Portfolio Management for Banks

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1 Enterprise Risk Solutions Portfolio Management for Banks RiskFrontier, our industry-leading economic capital and credit portfolio risk management solution, along with our expert Portfolio Advisory Services team, helps organizations to optimize risk-adjusted returns, improve strategic decisions, and comply with economic capital-related regulations. The Challenge: Compliance and Competitive Advantage Risk and Portfolio Managers face unprecedented pressure today from regulators, investors, and executives to demonstrate capital adequacy with world-class credit risk mitigation strategies and portfolio management techniques. They face these challenges at a time when their portfolios are growing increasingly complex, including exposures from a variety of asset classes and across a number of industries and borders. To achieve both compliance and competitive advantage, it is essential that Risk and Portfolio Managers select a solution that combines sophisticated analytics with robust technology. The ideal solution would also provide insight into the drivers of risks and suggest strategies to achieve the best possible return on investment. The Portfolio Management Process BUSINESS RISK REQUIREMENTS» review risk structure and risk management related policies AGGREGATE RISK MEASURMENT» Conduct loss data analysis» Design risk measurement models» Design limits framework IMPROVED PORTFOLIO MANAGEMENT» implement a risk-based pricing framework» Effectively manage a risk-based portfolio strategy PORTFOLIO MONITORING» Design reporting templates» Define reporting workflow

2 Portfolio Management for Banks The Solution: RiskFrontier Provides Effective Portfolio Management for Improved Decision Making and Transparency Understand Your Portfolio Perform rigorous analysis of credit risk and economic capital, which are critical to assessing capital adequacy and achieving regulatory compliance Identify risk concentrations by industry, geography, asset type, and borrower Calculate a portfolio s expected loss, unexpected loss, loss distribution and tail risk Calculate each exposure s marginal contribution portfolio risk Make Informed Strategic Decisions Obtain an aggregated and granular view of your portfolio and be positioned to make informed decisions about its risk profile and the strategic direction of the portfolio Identify a portfolio s Sharpe ratio, top and poor performers, as well as those exposures that are mispriced both positively and negatively Understand which incremental steps to take to improve portfolio risk-return performance Determine optimal buy/sell quantities, perform risk-return analysis for hedging strategies, and quantify required return on new investment opportunities to optimize a portfolio s overall risk-return performance Achieve Transparency Perform what-if analysis and stress testing using different inputs and model assumptions to determine losses and assess capital adequacy under changing economic conditions Easily articulate the sensitivity of economic capital calculations and portfolio management strategies to a variety of stakeholders with robust reporting This graph shows the capital distribution of a portfolio. With RiskFrontier, you can identify and understand the risk drivers in your portfolio by viewing, aggregating and analyzing data. 2 Moodys Analytics enterprise risk solutions

3 The Difference: A Comprehensive and Granular Correlation Model, Incremental Deal Analysis, Open Model Framework Global Correlation Model (GCorr ) gives clients: Accurate, granular correlation modeling that is empirically calibrated against reliable, global data that span several business cycles, and is updated annually Correlation of risks within and across a variety of asset types, including corporate, commercial real estate, retail and sovereign along with their related factors industry, geography, property type and retail product type Clear strategies for improving portfolio performance with correlations and concentrations that calculate each exposure s contribution to portfolio return and risk Full transparency Moody s Analytics publishes validation and research on updates or changes to the model and underlying data Incremental Deal Analysis using the DealAnalyzer module offers clients: Powerful analytics to quantify the impact a deal has on a portfolio s performance Incremental capital figures for new or prospective buy/sell decisions by applying a consistent model framework to portfolio management and deal origination Real-time insight into the impact of new deals, or changes to holdings, in a portfolio Quick assessment of deals in the context of overall portfolio holdings Transparent and Flexible Model Framework allows clients to: Easily import, store, and extract input, as well as output data through a robust and transparent data management platform Employ user-defined model parameters, such as Probability of Default (PD), Loss Given Default (LGD), credit migration, and correlation assumptions or use the established models that have been empirically derived from Moody s Analytics research Save time and money to implement the solution with its open model framework The Toolbox: Key Features Breadth of Coverage Encompasses a broad range of instrument types, including loans, bonds, CDOs, credit default swaps, basket default swaps, leases, retail credit lines, retail loans, equities and counterparty/derivative exposure profiles Covers multiple asset classes, including Corporate, CRE, Retail, SME, and Sovereign Models the effects of embedded options, including loan prepayment options and bond call/put options Correlation between Default Risk and Recovery Models the relationship between default risk and recovery, such as PD and LGD correlations Uses an empirically derived model of default and recovery data from over 17,000 firms across the globe Examines the effect of this correlation on portfolio risk and capital Scenario Analysis/Stress Testing Quantifies the sensitivity of the portfolio to stress for alternative scenarios Easily tests the portfolio by changing a variety of factors including PD, LGD, correlation, and other modeling assumptions which then displays differential reporting that presents the results of the stress test s impact Moves specific exposures in and out of the portfolio calculating the marginal impact of new instruments A User-friendly Application Server-based application with a grid-computing architecture allows massive simulations in a distributed environment, providing increased accuracy without increased simulation time Scales to fit the needs of large and complex portfolios and offers a user-friendly interface for day-to-day monitoring Control features include permission levels, different work groups and user types (with public/private settings) Moodys Analytics enterprise risk solutions 3

4 Portfolio Management for Banks Portfolio Advisory Services Extensive Risk Management and Credit Experience Moody s Analytics Portfolio Advisory Services team offers clients risk management, consulting, and training services customized to each client s unique requirements. These services empower clients to improve their credit portfolio risk management strategy, allocation of capital, and interaction with regulators, which in turn improves bottom-line performance. Over the past 15 years, the Portfolio Advisory Services team has worked extensively with banks and regulators, mastering industry best practices to anticipate and address challenges, both methodological and technical. Unmatched Data and Modeling Capabilities In addition to depth of experience, the Portfolio Advisory Services team leverages Moody s Analytics extensive credit, default and recovery databases, which are calibrated from a reliable and global empirical dataset that is updated regularly to capture current dynamics. This data, combined with our renowned credit research is used to develop, customize, and implement models that enable clients to significantly improve, measure, and manage credit risk within their portfolio. Implementation of RiskFrontier Our Portfolio Advisory Services team manages the implementation of RiskFrontier, thus allowing clients to integrate economic capital into core business processes, such as assessing and achieving capital adequacy (ICAAP) and allocating economic capital to exposures, products, and segments. By making RiskFrontier operational within your IT environment, credit culture, and portfolio risk management practices, you are able to make improved business decisions related to capital adequacy, capital allocation, management of risk concentrations, limit setting, portfolio improvement, risk-based pricing and more. Comprehensive Credit Risk and Portfolio Management Services Custom Correlation and Credit Migration Models Better reflect each portfolio and meet regulatory demands with customized correlation and credit migration models, as well as review the impact and gap analysis of the existing model relative to the customized model Expand and enhance granularity to the risk factor coverage by adding correlation factors such as macroeconomic variables, market variables, product specific factors, and non-credit risk factors Support internal validation and regulatory compliance with model documentation and training Risk-adjusted Return on Capital (RAROC) Measure economic capital from the loan officer level to the portfolio level with pricing models that take into account market pricing, costs of optionality, risk appetite, existing portfolio concentrations, as well as, the cost of funding, provisions and liquidity Deploy pricing model rollout services through the RiskFrontier DealAnalyzer module, including engine parameterization, installation and technical support and application programming interface (API) deployment Meet business needs for loan origination through parameterization services, including model calibration Model Validation and Benchmarking Validate internal models to meet internal and external/regulatory mandates by leveraging our experience, empirical and modeled data, and analytical platforms Meet regulatory and internal validation requirements by assessing appropriateness of economic capital models and parameters relative to the portfolio, as well as the model usage relative to business goals Benchmark models using RiskFrontier, or other industry models and data, and validate economic capital, correlation and migration models Conduct model gap analysis and develop a gap remediation roadmap including modeling refinement and customization 4 Moodys Analytics enterprise risk solutions

5 Model Validation and Benchmarking Regulatory Changes Organizations Risk Tolerance and Strategy Business Cyclical Factors Review Model Objective Assess Quality of Data Evaluate Methodology and Assumptions Check Processing Component Analyze Model Outcomes Review Model Governance Policies Review Model Governance Policies Model Validation is not a one step process, but a continuous practice to ensure the desired business objectives are achieved. Internal Capital Adequacy Assessment Process (ICAAP) Implement an ICAAP framework that satisfies both internal and external stakeholders Employ a total solution for ICAAP including gap analysis, recommendations and roadmap development, material risk assessment at the senior management level, data and review of stress testing and capital contingency at the enterprise level Stress Testing of Credit Portfolios Quantify the impact of different macroeconomic scenarios on portfolio risk drivers and portfolio losses Perform stress test modeling and analysis tailored to each credit portfolio, with a goal to support capital planning, mitigate risk, make informed strategic decisions, improve shareholder and market confidence, and satisfy regulatory demands Translate the impact of macroeconomic scenarios into credit portfolio risk drivers, including probability of default, correlations, and loss given default, as well as expected and unexpected portfolio losses under stress scenarios Use a framework for reverse stress testing to identify specific scenarios most likely to cause a specified level of portfolio loss and/or to render business models not viable Risk Limit Setting Allocate, manage, and monitor capital by establishing dynamic, economic capital-based limits taking into account existing business opportunities, limit dimensions, an assessment of existing portfolio concentrations in these dimensions, risk appetite, and regulation Develop a risk-based limits methodology and deploy in a limits framework such as Moody's Analytics RiskOrigins to assess, monitor, and manage exposures and limits across business units, products, counterparties and time zones worldwide Obtain limit model rollout services through RiskOrigins, including parameterization, installation and technical support Receive a full knowledge transfer, including methodology and expertise to enable ongoing self sufficiency, if required Collateral Management Build a robust collateral management framework that allows you to minimize potential losses due to poor collateral performance Obtain a reliable and consistent haircut level, taking into account correlation and future credit migration effects Collateralized Debt Obligation (CDO) Measure the impact securitized debt instruments have on economic capital within the context of a credit portfolio Analyze the valuation and risks of synthetic CDO tranches with pass-through waterfalls and basket default swaps to approximate the tranches with complex collateral and structures Moodys Analytics enterprise risk solutions 5

6 Portfolio Management for Banks Related Products and Services RiskCalc Plus RiskCalc is a private firm probability of default (PD) solution based on Moody s Analytics Credit Research Database (CRD) which is made up of over 500,000 private firms financial statement and default data. RiskCalc offers forward looking PDs as an input into RiskFrontier to compute economic capital for the middle market/sme (small and medium enterprises) portfolio. CreditEdge CreditEdge provides daily Moody s Analytics EDF (Expected Default Frequency) credit measures for public companies and financial analysis data from a variety of forward-looking, timely sources to support credit analysis. CreditEdge allows users to focus their resources on the most significant credit problems and opportunities by alerting them to emerging changes in risk. CreditCycle CreditCycle is an econometric PD and LGD model for retail credit based on Moody s Analytics economic forecasting analytics and your retail data. CreditCycle offers forward looking PDs and LGDs as inputs into RiskFrontier to compute economic capital for the retail portfolio. LossCalc LossCalc is a loss given default (LGD) model based on our LossCalc recovery database. LossCalc offers forward-looking LGD as an input into RiskFrontier for economic capital calculation. RiskAuthority RiskAuthority is a comprehensive capital and liquidity risk management solution that helps banks achieve Basel I, II, and III requirements. RiskFrontier provides banks with an economic capital solution to meet Basel II and III and Pillar 2 requirements (in support of ICAAP). RiskOrigins RiskOrigins is an integrated, workflow-driven platform that allows commercial lenders to streamline and standardize their complete underwriting process for all commercial classes. RiskOrigins incorporates Moody s Analytics industry-leading risk assessment capabilities including risk-based pricing and helps lenders demonstrate compliance to regulators. RiskOrigins Limits for Portfolio Management The RiskOrigins Limits module offers a framework to aggregate exposures from different business lines across a range of dimensions while accounting for multiple hierarchies for a consolidated view of enterprise wide risk. The module determines whether a new loan, derivative product, commodity holding or security exposure fits within pre-defined limits policies enabling a proactive pre-deal check. 6 Moodys Analytics enterprise risk solutions

7 Moody s Analytics Delivers Comprehensive Enterprise Risk Solutions Moody s Analytics enterprise risk management goes beyond credit, market and operational risk and delivers a solution for the entire risk life cycle, from measuring and pricing for risk in loan origination to portfolio and regulatory risk management and reporting, to managing balance sheet and liquidity risk. Our solution allows organizations to tie all credit exposures to an obligor, as well as to the entire portfolio, providing a consistent view of risk from origination to regulatory calculation and reporting to portfolio analysis. enterprise risk solution for banks Business Intelligence & Regulatory Reporting APPLICATIONS Credit Assessment & Origination Economic Capital & Portfolio Management Basel I, II & III Asset & Liability Management RiskOrigins TM RiskFrontier TM (via dis) RiskAuthority TM RiskConfidence TM PLATFORM Enterprise-wide Stress Testing Scenario Analyzer Financial & Risk Datamart RiskFoundation TM MODELS, DATA, SCENARIOS & RATINGS Spreading & Internal Ratings C&I and CRE PDs & LGDs Retail & Structured Models Agency Ratings RiskAnalyst TM RiskCalc TM, CreditEdge TM, LossCalc & CMM CreditCycle, Portfolio Analyzer & WSA Platform Moody s Rating Delivery Service implementation services Advisory services Training services About Moody s Analytics Moody s Analytics, a unit of Moody s Corporation, helps capital markets and credit risk management professionals worldwide respond to an evolving marketplace with confidence. The company offers unique tools and best practices for measuring and managing risk through expertise and experience in credit analysis, economic research and financial risk management. By offering leading-edge software and advisory services, as well as the proprietary credit research produced by Moody s Investors Service, Moody s Analytics integrates and customizes its offerings to address specific business challenges. Moodys Analytics enterprise risk solutions 7

8 CONTACT US Visit us at moodysanalytics.com or contact us at a location below: AMERICAS EMEA Asia (excluding Japan) JAPAN Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. SP23703/101215/ind-103

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