Data Problems, Requirements and Risk Management
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Over the last 20 years, the banking industry has seen major consolidation, increased use of complex financial products, and a lack of high-quality data at financial institutions. During the 2008 crisis, key decision makers lacked adequate data on the interconnectedness of firms. Lessons learned are that enterprise stress testing should be routine and large firms need to improve data management. Regulators are now focusing on increasing transparency, liquidity risk management, and capital standards to address these issues.
Data Problems, Requirements and Risk Management
- 1. Data Problems and Requirements:Transparency Across Products, Markets, and Legal EntitiesAmerican Association for Budget and Program AnalysisThomas DayManaging Director, Risk and Policy, SunGard Ambit Financial Solutions18-May-2010
- 2. Broad Bank and Bank Supervisory TrendsMajor consolidation over the course of the last twenty yearsSince 1990, the number of banks have declined by 7,146 institutionsSince 2001, the number of banks have declined by 1,735Total assets have increasedFrom approximately ~$4.0 trillion as of FYE-1991 to a FYE-09 level of $13.1 trillionSupervisory staff have declinedFDIC staff only: A 1991 level of 22,586 to a 2009 level of 6,558 (~+1,500 from 2008/2009), or approximately $2,000 million per employee versus 1991 level of ~$177 million per employee
- 3. Financial Mega-Trends and IssuesThe 1990’s saw a rapid increase in:Use of DerivativesStructured ProductsIncreased Use of SecuritizationDisintermediation of deposits (more wholesale $’s)Rapid Increase in Technological AdvancesIncreases in productivityWider distributions of risk across geographies and investor typeIncreased use of models in order to “sell” complexityWider bid/ask spreadsGreater faith in financial engineeringStability v. instabilityPeriod of relative calm and steady growthMuch greater belief in the “fine tuning” of our economy
- 4. The Decade of “The” BubbleBeginning in 2000 and continuing through 2004, a rapid decline in O/N funds rateWell communicated increase (and slow) increase in rates.
- 5. To RecapWe saw a significant increase in the use of technology to increase efficiencies over the last two decadesBanks got bigger, risk-taking got more “scientific”Funding liquidity seemed endlessProducts became more complexCompetition, globally, became more intenseEconomies-of-scale seemed to “rule” and “diseconomies” of scale were “inconceivable” in bankingMy experience:Multiple source systemsLegacy data problemsInability to pull current position balance sheets togetherInability to evaluate, plan and budget over such a large bookGovernance by volume and performance, not by risk
- 6. The Crisis: Decision-Makers Were Flying BlindAs the 2008 crisis unfolded key government decision makers were in the dark – despite all of the data that is currently collected - as to exactly what was happening.Lehman Bros. was allowed to collapse without data on how the vast counterparty network would be affected Treasury Secretary was unaware of AIG’s CDS book until the Lehman failureGovernment caught by surprise by a 21st century “bank run”No one had the data to see the interconnectedness between financial firms and how the collapse of Lehman Bros. could bring the world to the brink of a second Great DepressionWe live in a 21st century world without 21st century data-management expectationsThis will change. There are already some excellent examples.
- 7. Systemic RiskMonitoring one-bank at a time is necessary, but not sufficientHorizontal reviews of risk are necessaryImage/idea: The entire country’s financial system as a series of cash flows, some more volatile to macro- and micro-shocks that othersThe SCAP stress-test was a good, albeit painful, proxy for this “idea” Comptroller Dugan:“Bank information systems are not designed to aggregate information in this way on a regular basis. Much improvement is needed in these systems…but until strides are made, comprehensive stress-testing will remain very difficult.””…the issues I’ve just mentioned make me reluctant to begin conducting such tests routinely as the cornerstone of our supervision.” (also stressed PFRs shouldn’t disclose the results) – April 15, 2010 at the Richmond FRB
- 8. Stress-Test Result: Similar to Evaluating Loss Coverage in a Securitization
- 9. Data NeedsLessons Learned:Data quality at our large, systemically important financial institutions is largely in need of vast improvementThe modeling issues confronting the supervisory teams (economists and examiners) during the stress-test should not be “rare” or “unique”Enterprise-wide stress testing should be common and ubiquitousLarge firms should be able to defend their stress-tests and the supervisors need adequate tools to assess the inherent quality and robustness of internal testsA “debate and confirm” atmosphere would be healthyFDIC fees should have a relationship to the potential volatility of DI assetsWe live in a 21st century world without 21st century data-management expectationsThis has to change. There are already some excellent examples.
- 10. Data RequirementsStandardsFlexibilityScalabilityPracticalityPortabilityThanks to Mark Flood, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=924618See also: http://www.ce-nif.org/about-usThe NIF/OFR needs to proceed to ensure sustained improvement in EWRM at our TBTF institutionsYou can’t manage what you can’t measure…and you don’t get improved data standards without a standard setter
- 11. Regulatory Change: Liquidity and CapitalLiquidity Risk ManagementBCBS, SSG, IIF and Domestic RegulatorsKey areas of focus will be:The forgotten “dark art”: asset liquidity = “counterbalancing capacity” = liquidity bufferCash-flow based stress-testing (forward looking)Contingency funding plansCapital AdequacyWhat is capital? The “definition of capital” work-stream at the international level is a top priority. Are you prepared?Counter-cyclical rather than pro-cyclical capitalInternational convergence on a “leverage” ratio standard
- 12. Regulatory Change: Transparency and DisclosureTransparencyThe Office of Financial Research (OFR)CMSA IRP, ALERT, FpML, Project RESTART as examplesThe EDM Council and various types of mark-up languagesSEC proposed rule ABCovers all private label 144-A transactionsLoan-level (collateral) detail Computer code for the waterfall registered and available“No more secrets”The return of the “3-6-3” “2-5-2” rule?
- 14. Data Problems and Requirements:Transparency Across Products, Markets, and Legal EntitiesFor more information:thomas.day@sungard.comFor Analyst Relations:nicole.rowe@sungard.com