Professional Documents
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Contents
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Seeking Coordination and Answers: The Drive for Risk and Finance Integration 3 Using the Right Measures to Monitor and Manage Shareholder Value 4
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Executive Summary
Two years after the collapse of Lehman Brothers and the global financial crisis (GFC), the areas of risk and corporate performance management have come under close scrutiny. Key questions are now being asked of these capabilities such as, Why didnt we see the warning signs earlier? Why were risks underestimated to such an extent? What must be done differently in the future to manage and protect shareholder value across economic cycles? Accentures Integrated Risk and Performance Management (IRPM) research was launched in 2010 to help companies develop new perspectives and capabilities to manage corporate performance. In particular, the research focused on helping financial institutions overcome post-GFC challenges, which include optimising capital, managing the cost of funding, compliance with new regulations, increasing customer centricity, and maximising long-term shareholder value.
The Accenture IRPM Framework provides a set of business processes, methodologies and supporting technologies that give financial institutions a new, risk-conscious way to monitor and manage corporate performance and improve decision making. Additionally, this framework supports institutions in overcoming todays siloed approach to risk and performance management, and helps ensure that decisions are no longer made on a mutually exclusive basis. Implementing the IRPM Framework provides organisations with the ability to manage risk-based performance across multiple views, while also providing a path for improving return on equity (ROE) by up to 1.5 percent, risk-adjusted return on capital (RAROC) by 2 percent or more and economic profit margin by up to 11 percent1.
In this paper we outline and discuss: The drivers behind risk and performance integration and the journey banks are taking to restore shareholder value Accentures IRPM Framework and how banks can use this framework to enhance risk and performance management capabilities across the organisation Enabling technologies available on the market to support an IRPM approach
Seeking Coordination and Answers: The Drive for Risk and Finance Integration
Getting to grips with the challenges facing the C-suite executive agenda will require a fundamental review of how financial firms manage their risk/ return profile. This starts with the economic measures executives use to monitor and manage corporate performance (such as ROE, RAROC, economic profit). Following that, executives need to consider the operating models in place across Risk and Finance to monitor and manage underlying key performance indicators and key risk indicators. In addition, the data management and analytical technologies in place to support this capability are fundamental to ensuring accurate and risk-adjusted calculation, aggregation and reporting of key indicators across all levels within the organisation. Integration of risk and finance reporting, together with greater analytical capabilities, is enabling financial institutions to manage the risk, funding, liquidity and capital requirements of their business in a more dynamic fashion. This includes the ability to monitor and manage risk appetite in real time. For example, the ability to quickly redirect marketing campaigns and business focus if established risk thresholds are crossed, such as the value of loans extended in a particular segment or geography. Integrating risk and finance capabilities also enables companies to introduce greater risk sensitivity into product pricing, through the standardisation and streamlining of risk and finance processes and IT systems. The tantalising possibility for leaders is to be able to easily answer questions such as: Have we adequately priced all of our risks?
Figure 1: Key challenges and priorities facing the Asia-Pacific banking industry
Australia
1. Managing higher costs of capital 2. Adapting to regulatory reforms 3. Supporting changing business models and growth strategies
Singapore
1. Supporting changing business models across the region 2. Managing higher costs of capital 3. Improving asset quality
China
1. Supporting changing business models and foreign participation Managing the move to a marketorientated banking system 2. Adapting to a state-controlled and regulatory-driven banking system 3. Managing higher costs of capital and broader management of NPLs
I know my risk, but how can I improve the return for that level of risk? Can I dynamically price and reprice risk by customer, portfolio, and product type, taking into consideration factors such as wrong-way risk? What is the risk-adjusted profitability of my business unit, portfolio or activity when allocated capital and risk are taken into account? How can I rationalise my decisionmaking process regarding risks and investments? Can I compare the performance of my business lines according to their risk profile? Where in my company is value being created and where is it being destroyed? How can I incentivise my team to take a risk-adjusted view of business decisions?
The ability to viewat all levels of the organisationtraditional and riskadjusted measures, via these different corporate lenses, will improve the ability of decision makers to judge short-term and long-term impacts to the balance sheet. However, to do this properly, banks need greater real-time and analytical capability across existing reports and controls, including: real-time limit and exposure management, dynamic appetite setting in response to changing market conditions, improved risk-based pricing, real-time portfolio reports to improve capital, funding, and liquidity management. An integrated risk and finance capability will also support changes to employee incentives to drive more appropriate decision making, aligned to risk and reward objectives, in critical areas such as product pricing.
Snapshot: How IRPM supports superior performance management and risk integration
IRPM gives senior leaders and others the right information to assess whether the organisation is realising its strategy and vision. Well-designed performance measures are typically generated by the finance function. They enable managers to monitor and adjust their operational activities or to change strategies. The IRPM methodology for performance management brings together measures from across the organisation to provide a comprehensive picture. Risk management activities have traditionally focused on protecting banks from financial, customer and external threats. The steps involve identifying and assessing risks, developing responses, implementing controls, capturing information and continually monitoring the situation. The IRPM approach to risk supports simulation, calculation and aggregation of risk measures across all business lines. Risk reporting measures include credit risk, liquidity risk, market risk, operational risk, fraud, anti-moneylaundering measures and local regulatory requirements. Most banks struggle to generate enterprise-wide performance and risk information, let alone to connect the two. The reason is that large financial institutions are typically broken down into distinct operating silos and data sharing is hampered by traditional business processes or legacy technology systems. The IRPM Framework enables organisations to truly manage riskadjusted performance at all levels of the organisation.
IRPM Benefits
The IRPM Framework provides a structured approach to integrating risk and finance processes to gain a range of business benefits, including improved economic profit, greater capital management capabilities and better decision making, based on an integrated view of risk and performance. For the Asia-Pacific region, we estimate that banks can lift economic profit by as much as 11 percent by implementing an IRPM business and technology solution. This translates into a ROE gain of up to 1.5 percent and a gain on the RAROC of up to 2 percent across the Asia-Pacific region2.
The improvement in performance can be attributed to a number of benefits tied to introducing the IRPM Framework: Improved risk-based pricing incorporating cost of capital Risk-based customer analytics, enabling banks to focus on the right customers Improved asset quality Improved risk monitoring and capital management Integration of the finance and risk functions Improved investor confidence in risk management processes
Figure 2: Implementing an IRPM solution can directly benefit the bottom line
ROE Australia
0.4% - 0.6%
RAROC
1% - 2%
North America
0.3% - 1%
0.5% - 2%
3% - 7%
Europe
0.3% - 1.5%
0.5% - 2.5%
3.5% - 11%
Asia
0.5% - 1.5%
0.5% - 2%
4.5% - 11%
*Analysis is based on the latest available year-end financial statements for the five biggest banks (excluding investment banks) by market capitalisation in each geography. Each had revenues greater than US$10billion.
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4. Monitoring
Develop action plans, re-allocate resources and update forecasts, accounting for risk Review performance with executive management and analyse variances Monitor and report KPIs and KRIs, and review risk controls
5. Enablement
Integrated IT architecture and reporting Infrastructure for risk and performance management Standardised procedures for risk performance management and reporting Data structures and controls, governance, quality and accountability Risk-metric-driven incentives and rewards Leadership and culture
1. Strategic planning
Refine corporate vision and strategic objectives, considering enterprise risk strategy and appetite Determine key value drivers, taking into account the impact of risks across categories Determine KPIs and key risk indicators (KRIs) and define accountabilities Create the strategic plan, in the context of the broad risk management plan
2. Target setting
Conduct portfolio value assessment, allowing for risks Set targets or limits for key measures of performance Cascade measures (KPIs, KRIs) and targets or risk limits to lower-level metrics or categories
3. Operation
Review, challenge and finalise riskadjusted plans and forecasts Develop plans to achieve targets, based on risk modelling and scenario analysis Allocate resources to achieve plans, accounting for risk and compliance Review, challenge and finalise riskadjusted plans and forecasts
Figure 3: An integrated view of risk, return and capital for all C-level executives Return Management
Managing the value contribution of the business as a whole and of its inherent value drivers
Return
Employing risk most effectively Integration of risk, return and capital into a single framework allows the organisation to manage its performance in a more risk-centric manner Achieving highest return on capital
Risk
Capital
Risk Management
Qualifying and managing the economic risk embedded in business
Managing the economic net worth of invested shareholder capital and funding future growth
IRPM Supports the Implementation of New Risk-Adjusted Measures and Alignment of Employee Objectives
The RPM Framework provides a mechanism for aligning the goals and KPIs of individual managers to those of the bank as a whole. The strategy and objectives identified by the banks leadership flow through to the setting of objectives, and reporting on performance, at all levels of the organisation. This is achieved by breaking down corporate, risk-related measures into lower-level metrics for use within the organisation. In turn, managers and employees can determine where to focus their efforts. Specific performance scorecards can be used to help employees draw connections between their behaviour and their contribution to overall business outcomes such as economic profit and capital optimisation. In each case, the bank will move from a focus on traditional financial KPIs to the use of risk-based performance measures such as the examples shown in the following table.
Compliance
Traditional financial KPIs Cost-to-Income Ratio Loans / Deposits AUM / Deposits Dividend pay-out ratio Interest margin Non-interest income
Risk-based performance measures Risk-adjusted return on capital Economic profit % defaults to total credit exposure Earnings at risk Risk-weighted assets Loantoloss ratio Increase in Loantovalue ratio due to drop in the value of the asset financed Number of loan defaults due to incorrect creditworthiness assessment Enterprise stress lead indicators Portfolio indicators (e.g. Var, cVar)
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Enabling Technology
Current database, analytics and communications technology systems are critical to the effective integration of risk and performance information management. Accenture provides its own technology support and partners with a range of leading vendors to implement the myriad tools required to make the full IRPM Framework a reality. Of paramount importance is improving the quality of data sources, data management systems and storage infrastructure. This ensures that data is of sufficient quality before being supplemented and manipulated by the various core systems downstream, including core banking systems, payment and ledger systems, risk engines, finance systems and reporting tools. Among the most important considerations are the business intelligence and performance management systems in place to monitor and manage corporate performance, which must be able to cater for a variety of tasks including: Data cleansing and reconciliation Calculation, simulation and aggregation of key measures Analytics and modelling Reporting
Oracle Financial Services Analytical Applications (OFSAA) Immediate benefit realisation via out-of-the box reporting and dashboard suites covering customers, account, transactions, OFSAA Enterprise Risk Management products, and, organisation units OFSAA Enterprise Performance Management Modular components allowing for tailored capability build-out Oracle Hyperion Planning Reduced implementation time and ability to leverage packaged Oracle Hyperion Strategic Finance functional planning modules Oracle Scorecard & Strategy Management Supports business-driven deployment SAP Bank Analyser Solution Suite SAP Price Optimisation SAP FICO SAP Business Object Predictive Modelling Workbench SAP GRC SAP EPM High level of configurability minimising customisation requirements Ability to integrate with third-party tools Full audit functionality for complete traceability Slice-and-dice reporting capability Provides a fully integrated system from core bank to GL to financial accounting, management accounting, sub-ledger and IFRS Automated monitoring and alerts for key indicators
SAP
SAS
SAS Strategy Management SAS Enterprise GRC SAS Financial Management SAS Risk Management for Banking SAS OpRisk VaR SAS Optimisation SAS Business Intelligence Suite SAS Fraud Framework for Banking SAS Anti Money Laundering SAS Intelligent Forecasting SAS Profitability Management
Best-of-breed business intelligence and performance management tool suite Robust data integration with data cleansing capabilities allowing true drill-down from summary reports Advanced engines and data models to assist in summarising and calculating data for strategic monitoring purposes
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Accenture Services
Accenture provides a broad range of risk, performance, technology strategy, and implementation services. For IRPM solutions, Accenture clients receive a unique combination of services and resources spanning the end-to-end program lifecycle, from strategy consulting and operating model design to systems integration and large-scale technology delivery, and outsourcing and change management services. These services are supported by proven assets and methodologies. Typical steps involved in an IRPM engagement involve: Understanding and setting strategic goals and drivers Target operating model design and implementation System design and implementation Periodic review and enhancement to the IRPM model as business needs change
Figure 6: Accenture risk management and enterprise performance management capabilities Strategy and Governance
Vision and Value Target Setting Target Operating Model Maturity Assessment Policy and Appetite
Enterprise Risk Management Risk Management - Credit Risk, Market Risk, Operational Risk, Supply Chain, Sustainability, Technology Risk and Finance Integration Embedded Risk Culture Basel Solvency Stress Testing Fraud and Financial Crime Compliance Management Liquidity Risk Management Risk-Adjusted Performance Management Risk Analytics Scenario-Based Modelling Risk Architecture and Data Management Risk and Finance Architecture Reviews, Technology Strategy Risk and Finance System Implementation (Packaged and Custom Software) Risk and Finance Test Managed Services Risk and Finance Application Maintenance and Support Finance and Accounting Process Outsourcing Risk Process Outsourcing Enterprise Performance Management Outsourcing Risk and Finance Analytics Application Outsourcing Infrastructure Outsourcing
Regulatory Reform
Technology
Outsourcing
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About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with approximately 211,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.
ACC10-2814 / 11-2622