
• LARGEST COMMERCIAL BANK IN ITALY– Total assets 2005 = 273.535 millions Euro
• MERGER OF BCI, AMBROVENETO AND CARIPLO
• MAIN ITALIAN SUBSIDIARIES– CR Parma,– FriulAdria,– Intesa Holding Centro,– Banca Trento e Bolzano,– Biverbanca
• FOREIGN SUBSIDIARIES– CIB (Hungary),– Privredna (Croatia),– VUB (Slovakia),– KMB, UPI, ...
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Intesa Group: diversified portfolio
Dec. 2005Retail/SMEs
DivisionCorporate Division
Italian Banks Division
Foreign Banks Division
Customer loans 49% 28% 15% 7%
Capital allocated 46% 30% 15% 9%
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Intesa Group: the risk management function
Group Policy& Budget
Credit RiskManagement
Market Risk& Liquidity
OperationalRisk
PortfolioManagement
RISK MANAGEMENTDEPARTMENT
1994: 1st project on Market and Credit Risk -trading book
2001/2002: increasing focus on Credit Risk –banking book (driven by Basel II proposal)
2005/2006: from regulatory approach to active portfolio management
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Risk Management: size and mission
• SIZE 2006 OF THE DEPARTMENT IS ABOUT 120 PEOPLE, WITH THE FOLLOWING BREAKDOWN:
– Market & Liquidity Risk ≅ 40%– Credit Risk ≅ 25%– Operational Risk ≅ 10%– Valuation ≅ 15%– IT, subsidiaries & other ≅ 10%
• THE MISSION OF THE DEPARTMENT IS:
– develop the methodologies for measuring different risk types according to each portfolio
– set and monitor limits to business– evaluate capital requirements by business unit through portfolio
analysis
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Risk Management: credit risk function
Analytics and measurementRating Models Development
Credit Risk Mitigation
Portfolio Management
CR Monitoring
Loans Financial Evaluation
Structured Finance
Credit Data Management
Credit Risk StrategiesGroup Risk Policies
Value Based Management
Strategic support
provisioning policies
capital allocation
Credit Committee
Business integrationCR Internal Model development & maintenance
New Products Development and Pricing
CR Concentration & Risk Retention / Risk Transfer Policy
Rating Advisory
Subsidiaries Integration
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Credit Risk Management: the main projects
CAPITALREQUIREMENTS
(SAS)
ACTIVEPORTFOLIO
MANAGEMENT(MKMV)
CREDIT RISKMONITORING
(in-house platform)
LOANS MTM - IAS(SAS / MKMV)
BUSINESSUNITS
INTEGRATION &PRICING(MKMV)
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The Challenges: an overview
• CHALLENGES THAT ARE CHANGING THE BANK AND THE ROLE OF RISK MANAGEMENT:
– IAS 39 → new accounting principles involve different areas of the bank; the role of Risk Management is crucial for an appropriate evaluation of the main items in the financial statement
– B2 → closer link between regulators’ view and business perspective. Necessary but complex:
• huge effect on the structure of the bank (risk control, allocation process, ...)• new “bankers / managers” for the new functions
– PORTFOLIO MANAGEMENT → regulators still thinking about it, to assess capital requirements (1999 attempt, delays due to the lack of data). In any case, Pillar II will allow for estimates under diversification effect, also required for stress testing purposes: CAPITAL CHARGE NEGOTIATION ...
– CREDIT RISK MONITORING → evolution of the typical credit function, coherent with new risk modelling
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Basel II: the background
• INTESA IS THE TYPICAL “TARGET BANK” FOR THE NEW ACCORD:
– Large international group– Diversified activities (geographical, industries, asset types, etc.)– Foreign branches’ network (different rating culture, corporate portfolio)– Domestic / Foreign subsidiaries under consolidation
• WITH THE TYPICAL PROBLEMS IN IMPLEMENTATION:
– Different portfolios may need different models for risk evaluation– Different countries mean different Regulators (Home-Host recognition)– Common counterparties across banks within the Group– Evaluation of customers which are part of groups / conglomerates (captive, …)– IT / database / calibration sharing (technically complex, partially inefficient where
portfolios are totally different)
• … ROOM FOR FLEXIBILITY
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2002 – 2006: project developments
• 2002 / 2003– rating models’ development – ratings’ assignment / validation process
• 2004 / 2005– rating models’ extension to all portfolios, in line with priorities defined
with Regulators for the validation process– LGD / EAD database (historical)– LGD / EAD data model (future),– LGD / EAD models’ development– Credit process design for each customer segment– Group extension (according to flexibility / B2 compliance)
• TARGETS– full portfolios’ coverage with internal ratings– LGD / EAD db and models’ development for internal estimates– final achievement of AIRB solution
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Complexities: size and nature of the credit portfolio
• THE COMPLEXITY OF THE PROJECT FOR THE BANK CAN BE SUMMARISED BY THE FOLLOWING:
– rating estimates must be produced for more than 1.5 mlncounterparties, divided according to the following rules (coherent with B2 principles and business types):
– extension to the Group implies rating other 600,000 counterparties, with different specialisation, size and geographical presence
– counterparty type and size– network (domestic / foreign)– exposure type other than lending
• specialised lending• securitisations• other
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Portfolio breakdown: customer segments
Bankingportfolio
Securitisation
Specialised Lending
Corporate
No profitorganisations
Public entities
Sovreign
Financial institutions
Individuals
Other financialinstitutions
Banks
Factoring
Banks indev. countries
Banks in em. countries
CorporateItaly
Large Corporate(> 125 m)
Corporate(125 –50)
Leases
Enterprise Ret.(6 – 2.5)
Enterprises(50 – 6)
Other(< 2.5)
ForeignCorporate
Broker/SIM
Insurancecompanies
ObjectFinance
….
Project Finance
Type
of c
ount
erpa
rty
Type
of t
rans
actio
n
Business sector Turnover size
Diversified rating models
PrivateEquity
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Models developed by the Bank: different solutions
Other Portfolios TBD
Specialised Lending - Other MONTE CARLO SIMULATION
Specialised Lending - Project Finance MONTE CARLO SIMULATION
Sovreign COUNTRY RATING
Banks - Other FSR INTESA (+ KMV EDF / SPREADS)
Banks - Emerging Markets FSR INTESA (+ KMV EDF / SPREADS)Italian Retail CRIF / INTESA
Italian “Affari” CRIF / INTESA
Italian SMEs Statistical model with qualitative component
Italian Mid Corporate Statistical model with qualitative component
Italian Large Corporate SIRC / INTESA (+ KMV EDF / SPREADS)
Foreign Corporate
PORTFOLIOICGS (+ KMV EDF / SPREADS)
MODEL
SAS CRMS / EM: estimate, mapping of the process, validation
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Capital requirements: preliminary results
Significant capital savingsQIS3 – Standardized / FIRB Approach
QIS5 – FIRB / AIRB Approach
Past due effectMainly a technical issue, sharp decrease from QIS3 toQIS5 simulations
Offset operational risks integrationFIRB / AIRB capital charge estimates allow the Bank tocover new risk profiles
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Basel II is not enough ...: the diversification effect
• DIVERSIFICATION EFFECT is a main concern in the New Accord
• Appropriate correlations are certainly an issue for banks, STATIC APPROACH could result in significant DISTORSIONS
• ACTIVE PORTFOLIO MANAGEMENT could determine further significant improvement in banks’ performance and also in financial markets stability, with parallel decrease of credit crunch probability
Expected Loss(% Exp.)
CreditVar(% Exp.)
Retail/SME Div. ≈ 0,5%
Corporate Div. ≈ 0,3% ≈ 5%
≈ 3%
IAS39 – provisioning proxy for performing loans
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Active Portfolio Management: the pillars
CAPITAL ALLOCATION & PROVISIONING – total capital charge and provisioning are allocated to the Business Units according to strategies and implied risk allowed on each portfolio
PORTFOLIO MANAGEMENT – capital is allocated to business lines and strategic sub-portfolios / assets, given global limits and capital absorbed
POLICIES & PROCEDURES – credit / business processes are modified according to new capital management techniques
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Capital allocation & provisioning
SAS / MKMV platform allows the Bank to estimate Economic Capital, calculated according to Basel II and CreditVaRmethodologies, specific for the capital allocation process within the BankProvisioning is also estimated under IAS39 rules: the Bank delivered FTA results based on Dec. 2004 balance sheet data
VBM model can be managed using these estimates, based on RAPM / EVA measures for each portfolio
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Portfolio Management ...
Capital allocated to different portfolios is managed with a risk retention vs risk transfer approach, given the following drivers:
– Area / Country– Industry– Single name– Asset type (lending, structured finance, ...)
On the Origination side, new exposures are evaluated according to marginal risk or risk contribution to the overall portfolio, measured with MtM / Fair Value principlesMTM approach allows the Bank to manage in a dynamic way extreme events (default) and possible migrations of the performing portfolio (downgrade)Portfolio rebalancing
HedgingSecuritisations
Transfer pricingSeparation of Portfolio Management and Origination functionsMark to Market
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...
Innovation in technology to evaluate credit portfolioswhere secondary markets are not available (mark tomarket vs mark to model)
MKMV – CreditMark TechnologyIntegration with internal valuation policies
Use of alternative data sources and market-basedmodels to calculate MtM for different exposures
Estimate of risk capital based on market valuesUse of MtM values in portfolio simulations (PortfolioManager)
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Architecture for Active Portfolio Management
PORTFOLIOMANAGEMENT
inputs& outputs
PortfolioModel
Portfolio
ReferencesimulatedPortfolio
Analytical tool forrisk contribution
estimates
Pricing Tool
ORIGINATION
MTMModel
MKMV platform
LoansProject FinanceObject Finance...
Internal ratingsRecovery ratesExposure typesInterest rate curvesExchange rates...
RISKFACTORS
SAS platform ETL / Data Mining
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Policies & Procedures
• Correct definition of policies & procedures, based on the following layers:
– Shift of Limits Setting from notional amounts to CreditVar– Review of lending / renewal credit process, as a function of PD (1st
step), EL (2nd step), risk contribution (3rd step) and other strategic variables (risk concentration, other)
– Review of the credit process for different layers:• HO functions• Corporate Area / Branches• Desks• GRM / traders
– Alignment of BU processes (pricing)
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Strategies: the mispricing issue
Mispricing: <= -0.002 Mispricing: -0.002 .. -0.001Mispricing: -0.001 .. 0.001Mispricing: 0.001 .. 0.020Mispricing: > 0.020
Mispricing (Monte Carlo) to Portfolio using Expected Spread & Risk Contribution
Risk Contribution0.
1000
0
0.09
000
0.08
000
0.07
000
0.06
000
0.05
000
0.04
000
0.03
000
0.02
000
0.01
000
0.00
000
Expe
cted
Spr
ead
(Mar
ket)
0.25000
0.20000
0.15000
0.10000
0.05000
0.00000
-0.05000
-0.10000
-0.15000
-0.20000
-0.25000
-0.30000
-0.35000
-0.40000
-0.45000
The mispricing problem is handled within the portfolio model(Sharpe Ratio / Efficient Frontier):
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Credit risk: the waterfall for measurement & management
Legacy systems
DWB
DMART LAB
External Sources
PMR
SASEngines
MATLABEngines
MKMVEngines
...Rating / PDEDFsLGD...
DATA
RISKFACTORS
MKMVPortfolio
MKMVMtM
SASIASCalc
...Ec. CapitalProvisionsRisk index...
RESULTS
RiskReport
ModelsPerform.
Weeklyreports
...K reqs.B.U.Top Mgmt....
REPORTING
Host SolutionsDB2 / SYBASE
SAS / EM
SAS / WA
SAS / AppDevOther tools
SAS / WA
MIGRATION TO SAS9 / CRMS
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Conclusions
• Current experience: UNIVERSAL BANK MODEL
• Banking industry is evolving towards ACTIVITIES’UNBUNDLING
• Organizations change, risk management PRACTICES MUST BE FLEXIBLE and survive to changes
• CONSULTANTS should be flexible as well – no rigid framework / package can survive to innovation
• Risk management innovation is driving a NEW BANKING CULTURE that will inevitably affect any possible future governance framework