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TRANSCRIPT
Credit Process Workshop
Day 1
April 2008
Agenda
9:00 – 11:00
Credit Scoring
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Integrated Rating System Design
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Credit Risk Infrastructure and Risk Rating Automation
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Recap and Q & A
9:00 – 9:30
Information, Welcome and Review of Objectives
9:30 – 11:00 AM
Credit Process: Challenges and Leading Practices
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Technology/Data Considerations and Challenges
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Sample Solution and Demo
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Case for Change and Program Approach
Day 2Day 1
Introduction, Welcome
And Reviewof Objectives
CREDIT PROCESS WORKSHOP
• Introduction by: Dr. Adili Kandah, Director General, Association of Banks in Jordan
• Comments by: Glenn Tasky, Component Leader for SABEQ
• SABEQ Program
• BearingPoint, Inc.
CREDIT PROCESS WORKSHOP
• BearingPoint– Global $3.1 B Management Consulting and Technology Firm
– Over 17,000 Employees in 4 Global Industries
– Leader in Private & Public Sector Consulting Services
• BearingPoint’s Emerging Markets Unit– Over 600 professionals working in 65 Emerging Market Countries
– Highly experienced in the design, sequencing and implementation of broad-based economic and financial solutions
CREDIT PROCESS WORKSHOP• Norwin Estrada - is a Manager in the Financial Services practice of BearingPoint
based in New York City. He is a skilled consultant with significant experience leading a wide range of assignments covering commercial credit, risk management, business requirements analysis, and regulatory and compliance based initiatives. Mr. Estrada specializes in credit processes and customer management, along with operational efficiency and control. Norwin has extensive hands-on experience with all types of business lending products and credit qualities. He has also participated in the development of commercial lending solutions within BearingPoint’s North American practice. [email protected] cell phone: +1-917-907-2635
• Kevin O’Brien - is a Manager in the Emerging Markets practice of BearingPoint with deep experience in trade financing, commercial banking and financial consulting. He holds an Undergraduate Degree in Business from the State University of New York; a Masters in Business from American University in Washington DC; and a Jurist Doctorate from George Mason University School of Law in Virginia where he served as Adjunct Professor. Mr. O’Brien is a member of the Virginia and District of Columbia Bar Associations. As a banker, Mr. O’Brien was responsible for $500 million in retail and SME loans and managed the transformation of SME lending to an automated process that included implementation of credit [email protected] telephone: +1-703-747-8507
Presenters
• SME Credit Process and Products
• Risk Management
• Credit Risk Models
• Credit Management
• Data and technology for risk and capital-based management
• Risk Governance and reporting Risk
• Governance and Organization
• Credit Scoring
• Underwriting SME Loans
• Moody’s Credit Analysis
Kevin OBrienManager, Emerging Markets, BearingPoint
Fadi ArrarCredit Risk Manager, Housing Bank for Trade and Finance
• Capital strategy and calculation
• Credit Risk Management
• Basel II Implementation
• Risk Quantification and Measurement Systems
Norwin EstradaManager, Financial Services, BearingPoint
Focus Areas/ExperienceName/Title
The Credit Process is Comprised of Many Activities…
… More than can be covered
in 2 days therefore,
Prospect & Sell
Credit Assessment &
ApprovalService
Collect & Recover
Monitor
� Target market – risk appetite
� Opportunity identification and structuring
� Customer information gathering
� Application form population and sorting
� Task Allocation
� Statement preparation & distribution
� Product adjustment updates
� Handling customer inquiries
� Billing
� Payment collection and processing
� Limits
� Ticklers and Credit Reviews
� EL and ALLL
� Total Borrower Exposure
� Concentration/ Diversification
� UL and RWC
� Charge-offs
� Recoveries
� Assets sale
� Restructuring
Pricing, Close & Fund
� Preparation and assembly of documentation
Post-sale servicesLoan origination and assessment
Deal Proposal
� Pricing
� Closing/ Booking
� Drawings
Credit Package Assembly
� Credit analysis
� Compliance checks
� Ratings assignment
� Limit control
� Credit risk mitigation mechanisms
� Approval
Our Session Objectives are To:
� Provide insights into leading practices, considerations and challenges of the credit process, specifically around loan origination and assessment from both practical and theoretical perspectives.
� Leverage our experiences to illustrate what might be expected for certain related topics that are not found in most textbooks covering the subject matter.
� Have a collaborative process where we can share ideas over the next two days and also facilitate a forum for take-away items.
� We have assembled a group of practitioners with varying degrees of experiences within the credit risk, strategy and technology arenas.
� Collectively our presenters have been through various selected areas and/or full credit process assessment and redesign implementations.
Agenda
9:00 – 11:00
Credit Scoring
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Integrated Rating System Design
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Credit Risk Infrastructure and Risk Rating Automation
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Recap and Q & A
9:00 – 9:30 AM
Introduction, Welcome and Review of Objectives
9:30 – 11:00 AM
�Credit Process: Challenges and Leading Practices
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Technology/Data Considerations and Challenges
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Sample Solution and Demo
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Case for Change and Program Approach
Day 2Day 1
Credit Process:
Challenges and LeadingPractices
Contents
� Lending Process Overview
� Challenges
� Leading Practices� Enterprise Credit Risk Management
� Risk Rating
� Counterparty Management
� Facility Management
� Portfolio Monitoring
Credit Process Overview
Prospect & Sell
Credit Assessment &
ApprovalService
Collect & Recover
Monitor
� Target market –
risk appetite
� Opportunity
identification and
structuring
� Customer
information
gathering
� Application form
population and
sorting
� Task Allocation
� Statement
preparation &
distribution
� Product adjustment
updates
� Handling customer
inquiries
� Billing
� Payment collection
and processing
� Limits
� Ticklers and Credit
Reviews
� EL and ALLL
� Total Borrower
Exposure
� Concentration/
Diversification
� UL and RWC
� Charge-offs
� Recoveries
� Assets sale
� Restructuring
The scope of our session will mainly focus on the loan origination and assessment phases of the credit lifecycle
We will also incorporate elements of the post-sales process as needed
Pricing, Close & Fund
� Preparation and
assembly of
documentation
Post-sale servicesLoan origination and assessment
Deal Proposal
� Pricing
� Closing/ Booking
� Drawings
Credit Package Assembly
� Credit analysis
� Compliance checks
� Ratings assignment
� Limit control
� Credit risk
mitigation
mechanisms
� Approval
Challenges
– Financial Institutions typically extend a wide variety of credit to customers including Lines of Credit, Revolvers, Term Loans, ACH lines, Daylight Overdraft accounts etc.
– These credits are often extended by different groups within the organization, each typically operating with their own set of business processes and enabling technologies
– Credit packages put together by different lending groups are often inconsistent and no pre-validation is done to ensure that all required elements are present, compliance guidelines have been met etc.
– While the credit review process is underway, origination cannot tell where in the credit process their deals lie and loan administration groups have no way to anticipate volume/nature of deals that will soon need to be booked
– Groups within the organization that are tasked with managing credit risk and exposure across the entire enterprise are faced with the daunting task of assembling and aggregating obligor and facility data from across lending programs in a manual way
This current process is inefficient, costly and often leads to an incomplete or erroneous picture of exposure
Sample Illustration
The data fields needed to track a loan pipeline are relatively consistent across lending programs: Broker Name, Borrower Name, Address, Loan Amount, Index Rate etc.
Loan Accounting systems have developed sophisticated account level capability that can support multiple combinations of product types
Challenge
The SILO’s come back in the Credit Management Process -Standardizing a Credit Management workflow continues to be a challenge to the very disparate nature of collateral data and differences in Risk Models across product types
SMEUpper Middle
Market
Large
CorporateSyndications
Dealer
Finance
Vendor
Fin. Services
Real
Estate
Equipment
Finance
Pipeline Management – Siebel, SalesForce.com, SalesLogix
Loan and Lease Accounting SubledgersACBS, AFS, LoanIQ, OLM
Approval &Closing
Approval &Closing
Approval &Closing
Approval &Closing
Approval &Closing
Approval &Closing
Approval &Closing
Approval &Closing
Small
Medium
Enterprise UpperMidMktOffering
LargeCorp Deal
Package
SyndicateOfferingPackage
DealerCredit Story
Vendor FinServices Writeup
Real EstateTransactionSummary
EquipFinanceNarrative
Small Medium
Enterprise
Upper MidMkt
Underwriting Model
Large Corp Underwriting
Model
Syndications Underwriting
Model
Real Estate Underwriting
Model
Equipment Finance
Underwriting Model
Dealer Finance
Underwriting Model
Vendor Fin Services
Underwriting Model
Assemble Credit Package
Assemble Credit Package
Assemble Credit Package
Assemble Credit Package
Assemble Credit Package
Assemble Credit Package
Assemble Credit Package
Assemble Credit Package
Deficiencies of Current State
P&L Issues – Without a view into the credit pipeline, Operations group unable to plan ahead for periods of high activity and may not be able to complete loan bookings on time
Loan operations groups unable to see level of activity they should be expecting in the near term
5
Exposure Risk – Inability to view credit relationship with obligor across all lending programs may allow credit risk to approve deal even though total exposure triggers should have kicked in
Full view of other credits to same borrower /relationship across the institution is often not available
6
Inefficient Process – Origination needs to proactively ‘ping’ credit management group to ascertain deal status and to be able to report back to borrower
Origination/UW unable to see where in the credit process the deal is, who has approved, who still needs to approve etc.
3
Regulatory Non-Compliance – Organization cannot demonstrate to auditors/regulators what the history of the credit approval was – cannot be Basel II compliant without this
No audit trail to track history of the credit process and modifications that may have been made to deal terms due to credit input
4
Concentration Risk – Portfolio may become over-concentrated in certain Geography, Industry etc. based on deals currently in Pipeline but no way for credit group to become aware of this until after approval when it is too late
� No holistic view of all credit offerings being worked on prior to credit approval
� Concentration indicators cannot be viewed in aggregate of overall existing portfolio until after approval
7
� Workload balancing within credit group is difficult
� Slower Review Process - Different file types and a non standardized credit package makes it difficult for credit group to speedily review offerings from different lending programs
� Incomplete Credit Packages - Credit packages may be received that are incomplete and credit group must iterate with origination until all required data has been submitted
� Credit Management has limited view of what offerings are close to being submitted for credit review
� Credit package consists of a compilation of files of different types
� Completeness of credit package cannot be verified before submission
2
Increased cycle time - New offerings start from scratch and components of earlier deals are not retrievable in a standardized, repeatable fashion
Reuse of credit package components on a future deal is difficult1
Cost/Efficiency ImplicationsProcess Management Deficiencies
� Abstract out common credit criteria elements (e.g. Obligor risk rating, Target approval date, KMV rating etc.)
� Generate one standard credit offering template, with business specific sections as necessary
� Automatic routing to appropriate approval level based on modifiable, company specific approval matrix
� Interfaces files with fields needed for booking generated and sent to booking systems
Future State — An Enterprise Credit Management Solution
Vendor
Fin. Services
Pipeline Management – Siebel, SalesForce.com, SalesLogix
Loan and Lease Accounting SubledgersACBS, AFS, LoanIQ, OLM
Enter Common Credit Criteria
XYZ Commercial Credit Package
Section I. Borrower Profile
Section II. Master Exposure
Section III. Collateral Summary
Section IV. Business Specific
� Required Fields Filled In?
� Conforms to Credit Policy?
� Any Compliance Exceptions?
Create interfacefeed into Booking Systems
Build Electronic Credit FileElectronic Credit File has Placeholders for Biz Specific Models
Enterprise Credit Management Solution
Submit Deal for Credit Approval
Validate Deal Generate Offering Doc’s
Route for Approval
Book the Deal
S.M.EUpper Middle
Market
Large
CorporateSyndications
Dealer
Finance
Real
Estate
Equipment
Finance
Advantages of Future State
Electronic Routing and Approval – Credit approval matrix is built into application which can route offering to appropriate approver(s) based on deal parameters such as Line of Business, Deal Size, Facility Type, Region, Industry etc.
7
Full Exposure Understood – System shows all current credit facilities for obligor and all related obligors, allowing current credit decision to be made with knowledge of full exposure to this customer relationship
3
Auto-Generated Documents – Documents are automatically generated by the system based on data entry. Eliminates duplicative data entry, and allows company standard text to be utilized with data points filled in dynamically as needed
4
Electronic Credit File – All documents related to a credit offering, whether generated automatically by the system or manually uploaded, are stored together with the offering for easy viewing and retrieval
5
Auto-Validation of Credit Offering – system validations determine if all required fields have been filled in, all required documents have been uploaded etc. and offering is rejected if incomplete. Auto-validation ensures that once Credit Management gets the deal, they will have all the information necessary to make a decision
6
BackOffice Integration – Facility type or other deal parameters are used to automatically generate booking forms for appropriate backoffice processing group(s). Backoffice has all the deal terms necessary and can book the deal or an automatic booking routine can be written for even further efficiency gains
8
Deal Archiving – all data points and documents (even multiple versions of the same document if desired) are retained and accessible for use in future deals or for satisfying audit and regulatory requirements
9
Decreased cycle time - Reuse of credit package components on a future deal is now possible. New offerings need not start from scratch and components of earlier deals are retrievable in a standardized, repeatable fashion
2
� Dashboards allow view of credits in progress:
� Originators – can see the status of deals they have submitted for review
� Credit Risk – can see what deals are waiting on their approval, what deals are coming down the pipe and can research deals decisioned in the past
� Loan Administrators – receive all information needed to book the deal and can also see what deals are almost ready to be booked to be able to proactively plan for periods of high and low activity
1
Efficiencies Gained
Enterprise Credit Risk Management
Credit Risk Defined
� Definition:
– Credit risk arises due to uncertainty in a counterparty’s ability to meet obligations.
– Every risk is comprised of two elements: exposure and uncertainty.
– There are different types of credit risk, corresponding to the various types of counterparties and types of obligations.
� Issues to be Considered While Assessing Credit Risk:
– Probability of Default.
– Credit exposure
– Recovery rate
– Credit scoring
* Use ‘credit score’ for individuals and SME.
* Use ‘credit rating’ for large businesses
Source: Risk Glossary, Encyclopedia and Resource
Credit Risk Issues
� Credit Risk Modeling:
– Includes algorithm-based methods of assessing credit risk
– Asset Value Models vs. Intensity Models
– Need to use ‘potential credit exposure’ to analyze credit risk for derivatives
� Managing Credit Risk:
– Credit scores/Credit analysis
– Credit risk limits using credit risk modeling
– Collateralization/Credit enhancements
– Credit derivatives
– Holding capital
Source: Risk Glossary, Encyclopedia and Resource
Common Credit Risk Definitions
� Loss Given Default (LGD) – Measures the proportion of the exposure that will be lost if a default occurs.
� Exposure At Default (EAD) – Estimated amount owed to the institution at the time of default.
� Probability of Default (PD) – Measures the likelihood that a borrower will default over a given time horizon.
� Maturity (M) – Remaining maturity of the exposure.
� Advanced Internal Ratings-Based (A-IRB) – Based on the ANPR this is applies to the advanced approaches of measuring credit risk.
� Allowance for Loan and Lease Losses (ALLL) - The allowance for loan and lease losses that is adequate to absorb estimated credit losses associated with the loan and lease portfolio as filed with the Supervisory Body.
Credit Risk Management can Result in Value atHigher Maturity Levels
• Enterprise Credit Risk Management program and responsibilities
defined.
• Many Credit Risk activities are business as usual.
• Controls in finance and operational systems are automatically
monitored and made accessible to Credit Risk reporting system.
• Real-time controls monitoring triggers process workflows.
• Credit data stored in Excel, Word, etc.• Minimal visibility into status and processes.• Inconsistent/manual approaches.
• Custom systems to address credit risk.
• Role-based functionality to provide data security.
• Minimal functionality to support credit data repositories.
• Document management, version control, audit trail, archiving of
supporting documentation, collaboration.
• Business process definition, workflows, automation.
• Security, authentication, digital signatures, etc.
• Seamless integration of credit processes and operational
systems at the enterprise level.
• Credit Risk management, Compliance and Reporting functions
optimized and integrated.
1. Ad Hoc Controls Monitoring Tools
2. Credit Risk Function Governance and Data Repository
3. Integration of Infrastructure Based Enabling Technologies
4. Integration with Finance/Operational Systems to Provide Automated Controls Monitoring
5. Enterprise Credit Risk Management and Automated Compliance Processes
Maturity Level Characteristics of Credit Risk Management
Credit Risk Management Roadmap – Maturity Levels
Value
Enterprise Credit Risk Management
– Integrated Enterprise Credit Risk Management program balanced with business structure
– Total Borrower Exposure visible “quasi-real-time”
– Key business efficiency metrics visible
– Harmonized core technologies
– Enterprise wide Credit Risk Management tool deployed –supports multiple modalities of credit from single instance
ResultInfrastructure
– Chief Credit Risk Officer role established, roles and responsibilities optimized with Chief Risk Officer and the business
– Re-useable libraries of credit policies, models, procedures and validation
– Enterprise credit risk training program
– Credit framework integrated into business operations, responsibilities and design
– On-going credit risk assessment and management –Credit Review, Rating, Limit Setting, Reserving and Pricing.
– Electronic risk rating process, review, and approvalsusing configurable workflow
– Results presentation linked with credit activities – risk adjusted return on capital (RAROC)
– Core design configuration for changes in regulations, & business events
– Minimal manual control documentation
– Enterprise Credit Risk view of Compliance
OrganizationDomain
INTEGRATE BUSINESS INTELLIGENCE
Repositories
Legacy Aps
Repositories
Legacy Aps
Repositories
Legacy Aps
Repositories
Legacy Aps
Enterprise Applications Package Applications Legacy Applications Data Warehouse
INFORMATION SERVICES
APPLICATION INTEGRATIONActivity
CollaborationTransactionManagement
CommonBusiness Objects
ObjectTransformation Meta-Models
Publish-Subscribe
5
Benefits Of The Enterprise Credit Risk Management Framework
� A common process and technology platform supports an entire commercial product suite across the credit lifecycle.
� Collection and retention of integrated data on borrowers and exposures through lifecycle of credits.
� Credit risk measurement integrated through lifecycle of loans.
� Extends concept of common platforms from just Pipeline Management and Loan Accounting to the entire commercial loan lifecycle.
� Leverages common credit data across LOB’s so no need to reinvent the wheel on common elements (e.g. borrower profile, market summaries etc.).
� Credit decision based on review against institutional portfolio rather than solely against other intra-LOB activity.
� By crossing lending programs a view is provided of:
– Total Exposure to a Master Relationship across lending programs.
– Expected risk concentrations based on the flow of deals still in the creation phase.
– Distribution of workload which allows a corporate banking leader to see what his/her officers are working on well in advance of submissions.
Risk Rating - Environment
� For most banks, the efforts to date regarding the development of the commercial risk ratings have been primarily focused on compliance with Basel II.
� While the continuation of these efforts is essential in order to meet the regulatory requirements, they are also important in the context of strategic business objectives such as ensuring a controlled and risk based execution and growth of the commercial lending lines of business.
� Current regulations provide guidance and frameworks for migration to leading practices.
Overall Ratings System – Commercial ExposuresBorrower Rating
(PD)Facility Rating
(LGD)
Loan Loss Data Capture
� Recognition of Defaulted Assets
� Type of Default
� Amount of Loss
� Amount Recovered
� Source of recovery, Ex: Collateral, Liquidation proceeds, Guarantees
� Administrative costs
Adherence
� Measures conformity to Borrower Ratings and Benchmark Ratings
� Highlight Rating Outliers
R atings M odels/B enchm ark Ratingand F inancial D ata
Adjustm ents(Expert Judgm ent)
R ationale
O ffsets
O verrides
FinalRating
Exposure Dataand History
FacilityType
Structure/Debt
PositionCollateral
Adjustments (Expert Judgment)
AVD
Final Rating
Risk Rating System & Grades Basel II Requirements
Differentiation of Risk
Rating Grade Structure
Independent Review
and Assignment
System must be oriented to risk of borrower default.
Take into account transaction factors (i.e. collateral).
Minimum 7 grades for performing loans & 2 grades for non-performing loans.
Meaningful distribution of exposure across grades.No more than 30% of exposures within one grade.
Borrower ratings must be reviewed by group that will not benefit from grade assignment.
Financial condition monitored continuously.Credit re-rated or reviewed at least annually.
Sample Ratings System Design to Estimate Probability of Default (PD)
Sample Ratings System Design to Estimate LGD
Ratings Based on External Benchmarks
� Problem: Scarcity of defaults on investment grade issuers– Few, if any issuers with investment grade ratings default in any given year.
� Solution: External benchmarks with an expert judgment overlay– Allows banks to incorporate external default data directly into the internal
ratings process.
– Key premises
• External benchmarks are statistically valid as populations.
• Individual estimates are not necessarily accurate.
– The Model
• An external benchmark provides an implied rating.
• Bank’s credit expert makes reasonable adjustments.
• Adjustments should cancel out on a portfolio level.
Credit Risk Model Design
� In no particular order, the following principles reflect critical aspects of a leading model development platform:
– Theoretical Integrity – Model development should be based on established literature/evidence
– Model Transparency – Easily understandable to non-technical audiences.
– Model Documentation & Validation – Financial institutions should establish a model validation policy. All models should comply with company standards and regulatory standards.
– Model Consistency – A corporate-wide model development program should attempt to ensure consistency of measuring credit risk exposures. A consistent view of models and measuring exposures will enable the company to more easily measure economic capital and expected loss at a portfolio level.
– Operational Feasibility and Effectiveness – Models should generate accurate results in a timely manner. The latest computational approaches towards ensuring model performance should be utilized.
– Model Sustainability & Business Continuity – Infrastructure should be consistent with accepted industry standard applications when possible. Additionally, utilizing common econometric and programming languages should be done when possible. Doing so ensures that applications can be more easily maintained and mitigates against key-person dependency risks.
– Model Flexibility – Models should be flexible in handling enhancements. Examples are new product segments and features such as credit structures/enhancement applications.
Model Validation
� Developmental Evidence – The review of developmental evidence focuses on the reasonableness of the conceptual approach and quantification techniques of the model itself. This review typically considers the following:
– Documentation and support for the logic and risk quantification techniques used.
– Testing of model sensitivity to key assumptions and data inputs.
– Support for the reasonableness and validity of results.
– Support for the robustness of scenarios used for stress testing.
� Process verification – Process verification considers data inputs, the workings of the model itself, a model output reporting. It includes an evaluation of controls, the reconciliation of source data systems with model inputs, accuracy of program coding, and the usefulness and accuracy of model outputs and reporting. Verification also may include benchmarking of model processes against industry practices for similar models.
� Outcome analysis – Outcome analysis focuses on model output and reporting to assess the model’s predictiveness. It may include both qualitative and quantitative techniques:
– Qualitative reasonableness checks consider whether the model generally produces expected results.
– Back testing compares predicted results to observed actual results.
– Benchmarking of model output compares predicted results generated by the model being validated with
predicted results from other models or sources.
Model Governance
� Defined Responsibility: Formalizes and defines the responsibilities of senior management, model developers, independent reviewers, end-users and internal audit with regards to model development, validation, approval and usage.
� Model Documentation: Establishes model documentation requirements sufficient for the purposes of facilitating independent reviews and effective communication between model developers, senior management and end-users.
� Independent Review and Validation: Requires all models, and all changes to models, to undergo an initial independent review and validation prior to usage in production processes.
� Assumption and Performance Reviews: Requires all models to undergo periodic assumption and performance reviews to gauge a models ongoing applicability.
� Formal Approval: Requires all models, and all changes to models, to be formally approved by senior management prior to usage in production processes.
� Controls: Subjects all models to version and change controls, as well as business continuity and disaster recovery plans.
� Audit Oversight: Assigns responsibility to the firm’s internal audit department to periodically review the various groups impacted by this policy and verify compliance.
To ensure sound and effective model governance policy must contain the following key elements:
Counterparty/Relationship Management
Relevant Terminology
General Definitions:
•Legal Entity - Corporation, institution, organization, individual or similar body that can legally commit / contract itself.
•Counterparty - Legal Entity, not being the Bank.
•Obligor - Counterparty with whom the Bank has a business relationship and granted usage of a credit facility that leads to a (potential) claim on that Obligor.
•Guarantor - Counterparty that issued a guarantee or indemnity.
•Issuer - Counterparty that issued a financial instrument.
Typical Issue
Customer data and hierarchies have been defined and implemented in different product systems resulting in duplicate records and poor data quality
Major Customer Data Stores
EDW
Product System
Product System
Product System
Product System
Product System
Cognos Siebel
Customer
SystemSDS
DB@
DB#/
SiebelDB
salesforce CRM4 CRM5
Product
System
Product
System
Product
System
Other
Systems
Unique Entity IdentifierA key first step in this process is to establish a bank-wide unique entity
identifier for all Counterparties
a. Establish a unique identifier for all Counterparties
b. Focus on organizations (i.e., wholesale) in the short term – tackle individuals (i.e, retail) in the mid term
c. Link all other relevant internal and external identifiers regarding the same entity
d. Ensure all types of Counterparty (I;e., entity) relationships bearing credit risk are supported
Unique Counterparty
Identifier
Other Internal Customer Identifiers
External Legal Entity
Identifiers
• System a
• System b
• System c
• System d
• Dunn & Bradstreet
• Ticker symbol
• Etc.
AllApplicant
As applicableCustomer
Potentially any of the aboveGuarantor
Conduits and retail poolsAsset Pool
Purchased receivablesPayor
Securitization, sale-and-lease back, other fixed income
Issuer*
CRE, project finance, and private equityBusiness Developer or Sponsor
OTC derivatives, repo-style transactions
Counterparty*
Loans, Leases, LCs, and overdraftsBorrower or Obligor
Products SupportedCounterparty Relationship/Roles
(*) Not all arrangements carry credit risk
Entity Hierarchy
Capture and maintain up-to-date entity hierarchy for connected borrowers
a. Connect related organizations (i.e. legal entities) in the short term – link related individuals in the mid term.
b. Identify and establish a policy regarding all financially connected legal entities that may affect the bank’s exposure, including: non-borrowing subsidiaries, non-consolidating subsidiaries, joint ventures, franchisees, and other defined groupings
c. Establish rigorous procedures with clear data governance to identify and update entities in a connected group, all the way to the ultimate parent. Automate these procedures wherever possible and support secure manual entry for exception handling
i. Leverage recognized external databases (e.g., Dunn & Bradstreet).
ii. Reconcile and link connected entities information against other internal customer directories
Legal Entity A
Legal Entity B
Legal Entity C
Legal Entity D
Legal Entity E
Legal Entity F
Legal Entity G
Borrower
Guarantor
Borrower
• Risk rate each separate legal entity to which the bank is exposed, at least once a year
• Establish and follow sound policies regarding the treatment (e.g., credit rating) of individual entities in a connected group (e.g., PD substitution for guarantees)
Related Basel II Guidelines
Product Linkage
Maintain for each Counterparty up-to-date linkages of all their product arrangements
with credit exposure
a. Establish procedures and clear data governance to identify and maintain customer-product linkages. Automate these procedures wherever possible and support secure manual entry for exception handling
i. Reconcile product arrangements with other internal customer directories
ii. Identify and link product arrangements across all relevant product processor systems
Customer System
• Unique Entity ID:1233456
• Role: Customer
– Product Sys ID: AA001
• Product: Loans
• Arrangement
– System: Booking system
– Customer ID: 0020000825
– Account No: 0091
• Arrangement
• Role
• Product
Product System
• Unique Customer ID: AA001
• Customer Name: Aaron Rents Inc
• Product System: System A
• Obligor ID: 0020000825
• Product: Syndicated Line
• Obligor ID: 0020000833
• Product: Binding Revolving
• Obligor ID: 0020000817
• Product: Binding Revolving
• Product System:
Booking System
•Obligor ID: 0020000825
•Facility: 0091
•Limit
•Future
–Current
•Obligation: 0117
•Obligation: 0125
•Obligation: 0109
ILLU
STR
ATI
VE
Additional Considerations
• DO NOT put in place a system that overrides the bank’s KYC or Golden Source initiatives
• Initially leverage the existing counterparty management functionality within current systems until a global solution canbe developed
• Implement a solution that creates services to bridge the gap between today’s implementation and tomorrow’s vision of a single bank-wide golden source
• Facilitate counterparty management across the identified golden sources for associated BU’s (onboard other sources incrementally)
Potential Evolution
Year 1:
� Fix major product system interfaces and clean up data on Customer Systems
� Design and implement centralised customer and hierarchy solution with new governance and controls
� Design and build a dedicated data warehouse to enable risk management and analytics
Year 2:
� Fix interfaces to other systems and clean up data on Customer System
� Extend centralised customer hierarchy to support access control
Year 3:
� Make interfaces ‘two way’ to make the solution the source of core customer information for product systems
Counter-party
Agent
Legal Entity
Customer Data Model
Customer Hierarchy
Products Services
Facility Management
Classification of Exposure
Facility management must support Basel II classification of credit exposures:
Exposure Types
• Wholesale
– Corporate
– Financial Institution
– Sovereign
• Securitization
• Purchased Receivables
• Equity
• Mortgage Retail
– Residential Mortgages
– Home Equity Lines
• Non-Mortgage Retail (QRE)
– Credit Cards
– Overdraft Lines
• Other Non-Mortgage Retail
– Personal Loans
– Car Loans
– Student Loans
– Small Business Loans
Traded Products
• OTC Derivatives
– Interest Rate
– FX
– Equity
– Credit
• Repo-Style Transactions
– Repos and Reverse Repos
– Customer Margin Lending
– Securities Lending and Borrowing
Corporates by Size
• Corporate (>$50M sales)
• SME (<=$50M sales)
• Small Business (<$1M Exposure)
Wholesale Lending
• Core lending
– Term Loans
– Revolving Lines
– Syndicated Loans
– Letters of Credit
– Overdrafts Lines
• Specialized lending
– Project Finance
– Object Finance/ Leasing
– Commodities Finance
– Commercial RE
– High Volatility Commercial RE
Cradle to Grave Linkage
Ensure that facilities and their underlying product arrangements can be tracked
throughout their lifecycle.
a. Establish rigorous origination procedures and data governance policies to ensure new customers and/or facilities are properly identified and linked in CIS and related systems
Credit Lifecycle
Prospect & Sell
UnderwriteDocument,
Close & FundService
Collect & Recover
Monitor
� Target market – risk
appetite
� Opportunity
identification and
structuring
� Application
� Credit analysis
� Ratings assignment
� Limit control
� Credit risk mitigation
mechanisms
� Pricing
� Documentation
� Closing/ Booking
� Drawings
� Statements
� Billing
� Payments
� Limits
� Ticklers and Credit
Reviews
� EL and ALLL
� Total Borrower
Exposure
� Concentration/
Diversification
� UL and RWC
� Charge-offs
� Recoveries
� Assets sale
� Restructuring
b. Establish tight procedures and electronic linkages to ensure that facilities can be tracked if they migrate into special recovery efforts and/or restructuring – especially when this migration involves different systems
Additional Considerations
Establish a facility template that can be modified to accommodate:
• complex facility structures (allocation, syndication)
• diverse commercial products– This includes ability to onboard new products or evolve existing ones with
minimal customization or programming intervention
• Extensive reference data with pre-loaded industry standard facility, collateral, covenants, guarantee types, etc
Portfolio Monitoring
Monitoring Total Borrower Exposure
Total Borrower Exposure (TBE) should be calculated and monitored to prevent exceeding limits
TBE can defined as the aggregate of credit commitment extended by the bank to a Legal Entity, its subsidiaries, and its affiliates: whether internally committed or legally binding, whether funded or un-funded, whether obligated directly or indirectly as co-maker, endorser, or guarantor
a. Aggregate exposure balances across all product arrangements and connected borrowers
b. Support calculation of different measures of exposure to support management and Basel II reporting
i. Gross Outstandings (after accounting offsets)
ii. Outstandings plus Accrued Interest and Uncollected Fees
iii. Gross Exposure (i.e., outstanding plus EAD of undrawn commitments)
iv. Net Exposure (after risk mitigation)
v. EAD of all Non-Defaulted exposures including traded products
vi. EAD of Defaulted Exposures including life-to-date accounting offsets
c. Ensure that reported exposure amounts (or their drivers) are reconciled against reported general ledger balances to comply with Basel II
Company Operated StoresCompany
Operated Stores
Company Operated StoresCompany
Operated Stores
Company Operated Stores
Company Operated
Stores
Company Operated Stores
Franchised Stores
Company Operated
Stores
Franchised Stores
Company Operated Stores Franchised
Stores
Company Operated Stores
Franchised Stores
Total Borrower Exposure - Example
Calculating TBE for Aaron Rents highlights some of the complexities regarding connected borrowers with diverse exposure types.
Aaron Rents, Inc.
Aaron Investment Company
Aaron Rents, Inc.
Puerto Rico
616 stores in 27 states and Puerto Rico
Rent-to-Rent Division
Sales & Lease Ownership
Division Mac Tavish IndustriesDivision
Company Operated Stores
Franchised Stores
357 stores in 43 states and Canada.
Company Operated StoresCompany Operated Stores
Company Operated Stores
Rent-to-Rent Stores
58 company operated
• Revenue: $950M
– 52% electronics & appliances
– 35% furniture
– 12% computers
• Net Earnings:$53M
• $25M construction and lease facility
• $150 operating leases
Franchised Stores
Franchised Stores
Franchised Stores
LLCs for capital Leases
Controlling stockholders
• $18M capital leases
• $100M franchise guaranty
• Interest rate swaps ($32M notional)
• Co-borrower
• Borrowers
• Guarantor
• Co-borrower
• Borrower
• Counterparty
TBE > $300M*
Legal Entity
Organization Entity
Legend:
• Role
• Exposure
Comment(*) Exposures balances are based on total balance sheet exposure. Aaron Rents commitments in Compass amount to approximately $73M
ILLU
STR
ATI
VE
Reporting Risk across Management Hierarchy Structure
– Credit Risk Reporting needs to,• support extensive and sophisticated portfolio risk monitoring and
analysis capabilities across credit risk management functions to meet A-IRB standards.
• enable accuracy and integrity in risk measurement, improved effectiveness in risk management, use of the new risk measures in managing the business, and disclosure and transparency to the market.
– Sample Reports should focus on,• Total outstandings and credit risk exposure by Basel Asset Class over
the Lines of Business, Geography and Industry• Credit exposure across PD grades (obligor risk rating grades) by Basel
Asset Class• Analysis of Probability of Default, Loss Given Default and Exposure at
Default actual outcomes against estimates.• Percentages of number of exposures migrating from a Probability of
Default Grade to other PD Grades for each Basel asset class (andmajor sub-types)
• Comparison between realized default rates and the expected estimated PDs for each grade (across Basel asset classes and sub-types)
Monitoring Concentrations
Should focus on reporting of risk exposure and concentration for management and
Basel II purposes
a. Enable consistent risk exposure and concentration (vs. limits) reporting across key business dimensions
i. Business Unit
ii. Exposure Type
iii. Geography
iv. Industry
v. PD and LGD Ratings
vi. Residual Maturity Intervals
b. Standardize reference data across these key reporting dimensions
c. Establish optimal (i.e., effective yet cost efficient) data management mechanisms to ensure data integrity and consistency
d. Support periodic standard reporting as well as ad-hoc queries (e.g., TBE on an specific group)
e. Enable retrieval (or generation) of historic exposure and concentration reports (i.e., monthly reports for the last 7 years)
f. Support comparison of entity hierarchies for the last 12 months
Additional Considerations
Portfolio Monitoring should aim at improving credit risk management practices along several key dimensions
• Advanced Mitigation Analysis• Derivative strategies• Secondary Market strategies• Capital allocation strategies• Exposure concentration views• Alignment of RAROC with Basel II calculations• Fraud Management
Agenda
9:00 – 11:00
Credit Scoring
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Integrated Rating System Design
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Credit Risk Infrastructure and Risk Rating Automation
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Recap and Q & A
9:00 – 9:30 AM
Introduction, Welcome and Review of Objectives
9:30 – 11:00 AM
Credit Process: Challenges and Leading Practices
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
� Technology/Data Considerations and Challenges
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Sample Solution and Demo
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Case for Change and Program Approach
Day 2Day 1
Technology/Data Considerations
and Challenges
Contents
� Overview
� Example Architecture
� Straight Through Process
� Vendor Comparison
Overview
� CEOs and CFOs of major financial services organizations share two perpetual priorities:
– The ongoing challenge to continually meet the minimum compliance requirements of lawmakers, regulatory agencies and shareholders.
– Leverage those requirements efficiently to achieve effective overall performance and risk measurement processes that add immediate business value.
� In order to meet the above mentioned priorities, organizations must leverage technology and data creating performance and risk measurement solutions that provide:
– One enterprise process – providing all levels of management with the financial and risk information needed to align decision making with organizational and line of business strategies.
– One version of the truth – a common definition and source of information that reduces the need for reconciliation and redundant data collection.
– One-step access – the delivery of information tailored to the individual user, supporting drill-down from strategic to operational data for business analysis and modeling.
– One integrated architecture – a flexible and scaleable architecture that efficiently facilitates the capture, transformation, enrichment and distribution of financial and risk data across the enterprise while protecting your technology investments.
Risk Architecture Components
Risk Architecture Components (cont)
Relevant Peripheral Applications and Ecosystem Linkages
Relevant Peripheral Applications and Ecosystem Linkages
Example Architecture
Enterprise Data Storage
Source Transaction Systems
Financial Processing Systems
Data Management Infrastructure
Decision Support & Analysis
OLAP
Other Reporting
Risk Reporting Processing
Financial Reporting Processing
Recon & Suspense
Control
Financial Mgt Control System
Revenue & Cost
Allocation
Economic & Regulatory Capital Allocation
Funds Transfer Pricing
Consolidation
Sub-Ledge
r
Journal
Entry
Trans Detail
Gen Ledge
r
Other Reporting Warehouses (Eg CRM)
Mkt Risk Data Mart
Op Risk Data Mart
Credit Risk Data Mart
Accounting Rules EnginesAggregation Rules Engine
Posting Rules Engine
Business Event Transformation
Financial/Risk Reporting
Data Warehouse(s
)
Common Reference Data
Financial Reporting Data Mart
Reserving
Credit Risk
Reporting (Limits Mgt, Portfolio
Monitoring, Problem Acct Reporting)
Market Risk Reporting (Limits Mgt, VaR Reporting, ALCO Reptg)
Operational Risk Reporting (Limits Mgt, Loss Reptg, Risk
Dashboards)
GAAP Reporting
Product/ Customer
Profitability Reporting
Budgeting And
Forecasting
Operations Reporting
Marketing & Sales
Other Reporting
OLAP Applicatio
ns Layer
Product &
Customer
Profitability
Budgeting &
Forecasting
Treasury/ALC
O Reporting
Other Mgt
Reporting and
Analysis
Web Browser Access Layer
Financial Transaction
Systems
Deposits /Checking/ Cash Mgt Systems
Loan Acct
Systems
Credit Approval Systems
Capital Mkts Product Systems
Document Mgt Systems
Collection
Systems
Risk Rating and Pricing Tools
External Data Services
CRM/ Sales
Force Mgt Systems
Collater
al Mgt Systems
Desktop Platforms & Browser Access Layer
MESSAGING INFRASTRUCTURE
• File to message conversion• Rules based data standardization
• Business event transformation
• Message queues and management
Web Services
Data Routers/ Controlle
rs
Extract/ Transform/ Load
Risk Modeling
& Portfolio
Analytics
Systems and Processes significantly impacted
Enterprise Data Storage
Source Transaction Systems Financial P rocessing System s
Data M anagemen t In frastructure
Decis ion
Support &
Analysis
OLAP
Other Reporting
Risk Reporting Processing
Financial Reporting Processing
Recon &
Suspense
C on tro l
F inancia l Mgt
C on tro l
S ystem
Revenue & Cost
A llocation
Econom ic &
Regulatory Capita l
A llocation
Funds T ransfer
Pric ing
Conso lida tion
Sub-Ledger
Journal Entry
Trans Detail
Gen Ledger
Other Reporting
Warehouses (Eg CRM)
Mkt Risk Data Mart
Op Risk Data Mart
Credit Risk Data
Mart
Accounting Rules Engines
Aggrega tion
Ru les Eng ine
Posting R u les
Eng ine
Bus iness Event
T ransform ation
Financial/Risk Reporting Data Warehouse(s)
Common Reference
Data
Financial Reporting Data Mart
Reserv ing
C red it R isk Repo rtin g
(L im its Mg t, Portfo lio
M on itor ing , P rob lem
Acct Repo rting )
Market R isk Reporting (L im its M gt, VaR
Reporting, ALCO Reptg)
O pe ra tiona l R isk
Repo rting (L im its
M gt, Loss Rep tg ,
R isk Dashboards )
GAAP Reporting Produc t/ Cus tome r
P rofita b ility
R eportin g
Budge ting And
Forecasting
O pe ra tions
Repo rting
M arketing &
Sales
O the r Reporting
OL
AP
Ap
plic
atio
ns
La
ye
r
Product &
Customer
Profita
bility
Budgeting &
Forecasting
Treasury/ALC
O Reportin
g
Other M
gt
Reportin
g and
Analysis
Web Browser A
ccess Layer
F inancia l
T ransaction
System s
Deposits
/Checking /
Cash M gt
System s
Loan Acc t
S ystem s
Credit
Approva l
System s
Cap ita l
M kts
P roduc t
System s
Document Mgt Systems
Co llec tion
System s
Risk Rating and Pricing Tools
E x te rna l
D a ta
Se rv ices
CRM / Sales
Fo rce M g t
Sys tems
Colla te ra l
Mg t
System s
Desktop Platforms & Browser Access Layer
MESSAG ING INFRASTRUCTURE
• F ile to message conversion
• Ru les based data
s tanda rd iza tion
• Bus iness event transform ation
• M essage queues and
m anagem en t
Web Services
Data Routers/
Controllers
Extract/ Transform/
Load
Risk Modeling
& Portfo
lio
Analytics
Example of Organization and Technology
Challenges
Limited operational risk data often on
spreadsheets and Access Databases
Credit risk data in multiple repositories and forms, often in
Access
Ad hoc and paper-based risk reporting processes not linked or using inconsistent data
Multiple, siloed risk analysis and modeling tools not using
consistent data. Limited analytical Capability
Ad hoc and manual regulatory reporting
processes, not transparent or readily auditable
Mixture of 2 tier & 3 tier application access layers, limit inter-operability
Ad hoc linkages between financial and risk data
Legacy applications not taking advantage of
middleware and hence not inter-operable
Multiple credit servicing
systems with inconsistent data of variable integrity and many manual processes
Informal & paper-based risk rating and credit
processes
Ad hoc and paper-based
loan documentati
on
Stand Alone Product Pricing Tools
Stand alone Recoveries systems and processes
Manual and ad hoc data loads, instead of programmed
ETL
Where We See the Industry Going: An Integrated Risk Architecture
WorkflowData Quality, ETL, Exception and Error Management, Reconciliation
Transaction
Systems
Collateral
Managment
Financial Products
System
External Data
Portfolio Mgt Loan
Servicing
PB&F
Variance
Reconciliation
Tax
Reserve
Management
Exception
GAAP
Corporate
Variance
Management
Reserve
Tax
Statutory
Excel
Help
Coll
Integration Bus
Performance Monitoring and Recovery
Security (One Identity)Authentication / Authorization / Audit Logging
Accounting Engines / Services
Future State Application Architecture
SOURCE SYSTEMS
Adjustment Entry
ADJUSTMENT ENTRY VEHICLE
Notifications SchedulerException Management
Transformation, Validation, Accounting Rule
REPORTING
ENGINE*
ENTERPRISE SERVICES LAYER
Accounting
Engine
Allocation
Engine
Accounting
Basis
Translation
Currency
Conversion
Metadata
Mgm't
Reference
Data
Mgm't
Data
Support
Services
Reconci-
liation
General
Ledger
* *
Recv & Credit
Exp Mgm't
Sensitivity
Analysis
Scenarios
Limits and Exp
ROE / SVA
RORAC
Other
Ratings LGD EADCredit
VARVAR Sensitivities ValuationRisk
Engines
Capital
ManagementNetting
Limit
Management
Loss
Tracking
Exposure
Management
Custody
Settlements
Corporate
Systems
Applications
Where We See the Industry Going: Where the Impact Will Be Felt
Moving towards an integrated risk and finance architecture that better supports the business means targeted investments that…
• Investments in better data and analytic engines have not made their way to the front office
• Front office relationship managers can make better decisions when they understand the risk implications of competing deals on an ex ante basis
• Extending analytic capability to the front office gives risk theability to better manage and advise the business prospectively
Data Transformation Layer*
Data Abstra
ction and Integration*
Canned Reports
Custom Reports D
ashboard / P
ortal (X
L Net)
Risk Analytics
• Alerts and triggers that automatically kick off once thresholds and limits have been breeched
• Automated workflow that kicks off approvals process based on established roles and responsibilities
• Scheduled tasks, reviews, and monitoring processes coupled with robust exception reporting that enhances risk management discipline
Push Risk Tools and Technology to the Front Office
Enhance Workflow, Exception Reporting and Automated Alerts
Where We See the Industry Going: Where the Impact Will Be Felt
Moving towards an integrated risk and finance architecture that better supports the business means targeted investments that…
• Streamlined risk reporting that draws a comprehensive risk profile in a timely and accurate fashion
• Standard portfolio scenarios and volatilities run daily to support robust “what if” capability
• Shift in risk role from “compiler of information” to value added provider of analytics to the business
Data Transformation Layer*
Data Abstra
ction and Integration*
Canned Reports
Custom Reports D
ashboard / P
ortal (X
L Net)
Risk Analytics
• Transparent data management and integration rules that support one version of the truth
• Cost take out opportunities such as redundant data marts and ETL processes are streamlined and consolidated
• More timely access to information and analytics supporting the business
Enhanced Risk Reporting and Analytics
Data Management and Transport Layer
Where We See the Industry Going: Where the Impact Will Be Felt
Moving towards an integrated risk and finance architecture that better supports the business means targeted investments that…
• Tighter integration between risk engines (Ratings, LGD, EAD, Var, etc.) and Finance Applications supporting enhanced performance measurement and management
• Linkage to financial planning applications supporting enhanced risk and finance planning and forecasting capability
• Better tools supporting ad hoc risk adjusted performance measurement and management analytics on demand
Integrated Risk Engines and Finance Applications
Straight Through Process
Straight Through Process (STP)A key strategic initiative is to “Develop an End-to End Credit Process”. The desired result is the implementation of a cost efficient, standardized, secure, reliable and integrated sales-to-operations workflow solution. The end-state will unify disparate processes and systems to leverage existing data, minimize risk, improve compliance & control and
eliminate unnecessary steps for a more responsive client experience.
�Eliminate redundancies and variability. Consistent execution across geographies and lines of business.� Improved management of risk exposure and adherence to credit policy. Preservation of
credit quality.� Full automation – automated access to client information, total exposure, risk ratings, credit
history, asset, appraisal, balance, transaction and other information regardless of source.
� Utilization of centralized underwriting capabilities across all lines of business and geographies.
� Rapid processing of credit from sales through documentation and booking.� Transferability – key components can be applied across multiple lines of business.� Enhanced productivity and cost reduction. Optimal use of people and resources.� Metrics and measurements allowing for inspection and coaching.
A “Best-in-Class” recommendation would have the following characteristics:
Impact and Benefits of an STP
�Pricing discipline. Integration of pricing model; ability to track actuals against baseline.�Financial statement analysis tools�Automated credit policy cross-reference�Utilization of the Banks Product Divisions (Real Estate, Trade & Energy)�Utilization of Regions’ business partners �Multiple credit decision-making routes�Client contact management system�Client relationship reporting and metrics�Loan documentation and booking�Enhance all Construction Lending capabilities via web-based solution�Enhanced exception tracking & control
The end-state will integrate and improve the components of the credit process, including:
Sample Illustration of a STP Supported by Integrated Solution
Origination/Information Gathering
Underwriting
Approval
DocumentPreparation
Loan Closing
Funding
Loan Servicing
The underwriting process Integrates risk models, pricing models, and statement spreading system to integrate information into the Credit Memo.Policy and compliance will be enforced and tracked.
Loan documents arestandardized. An interface to the document preparation system reduces turnaround times and errors. Boarding of the loan
and paper tickets are eliminated through automated electronic funding, allowing for same-day booking.
Multiple systems and databases are eliminated. Loan and collateral information is stored together including real estate. Ongoing servicing tasks are streamlined to improve customer service.
RM & Customer
Deal Team
Underwriting
Credit Analyst
Portfolio Manager
Document Preparer
RM & Customer
Funding Analyst
AccountingSystem
Processor
Information gathered from the customer is entered to the system one time and retained through the entire process. Relationship data are pulled from CIF and the loan system.
The Credit Memo is populated and electronically routed for approval, reducing the turnaround times from weeks to days.
Loan is closed, funded and booked the same day. Faxing loan documents is eliminated. Completion of Loan Boarding sheets are eliminated. Status of loan can be tracked.
Few
ven
do
rs h
ave b
uilt a
co
mp
lete
en
d to
en
d s
olu
tion
Credit RiskModels Engine
ExternalLoss Data & Ratings
Integratio
nMonito
ring
Supportin
g
Technology
Loan Orig
inatio
n and Assessment
Sales
Solutio
n Domains
ACBS
SOA, Open Source
FileNet
Doc Mgt
Documentum
CapStream
Customer Relationship Management
Customer Information System
Workflow (BPM)
Document & Content Mgt
Pricing
Loan Accounting
AFS
(Deal) Pipeline Mgt
Credit Decisioning
Siebel
Salesforce.com
CRM
LoanIQ
OriginationRisk
Cognos
Experian
Oracle
Data Mgt & Reporting
D&B
External Data & Credit Models
Reporting
Capital Calculation
Terradata
Moody's/KMV
SAS
Algorithmics
Reveleus
OtherPortfolio
Risk, RAROC, and EVA
Enterprise Architecture & Data Model
Solution
Vendors
Credit RiskModels Engine
ExternalLoss Data & Ratings
Integratio
nMonito
ring
Supportin
g
Technology
Loan Orig
inatio
n and Assessment
Sales
Solutio
n Domains
ACBS
SOA, Open Source
FileNet
Doc Mgt
Documentum
CapStream
Customer Relationship Management
Customer Information System
Workflow (BPM)
Document & Content Mgt
Pricing
Loan Accounting
AFS
(Deal) Pipeline Mgt
Credit Decisioning
Siebel
Salesforce.com
CRM
LoanIQ
OriginationRisk
Cognos
Experian
Oracle
Data Mgt & Reporting
D&B
External Data & Credit Models
Reporting
Capital Calculation
Terradata
Moody's/KMV
SAS
Algorithmics
Reveleus
OtherPortfolio
Risk, RAROC, and EVA
Enterprise Architecture & Data Model
Solution
Vendors
Agenda
9:00 – 11:00
Credit Scoring
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Integrated Rating System Design
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Credit Risk Infrastructure and Risk Rating Automation
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Recap and Q & A
9:00 – 9:30 AM
Introduction, Welcome and Review of Objectives
9:30 – 11:00 AM
Credit Process: Challenges and Leading Practices
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Technology/Data Considerations and Challenges
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
� Sample Solution and Demo
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Case for Change and Program Approach
Day 2Day 1
Sample Solution and Demo
The commercial lending industry faces many challenges
• Typical Process Issues
– Processes and systems inconsistently applied
– Paper intensive
– No tracking of progress
• Quality Management
– Challenged with compliance tracking
– Imperfect documentation creating delays
– Customer frustration
• Risk Management Issues
– Inconsistent application of credit policies
– Lack of visibility into risk exposures of all types
– Inadequate portfolio management
Typical Current StateProspect & Sell
Credit Assessment& Approval
ServiceCollect & Recover
MonitorPricing, Close& Fund
DealProposal
CreditPackageAssembly
CreditPackage
Reading forBooking
Are All
Deal Terms Present?
Obligor DataPresent?
Deal isApproved
Credit Decision
Accepted?
CreditApproval
ExternalSystem
External System
ExternalSystem
ExternalSystem
Inter-office Mail
Inter-officeMail
Inter-office Mail
Inter-office Mail
Gather andAssembleFinancials
AttachCompanyFinancials
GatherExternal RiskRatings
GatherThird-Party
Market Reports
WriteCreditNarrative
AssembleFinal PackageCredit Unit
Credit UnitReceivesCredit
Package Are RequiredElements
Present?
Complies with
Credit Policy?
Deal TermsAcceptable?
Risk Ratings
Acceptable
CounterpartyExposure
Level?
Routeto
Appro-vers
Originator BeginsPackage Assembly
Fragmented Organizations, Processes and Systems
Large Dependencyon Paper
Poor Visibility intoRisk Exposures
Inconsistent Applicationof Credit Policies
Poor Compliance Tracking
Manual Processes
ImperfectDocumentation
Long Cycle Times
Costs Too Much
Quality Suffers
Difficult to Manage Risk
Prospect & Sell
ServiceCollect & Recover
MonitorPricing, Close& Fund
Credit Assessment& Approval
DealProposal
CreditPackageAssembly
A solution that " Bridges the Gap"
• There is a common belief that:
– This space is typically custom processes and architectures
– Existing vendors do not provide a real "bridge" solution
•As a result, this offering is unique…
– It bridges the gap of sales/origination to financial booking
– The solution framework provides best of breed architecture
– The solution provides highly value-added, flexible workflow that models the complexities of the lending process and credit approval
– The tools and templates accelerate your implementation
– It leverage current functional application and systems investments where appropriate, to minimize investments in new systems and tools
ALPS: Role Based, Origination Solution
Prospect & Sell
Credit Assessment& Approval
ServiceCollect & Recover
MonitorPricing, Close& Fund
DealProposal
CreditPackageAssembly
On Line
Architecture based on Service Oriented Architecture (SOA), Bus. Process Management (BPM) & Doc.
Management tools
Tight integration between credit policy & approval
Better visibility intoRisk during approval
Improves Quality of Documentation
Streamlined Processes across LOBs, systems
Cost Reduction
Quality Improvement
Risk Management
Solution Elements
Solution Accelerators
� Business Strategy & Plans
� Business Case & Financial Models
� Technology Strategy
Solution Accelerators
� Project Plans
� Staffing Models
� Estimation Models
Solution Accelerators
� Process Flows
� Use Cases
� Data Models
� Application and Integration Architectures
Solution Accelerators
� Complete Automated Lending Portal
� Complete flexibility and source code
� Test Plans & Scripts
Align with corporate business and technology
strategy
Manage the project effectively, based on actual
implementations
Jump-start implementation with pre-designed components
Leverage source code for easier customization and
maintenance
16 Process Flows • 68 Use Cases • 60 Screens • 33 Test Cases • 10 Reports 140000+ Lines of Code • 3000+ Class Objects • 175+ DB Tables
Strategy DesignPlanning Build
Benefits
•Risk Management and Operations Improvement– Automation of the entire commercial lending process
– Gained visibility into risk exposure across the institutional portfolio and customer relationships
– Provided transparency to regulators on pricing and credit policyadherence
– Improved data integrity by automating the credit approval process
– Significantly increased credit policy compliance
•Rapid Results– Months and weeks to implement because of Architecture and
completeness of ALPS
– Client owns code when complete – best of both worlds: Build versus Buy
Demonstration
Agenda
9:00 – 11:00
Credit Scoring
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Integrated Rating System Design
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Credit Risk Infrastructure and Risk Rating Automation
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
Recap and Q & A
9:00 – 9:30 AM
Introduction, Welcome and Review of Objectives
9:30 – 11:00 AM
Credit Process: Challenges and Leading Practices
11:00 – 11:15 AM
Break
11:15 – 1:00 PM
Technology/Data Considerations and Challenges
1:00 – 2:00 PM
Lunch
2:00 – 3:00 PM
Sample Solution and Demo
3:00 – 3:15 PM
Break
3:15 – 4:00 PM
� Case for Change and Program Approach
Day 2Day 1
Case for Change and
Program Approach
Contents
� Case for Change
–Business Case Development
–Roadmap
–Executive Sponsorship
� Implementation Approach
– Program Approach
–Methodology
–Team Composition
Information Required to Calculate Business Case
1. Cycle Time: How long does it take to approve a loan in your current environment?
2. Workflow Steps: How many approvals do you currently require?
3. Volume: How many loans are approved monthly or annually?
4. Deal Loss: Do you have transparency to deals won, deals lost, reason for losing the deal and yield loss for the ratio of wins to losses?
5. Staff Costs: What is the average fully loaded expense of the individuals and in the origination, administration and underwriting process?
6. Full View of Staff Costs: What are the staff levels in the origination, administration and underwriting process? What other areas are involved operations, Systems Resources (Hardware /Software / Staff)?
Business Case Questions
• What could your bank accomplish when your Relationship Management Team has more time for selling and relationship building?
• What is the value of improved quality and consistent application of Credit Policies?
• How will you redeploy resources freed up by the reduction of data entry and reduced paperwork/handling ?
• Will you expand your solution to straight through processing to the Loan Accounting system?
• How will you use the information regarding the reason(s) for losing a deal?
• Will having pipeline information by region, district and industry improve you approval and risk analysis?
Business Case Opportunities
• Staff Redeployment as a result of improved efficiencies:
• Relationship managers are able to spend more time selling or cover an expanded customer base as a result of reduced processing times.
• Credit Administration / Credit Underwriting are available to spend more time with complex approvals and renewals.
• Electronic application of Credit Policies improves compliance while reducing internal review and audit review.
• Provides a foundation for an electronic Credit File and a “single view of the truth”.
A Typical Business Case
$3,000,000/-
5 days25 days
Results of using ALPS
This is what we typically see
today
….resulting in savings of $2,400,000/- each year.
Assumes fully loaded costs of an FTE is $150,000/-
Average time it takes to do a deal reduces
So, the FTE effort required is less
And the cost/year reduces
20 FTEs 4 FTEs
$600,000/-
Sample Roadmap
Phase IIPhase I
� Core functionality
� Retirement of Current applications
� Integrated portal for Commercial lending
� Seamless integration to key systems
� Data Migration from prior systems
� Transactional and Operational Reports
� Add’l functionality
� Data Migration
� Ad-hoc Reporting
� Seamless integration
to:
�Booking
�Rating / Spreading
�Critical Enterprise
Systems
�Moodys MRA, MFA
Release I (6 Months)Release I (6 Months)Release II (3 Months)Release II (3 Months)
Migrate additional LOBs to new Platform
Complete Integration Rollout New Commercial Lending Platform to Core LOB’s
Release III (3 Months)Release III (3 Months)
• BearingPoint proposes a phased deployment with the following objectives:– Deliver value rapidly through manageable releases where the initial
release focuses on overall value to the business
– Reduce overall risk through a proven product solution
Ongoing maintenance, support
Implementing a Commercial Lending Platform
� Involve Stakeholders: Key stakeholders must drive Program decisions and champion the new system -conduct regular, scheduled checkpoints to ensure participation.
� Establish User Group: Foster collaboration by establishing a user group and involving them in key stages – Scope Review, Screen Design, User Acceptance Testing & Change Management
� Align Business Processes: Use the project to align cross-functional business processes across Business Units early on.
� Establish Technology Foundation: Establish the technology foundation and underlying framework initially and add more application components in later releases
� Architect Holistically: Approach the entire Commercial Lending landscape (not only Origination), when creating the Information & Technology architectures.
� Set Manageable Releases: Structure the program as a set of manageable production releases to mitigate risk and to be able to get to deliver business value rapidly
� Start Change Management Early: Plan for aspects of Change Management early on by availing of formal & informal communication, documentation & training
� Manage One Program Plan: Manage all aspects of the program (business, technology, offshore, vendors) through a common Program Plan, Status Review and Issues.
� Create Transparency: Ensure red flags are raised and addressed as they occur.
Our success in implementing commercial lending platforms is based upon a set of best practices based on extensive experience.
Program Approach
1. Fully leverage an market tested solution – re-use business process, delivery artifacts and code to shrink the timeline
2. Deliver business value rapidly through manageable releases – break the program into manageable pieces where the initial release focuses on value to the business
3. Focus initially on the “knowns” – areas of scope requiring more analysis and design are handled in follow up releases
4. Keep the cost reasonable – promote the use of offshore development and testing resources with deep experience
5. Leverage partnerships – ability to provision hardware and test environments rapidly
6. Reduce project overhead – utilizing methodology, run concurrent workstreams where feasible and practical
7. Develop a complete solution – in addition to the software, provide documentation, training, change management support, product maintenance and support
Based on 7 key drivers, BearingPoint recommends a two-phase approach with three production releases over a twelve month period.
Methodology Selection
• Adopt a global methodology that
� provides the framework that enables solution delivery
consistently across a global footprint.
� supports the following elements
� Project Management
� Packaged Application
� Software Development
� Systems Integration
� Testing
� Production Services
� further ensure repeatable quality and mitigate risk
Program Lifecycle Overview A Sample Methodology
Activities:
• Formulate the scope of the project.
• Formulate a plan.
• Prepare the Application Use Cases.
• Synthesize candidate architecture.
• Prepare the project environment.
• Define project stakeholders and change control committee.
Artifacts:
• Defined project scope
• Test Strategy
• Preliminary Project Plan
• AUC Matrix
• Initial AUC Models
• UI Style Guide
• Risk list.
Exit Criteria:
• Approved project scope and acceptance criteria.
• Approved AUC Matrix.
• Approved candidate architecture.
• Approved Test Strategy.
Activities:
• Validate business use cases.
• Define, validate, and baseline the application architecture.
• Unit testing
• Establish the testing environment and execution plan.
• Establish the database environment.
Artifacts:
• Final Application Use Cases.
• Sub-System architecture definition.
• Final System Test Use Cases.
• Logical Data Model.
• Refined construction phase project plan.
Exit Criteria:
• Approved AUCs.
• Approved STUCs.
• Approved LDM.
• Approved sub-system architecture.
Construction
Activities:
• Manage resources and control processes.
• Develop and test components.
Artifacts:
• Final application source code.
• Final Physical Data Model.
• Refined transition phase project plan.
• Deployment Plan.
Exit Criteria:
• Achievement of System Test objectives.
• Agreed upon project scope delivered in source code.
Activities:
• Finalize support and end-user training materials.
• Test the system in a “production-like”environment.
• Refine/Plan system updates based on UAT feedback
• Deploy the major release.
Artifacts:
• Training material and documentation.
• Minor release deployment plan (High-Level).
• Updated technical design artifacts.
• Release the ECM system.
Exit Criteria:
• User Acceptance Test passed.
• End-user training sessions have been completed for initial “pilot” group of users.
• Deployment plan approved.
Inception Elaboration Transition
Strategy Design Build Deploy Operate
Lifecycle Acceleration
Strategy Design Build Deploy Operate
Inception
Elaboration
Construction
Transition
28 Weeks
10 Wks
8 Wks
6 Wks
4 Wks
2 Wks
2 Wks
Sample Team Structure
Commercial LendingLead
Commercial LendingSME
Credit RiskBasel II Advisor
Credit RiskBasel II SME
Business Analyst User ExperienceLead
Business Lead
Junior Developer
Developer
Senior Developer
Technical Lead
DBA StandardsGroup
Database Architect
Environment &Configuration SME
Configuration Lead
Development Manager
Test Analyst User AcceptanceTest Group
Testing Lead
Engagement Manger
EngagementManaging Director
Executive Steering/Change Control
Committee
EngagementExecutive Sponsor
External Resource
Internal Resource
Roles & Responsibilities
Staffing Plan
Role Responsibilities
Engagement Managing Director
• Provide leadership to the project teams• Build and sustain executive commitment and support for the project• Monitor project progress• Escalate issues and decisions to the Steering Committee and assist in resolution• Solution and Industry solution experience
Engagement Manager
• Provide day-to-day program management and leadership• The engagement manager will be responsible for project planning, staffing, work assignments, status meetings, status reports, and client billing. • Maintain overall responsibility for project delivery• Redirect course of action based on changing business context• Measure and monitor progress to validate that high quality project deliverables are completed on time and within budget and meet requirements• Provide process and systems advice to project team• Coordinate BearingPoint team resources and focus, and timely feedback• Manage issue identification and resolution• Support the identification of project risks and create mitigation/resolution strategies• Credit risk and Basel II and lending automation subject matter input
Business Lead • Manage business team activities and report status to PMO.• Facilitates management workshops for each line of business.• Liaison to the testing and business teams.• Participate in quality assurance reviews.• Participates in bi-monthly steering committee meetings.
Roles & Responsibilities
Role Responsibilities
Commercial Lending Lead
• Commercial lending and processes subject matter advisor• Provide input to creation of requirements, designs, testing strategies, and training documentation• Participate in quality assurance reviews• Serves in a QA capacity on business side, reviewing business deliverables and providing insight based on industry and technical experience• Participates in bi-monthly steering committee meetings
Credit Risk/Basel II Advisor
• Credit Risk and Basel II subject matter expert.• Provide input to creation of requirements, designs, testing strategies, and training documentation• Participate in quality assurance reviews• Provide input and review on leading industry practices and approaches to Basel II implementation.
Business Analyst • Document processes, workflows, and requirements in the form of application use cases to facilitate understanding of the intended business functionality of the system.• Create detailed use cases and process flows.• Transmit business requirements to technical team. Work with the Technical Architect to provide overall guidance on an integrated design from a functional perspective, leveraging the capabilities of the application• QA of technical output for consistency with requirements• Provide standards for collecting, analyzing, and documenting business requirements• Coordinate with client training resource on knowledge sharing and Train-the-Trainer
Roles and ResponsibilitiesRole Responsibilities
Development Manager
• Manage the development team through all phases of delivery.• Work closely with project management on integration design items and verify overall design• Conduct quality assurance reviews of team deliverables• Liaison to the testing and business teams.• Participate in quality assurance reviews• Manage technology team activities and report status to PMO• Coordinate knowledge sharing
Technical Lead • Lead application, integration and data design and development efforts.• Own the overall application and subsystem architecture.• Lead technical design and development efforts.• Conduct quality assurance reviews of team deliverables• Identify and resolve issues that impact the integrity of the end-to-end application design.
Senior Developer • Responsible for application design and development deliverables for a set of application use cases within a component stack.• Participate in application use case and test script review sessions.• Perform application configuration and customization using system tools and standard coding languages to support the functional business requirements of interfaces and conversion components• Perform unit testing of configurations and customizations to the system• Support testing activities and correct identified defects
Developer • Perform application configuration and customization using system tools and standard coding languages to support the functional business requirements of interfaces and conversion components• Perform unit testing of configurations and customizations to the system• Support testing activities and correct identified defects
Junior Developer • Perform unit testing of configurations and customizations to the system• Support testing activities and correct identified defects
Roles and Responsibilities
Role Responsibilities
User Experience Designer
• Create the application style guide, defining the overall look and feel of the system.• Lead the wireframe development effort.• Responsible for all UI deliverables.
Database Architect • Participate in integration and data conversion design and development efforts• Identify and resolve issues that impact the integrity of application the end-to-end application design• Support design of integration with existing data sources, migration and cleansing of existing data, and interaction between reporting capability and existing data stores• Build and unit test interface and data conversion applications based on requirements and design• Support testing and correct identified defects
Configuration Manager
• Provide oversight related to version control, development environment setup and maintenance, check-in/check-out procedures, data backup, and verification• Document naming convention standards and change control procedures• Provide documentation for, and oversight of, code migration procedures• Setup code migration tool• Perform code migrations as determined by strategy during development and testing. • Manage system security and entitlements
Testing Lead • Responsible for the Test Strategy• Develop Master Test Plan• Develop System Integration Test (SIT) Plan• Coordinate creation of test scripts and data• Coordinate defect management
Tester • Perform SIT Testing• Maintain testing tools• Work closely with other team members to identify and resolve test defects• Track and manage defects• Assist client in UAT test planning and execution
Day 1 Recap and
Q & A