Solutions for Balance Sheet Management

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1 ENTERPRISE RISK SOLUTIONS Solutions for Balance Sheet Management Moody s Analytics offers a powerful combination of software and advisory services for essential balance sheet and liquidity risk management. The RiskConfidence solution Moody s Analytics enterprise asset and liability management (ALM) software solution integrates ALM, liquidity risk management, funds transfer pricing (FTP), and business and regulatory reporting capabilities onto a single platform with a common data source and single engine strategy. This is supported by comprehensive balance sheet management and liquidity services such as gap analysis, roadmap enhancement, benchmarking and model validation. The Challenge: More Holistic and Forward-looking Balance Sheet Risk Management in a Stricter Regulatory Environment The industry and regulatory response to the market dislocations that began in 2008 have sparked renewed interest in ALM. More traditional ALM approaches did not foresee or prevent the credit crisis which emerged in This acknowledgment of industry gaps and the emergence of strong regulatory reform is changing the way banks perform their asset and liability management. To remain competitive, banks must improve risk measurement and management to better align risk and capital. In particular, ALM professionals are being challenged to tie risk to decision making in a more holistic and granular way. Comprehensive Balance Sheet Management Moody s Analytics offers an essential combination of software and services for more effective and streamlined balance sheet management. Gap Analysis, Policy Improvements, Governance Design & Model Management Interest Rate Risk Management Funds Transfer Pricing (FTP) Liquidity Risk Management Industry Benchmarking & Best Practices

2 Enterprise-wide Asset Liability Management The RiskConfidence solution goes beyond the traditional ALM feature set by creating a high value front office balance sheet management solution. It integrates enterprise-wide analytics for stress testing, interest rate risk management and funds transfer pricing, leveraging chart of accounts, balance sheet strategy and multi factor behavior model for single entity and holding company consolidation. INPUT DATA STREAMLINE PROCESS REPORT RESULTS Bank Data Rates/Spreads Foreign Exchange (FX)»Volatility» Market Value Assumptions New Volume Assumptions Mark to Market Prepayment Assumptions Deposit Decay Line of Credit Draw (LOC) Draw/Repayment Scenario Analysis and Stress Testing Balance Sheet Strategy Behavior Modeling Funds Transfer Pricing Deposit Modeling RiskConfidence Business & Regulatory Reporting Parameter Deal Mapping Chart of Accounts Formula Builder Value at Risk (VaR) Data Consolidation & Management Interest Rate Risk: Forecast Balance Sheet Income Statement Net Interest Income Sensitivity Liquidity Risk: Liquidity Gap Stress Testing Basel III (Liquidity Coverage Ratio, Net Stable Funding Ratio) Funds Transfer Pricing Market Risk: VaR Moody s Analytics offers a robust platform, modeling expertise and comprehensive data resources for essential asset liability management. The Toolbox Multi-Currency Capability allows users to run scenario analysis on exchange rates to measure balance sheet Foreign Exchange (FX) risk exposures. The solution also permits the quantification of FX exposure to improve FX risk management strategies. Chart of Account (COA) Structure organizes all financial instruments on a bank s balance sheet into a tree-like structure and is the fundamental building block for risk methodology, assumptions, and navigation. The solution maintains a single COA to ensure compatibility of data, processing and results and provides a high level of consistency between all levels of the application. Contractual characteristics, client behavior, FTP methods, and more, can all be specified at the account level. Advanced Formula Builder permits users to exercise a high degree of customization through a scripted language that is easy and intuitive. It leverages mathematical operators and functions in order to access and manipulate bank data, market data, or cash flow engine results. Market Data Manager centrally manages all capital markets time series to ensure coherent and uniform usage across the enterprise. The interest rates, foreign exchange rates, currencies, counterparties and market data is easily accessible to assign scenario based assumptions to each forecasted computation. Balance Sheet Strategy Capability permits users to specify future balance sheet activity based on their most recent bank data. Users have the flexibility to target new volumes, average balances, or ending balances. The Balance Sheet Strategy can be constructed in the Excel software environment and is integrated with the cash flow engine, allowing for dynamic net interest income simulations under multiple scenarios or to forecast the economic value of equity across time and under multiple interest rate scenarios. Parameter Deal Mapping (PDM) groups financial instruments at the deal level into cohorts of deals that can be used to parameterize different types of behavior, assumptions, and calculations. PDM offers users a high degree of flexibility in grouping bank deals together for specific analysis computations and the granularity to assign behavioral assumptions to those deals. 2 MOODYS ANALYTICS SOLUTIONS FOR BALANCE SHEET MANAGEMENT

3 The Solution: Essential Software for Liquidity Risk, Interest Rate Risk and Funds Transfer Pricing Management Manage Liquidity Risk Leverage the RiskConfidence solution to calculate key liquidity risk measurements, such as the liquidity gap and buffer, and perform advanced liquidity modeling. Quantify sources and uses of funds, taking into account both contractual and optional cash flows. The RiskConfidence solution is natively integrated with Moody s Analytics Basel I, II and III regulatory capital calculation software - RiskAuthority solution. It calculates the new Basel III liquidity ratios Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). Compute Net Interest Income and Economic Value of Equity The Balance Sheet Strategy feature and Market Data Manager allow you to quickly and accurately produce dynamic net interest income simulations across multiple interest rate and economic scenarios. Leverage the cash flow engine to produce the sensitivity for the economic value of equity. Define Multi-Factor Behavior Models The multi-factor behavior model allows users to leverage their understanding of client behavior and embedded optionality. Users can leverage the tool to create multi-factor behavior models using pre-defined or user-selected factors, multi-dimensional look-up matrices and multiplier matrices, and unit settings. Perform Advanced Deposit Modeling Precise cash flow modeling of non-maturing deposits allows for realistic use cases where balances and deposit rates change and interest payments take place at different time intervals. The model also accounts for compound interest. Leverage Dynamic Credit Line Utilization A dynamic credit line utilization methodology allows the modeling of contingent credit usage, which varies with the economic environment and the credit quality of borrowers. Forecasts of usage for balance sheet and off-balance sheet commitments are incorporated into the liquidity and earnings analysis in order to provide a holistic view of the facilities commitments/exposure of an institution. Manage Funds Transfer Pricing (FTP) RiskConfidence offers a powerful matched-maturity FTP capability used to measure business unit performance. The model features custom Dynamically Linked Library (DLL) functionality used to implement institution specific transfer pricing needs. The software allows for custom DLLs that offer complexity in the computational approaches, while still having the user-friendly results of those computations. Perform Integrated Scenario Analysis Define transfer pricing settings either at the account or the PDM level. Matched maturity FTP calculations are performed at the Instrument level including deal level adjustments to the base transfer pricing curve. The solution is natively integrated with Moody s Analytics enterprise risk stress testing solution Scenario Analyzer to understand the impact of changing market conditions on the balance sheet, portfolios of loans, individual loans and/or internal ratings models. MOODYS ANALYTICS SOLUTIONS FOR BALANCE SHEET MANAGEMENT 3

4 The Difference Built-in Data Management The RiskConfidence solution leverages Moody s Analytics powerful enterprise risk platform RiskFoundation to consolidate and store ALM, regulatory and financial risk management data. A single cash flow engine allows users to manage interest rate risk management, capital management, liquidity risk management, and performance measurement calculations. A common data source for capital markets data, retail origination information, and institutional distribution/securitization channels fosters communication and consistency across the enterprise. Consistent data quality checks increase the reliability and accuracy of the underlying data. Comprehensive Financial Risk Management The RiskConfidence solution quantifies sources and uses of funds, taking into account both contractual and optional cash flows for purposes of liquidity risk management and compliance, funds transfer pricing and balance sheet forecasting. It offers unparalleled accuracy computing daily cash flow-based projections. Additionally, the solution is extensible allowing users to leverage other products for Basel III regulatory capital and liquidity calculations, integrated stress testing and risk and finance data management. Powerful Balance Sheet Analytics RiskConfidence covers a wide array of assets, liabilities, and complex derivative instruments, including non-standard constant installment loan categories and non-maturing deposits. Users can leverage the solution to: Forecast optional cash flows based on simple to complex behaviors via a multi-factor behavior model Calculate precise contractual and optional cash flows Maintain data integrity during ETL process Calculate historical Value at Risk (VaR) for both the trading book and the banking book Manage line of credit facilities with three proprietary draw and repayment approaches Improve data during ETL process Plan new volumes for purposes of dynamic net interest income simulation with an intuitive user interface and powerful formula builder for defining new volume functions and specifying interrelationships between other accounts. Defining, uploading, and reviewing market rates, economic indices, and currencies is easy with the intuitive RiskConfidence solution user interface. State of the art analytics enable trading desk quality calculations. 4 MOODYS ANALYTICS SOLUTIONS FOR BALANCE SHEET MANAGEMENT

5 Balance Sheet and Liquidity Management Services Effective Implementation Services Our team of experienced professionals will implement the RiskConfidence solution across your organization, train your users, and help you maximize your software investment from day one. With over 50 ALM installations and counting, our experienced implementation specialists will work with you to plan your project, set milestones and align work streams with your business to help you meet your objectives. Comprehensive Advisory Services Leverage Moody s Analytics experienced balance sheet practitioners for advisory services covering gap analysis and roadmap enhancements, benchmarking and validation, balance sheet management policies and governance and modeling expertise. Our experienced practitioners evaluate an institution s balance sheet management policies and methodologies, and compare them to relevant regulatory requirements and industry best practices, helping firms stay on top of regulatory and industry developments. Industry Best Practices and Regulatory Developments GAP Analysis & Roadmap Enhancements Industry Benchmarking & Validation Risk Appetite Policies & Governance ALM & Liquidity Management Gap Analysis and Roadmap Enhancements Our advisors provide a quantitative and qualitative assessment of an institution s ALM data, software and policies, liquidity methodology and in-house models. The assessment ensures that the liquidity and ALM/FTP management practices are consistent with shareholders expectations, the institution s strategic plan, and the relevant regulatory requirements. We provide a detailed set of reports with findings, guidelines and recommendations to improve analytics, infrastructure, and software, as well as an analysis of the coverage, quality and density of the institution s data across different dimensions. Industry Benchmarking and Validation Moody s Analytics leverages its unique data and modeling expertise to validate and benchmark existing models, to meet new and stricter regulatory requirements. We normally break the project down into four distinct phases, ensuring effective knowledge transfer throughout the process. PHASE 1: Perform Risk Assessment & Gap Analysis PHASE 2: Develop Model Validation Procedures PHASE 3: Execute Models, Validation, & Benchmarking PHASE 4: Summarize Findings and Create Documentation Validate project plan Understand models»perform» risk assessment analysis»undertake» data segmentation analysis»undertake» data completeness analysis»implement» accuracy analysis»perform» conceptual soundness Methodology Review Benchmarking»Perform» model validation test plan to preapproved test procedures»complete» model validation work plan»perform» detailed model and data gap analysis»prepare» model validation reports for internal stakeholders and regulators MOODYS ANALYTICS SOLUTIONS FOR BALANCE SHEET MANAGEMENT 5

6 Policies and Governance We evaluate the appropriateness of balance sheet policies and governance based on the institution s size, regulatory requirements, desired future state, and business strategy. Our team provides detailed reports with recommendations to improve policies and governance so clients can maximize their balance sheet and liquidity management across the enterprise. The team also designs processes to capture a wide array of data to monitor an institution s liquidity and ALM practices, including market data, assets, liabilities, off-balance sheet items, counterparties, data on collateral, as well as credit ratings across the business and related systems. ALM and Liquidity Model Management Our experienced practitioners help institutions create, validate and integrate bespoke models, facilitating more effective and granular balance sheet management. The models allow institutions to accurately capture the dynamics of assets and liabilities by calibrating their ALM systems to bespoke behavioral models and estimation results. Our balance sheet modeling services cover liquidity and solvency management, collateral management and funding, balance sheet management and liquidity stress testing. REGULATORY LIQUIDITY MANAGEMENT CUSTOM LIQUIDITY MANAGEMENT ALM / FTP / LIQUIDITY MANAGEMENT LIQUIDITY STRESS TESTING Liquidity Coverage Ratio Net Stable Funding Ratio Behavioral models: - Non-Maturity Liabilities - Short-Term Liabilities - Usage and Revolving Credit Facilities - Prepayments Funding models Margin and collateral management Selloff scenarios & haircuts Contingent Liquidity & Buffers Duration of Equity & Profitability Cash flow simulation Liquidity allocation ALM FTP Cumulative Cash Flow Analysis Scenario Simulation Collateral Inflow / Outflow Analysis Collateral Stress Testing Funding Stress testing Comprehensive Liquidity Analysis and Review (CLAR) Early warning models Leverage our ALM and Liquidity Management Services to Answer Key Questions including: How do I meet the new regulatory requirements covering ALM, funding and liquidity, and stress testing? Are our FTP model and liquidity management assumptions sound? How do we establish liquidity and FTP best practices? Does our FTP model incorporate the right drivers and meet the relevant regulatory requirements? Is our FTP model implemented and calibrated correctly? Do our behavioral models produce meaningful results? Consultative Client Engagement Moody s Analytics approach is characterized by close cooperation, continuous communication, and knowledge transfer. Our practitioners work hand-in-hand with the project sponsor to identify and mitigate project risks, conduct engagement opportunities, and keep clients fully informed of progress. Trusted Expertise Moody s Analytics is widely recognized for delivering high-quality analytics to the marketplace, developed both for standard use as well as on a custom basis. Our breadth of industry and client experience has given our practitioners a strong understanding of the challenges our clients face when building, benchmarking, and validating models that can withstand the scrutiny of regulators and internal and external stakeholders. 6 MOODYS ANALYTICS SOLUTIONS FOR BALANCE SHEET MANAGEMENT

7 Moody s Analytics Delivers Comprehensive Enterprise Risk Solutions Moody s Analytics offers comprehensive, modular and robust solutions to effectively and efficiently manage risk. Our solutions are built around a common data platform RiskFoundation which consolidates, cleanses and stores the organizations risk and finance data. Dedicated applications for loan origination and spreading management, economic and regulatory capital calculations, enterprise stress testing, ALM and liquidity risk management and business and regulatory reporting are integrated with the RiskFoundation platform. Additionally, Moody s Analytics unique data covering C&I, CRE and Retail PDs & LGDs, macroeconomic scenarios and Moody s Ratings Delivery Service feeds the platform. The Balance Sheet Solution Family The RiskFoundation platform includes a common datamart optimized for managing risk and finance and delivers business reporting and intelligence, an administrative console, customization toolkits and grid computing functionality. Scenario Analyzer coordinates the stress testing process across the enterprise, centralizing a wide range of Moody s Analytics, third-party and proprietary models and data. The RiskAuthority solution delivers comprehensive regulatory capital and liquidity calculation and management for Basel I, II and III. Regulatory Reporting Module creates, validates and submits regulatory reports for over 50 countries and over 3000 reports. The RiskFrontier software is the credit portfolio risk management and economic capital solution trusted by leading financial institutions worldwide. The RiskOrigins software is a risk-focused, workflow-driven software platform that allows commercial lenders to streamline and standardize their underwriting process for commercial credit facilities. The RiskAnalyst software gives you a comprehensive and consistent view of your firm s counter-party risk by combining financial spreading, credit analysis and robust data storage using one flexible, secure enterprise platform. MOODYS ANALYTICS SOLUTIONS FOR BALANCE SHEET MANAGEMENT 7

8 CONTACT US Visit us at moodysanalytics.com or contact us at a location below: AMERICAS clientservices@moodys.com EMEA clientservices.emea@moodys.com ASIA (EXCLUDING JAPAN) clientservices.asia@moodys.com JAPAN clientservices.japan@moodys.com Copyright 2013 Moody's Analytics, Inc. and/or its licensors and affiliates. All rights reserved. SP24966/101215/IND-103A