de-risking financial institutions in ‘the new beginning’ · 2020. 9. 6. · de-risking...
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De-Risking Financial Institutions In ‘The New Beginning’
by Vijayaraghavan Venkataraman,Global Head, BFSI Risk Management & Regulatory Compliance, CRO Initiative, TCS;
Ramesh Iyer,Partner, BFSI Europe, Risk Management & Regulatory Compliance, CRO Initiative, TCS and
Raghunandan M,Global GTM & Solutions, Risk Management & Regulatory Compliance, CRO Initiative, TCS
Background and key dimensions of pandemic impact
After the 2008 recession, financial institutions (FIs) & central banks
have been continuously building resilience against market shocks
to avoid resorting to public funded bail outs. Capital & liquidity
buffers have been maintained at a healthy level through the past
decade, that can now be used to mitigate the financial crisis
triggered by the current pandemic.
Moreover, in responding to the pandemic, global regulators have
come out with similar responses, by encouraging FIs to support
customers in surviving this crisis and gradually land on their feet.
To this purpose, many non-critical regulatory deadlines have been
postponed in order to reduce the operational burden to some
extent. In brief, the guidance has been:
An increased focus on protecting consumers and market integrity
in the short term, and remaining vigilant against financial crime
Continuation of liquidity injection into the markets to avoid any
ripple effect resulting into a systemic breakdown
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The present crisis has an impact on various dimensions of business
operations. These repercussions fall under four main buckets – Financial,
Operational, Customer and Regulatory – that can ultimately lead to
business disruption (see Figure 1).
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CRO / CCO response to pandemic impact to date
The impact of COVID-19 has dealt a dual blow creating supply chain
disruption and demand-side slowdown. The chief risk & compliance
officer (CRO/CCO) division plays a key role in the mitigation of rapidly
emerging risks and to lead recovery efforts into the new beginning. Two
primary focus areas are driving these efforts: client centricity and
operational resilience.
Disruption To Business Continuity
Stress On Capital Adequacy due to operational losses & reduced profitability
Increased NPLs
Impact on Revenue due to deferred payments, reduction in interest rates, waiving off late fees etc..
Expectation is to Keep providing financial support to hardest hit viable clients
Eased capital, liquidity constraints & stimulus package(s), to increase the ability of banks to
lend and absorb losses in this challenging environment
Compliances to Conduct, and FCRM normsTo continue to deliver customer outcome during stress scenarios
Deal with client challenges by delivering out of the box services & incentives
Increased Stress on continuity of services
Increased effort on external & internal Communication
Increased Cyber, Fraud & Money Laundering Risk
Unplanned Outages & stress on IT / Infrastructure & Inventories
Adverse Impact on Resource availability & Overall employee well being
Stress On Liquidity
FI (Bank)
Fina
ncial Operational
Custom
er
Regulatory
Figure 1: Dimensions of pandemic impact
Moreover, the risk & compliance leadership is using pandemic impact
(e.g. changed working practices), as a strong driver to accelerate their
digital adoption roadmap. The upcoming two quarters will prove
critical in determining the future course of the financial organization
and industry.
Operational resilience and customer centricity will become the overarching theme for CROs to deliver
confidence and continuity of services
Indicative regulatory focus
We are witnessing a two-way push across the regulatory spectrum, with
the focus increasing in some areas and easing out in others. Broad
categories across global regulators include:
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Efflux of Remote operations & change in operating model to ensure client safety and continuity of services
Focused analytics to sustain surge in call demand and agent supply, along with dedicated helplines and personalized services
Creative customer engagement & communication mechanisms
Minimize customer Complaints and drive positive conduct outcomes
Deal with client challenges by delivering out of the box services & customer centric risk management
EWI’s to effectively assess sectorial risks and drive mitigation
Identifying critical processes, staff and infrastructure to prioritize mitigation and deliver remote services
Re-calibration of financial risk models & streamlining model risk management frameworks
Deliver Capital optimization
Improvement in controls effectiveness across the enterprise with special focus on fin crime
Execute BCP & DR plans
Re-prioritize and right-size book of work
Client Centricity Operational Resilience
Focu
s A
rea
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Outcomes map in the New Beginning
With the rapid evolution of financial ecosystems, the risk and compliance
function is also constantly growing in coverage as the result of newer risk
types into the governance, risk and compliance (GRC) spectrum. The
pandemic has accelerated this change, and encouraged CROs to reassess
& reimagine their core capabilities and the corresponding expansion
possibilities in delivering incremental value, positioning CROs/CCOs as
potent catalysts in optimizing risk-return profiles
Furthermore, there is also an active focus on proactively developing
transformational capabilities toward delivering a competitive advantage
for the organization. The segregation of outcomes across core, adjacent
and transformational themes can be seen in Figure 2.
Enhanced reporting requirements for liquidity globally
UK & EU regulators have emphasized on, fair & flexible treatment of customers and transparency in communication
AFM (Dutch) calls for extra attention to diligent customer care in product development and evaluation
Restrictions on short selling in EU
European Insurance and Occupational Pension Authority (EIOPA) stated insurance companies should preserve their solvency capital positions
Reduction of the countercyclical buffer (CCyB) rate to 0% of banks’ exposures to UK & EU borrowers. Supplementary leverage ratio relaxed in US.
The PRA clarified on VAR backtesting breaches that have arisen as a result of market volatility. Firms will be allowed to offset increases due to new exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements. The approach will be reviewed after 6 months
Clarification on treatment of forbearance under IFRS 9 & CECL, and flexibility on classification of loans
Monitoring guidance on WFH arrangements, online data & services access to customers and employees globally
ESMA clarifies on MiFID II requirements of call recording and communication surveillance, to mitigate conduct risk due to increased remote working, & EBA emphasizes focus on financial crime mitigation
Monetary Authority of Singapore (MAS) has reminded financial institutions to adopt BCPs and appropriate control measures to guard against cyber threats
AUSTRAC & US Fed Issues new scenarios for financial crime risk monitoring during pandemic scenarios
Annual stress test – UK & EU have cancelled their annual stress tests but US hasn’t
BSBS postponed implementation of Basel 3.1 to 2023
EC (European Commission) postpones leverage ratio GSIB buffer
Australia Prudential Regulatory Authority (APRA) has suspended majority of its 2020 policy and supervision priorities in order to free up capacity
Increased Supervisory Push on Market Integrity & Consumer protection Relaxation Of Capital & Liquidity buffers
Increased Supervisory focus on Operational Resilience & Financial Crime
Relaxation on non critical regulatory submissions
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Role of emerging AI and ML technologies to re-imagine use cases
In a recent survey report conducted by TCS and Chartis across 166
relevant risk business & technology leaders, covering retail and
commercial banks, capital markets institutions, and insurance and wealth
management firms, we discussed the maturity of AI in their institutions,
and the potential for further uplifting these capabilities to deliver specific
outcomes. The next few sections list some of our key findings.
In enterprise resource management (ERM) the use of artificial
intelligence (AI) techniques is focused on non-regulated use cases, such as
the generation of early warning signs, and the analysis of what-if scenarios
instead of regulatory reporting projects. A representative of a large
universal bank proposed leveraging AI capabilities to construct a varied
and expansive stress and scenarios library. The bank could then scan tens
of thousands of benchmark results, and millions of market data points, to
pinpoint potential areas of concern.
How to Win
Wh
ere
to p
lay
Client & workforce safety Reputation management
Technology effectiveness
BCP & DR
Remote operations Capital & liquidity management
Cognitive fin crime & cyber management
Cognitive controls diagnosis and recommendations
Refine policies and procedures to reflect new normal & enable growth
Modelling emerging risks, revenue and cost scenarios
Fulfil capacity gaps and activate alternate channels to expand customer service
Increase digitization in credit risk, stress testing, operational risk andcompliance
Deliver ecosystem enabled competitive edge
Stress Testing As A Service Quantification frameworks for emerging risk
Proactively manage reputation risk factors
Optimization of omnichannel performance for growth
Behavioral analytics for conduct risk EWIs & strengthening risk culture
Monetizing risk data for insights & services
Cognitive risk intelligence to sense and identify future risk scenarios
User journey-driven risk management
Renewed rigor in cost optimization
Leverage emerging digital design patterns to drive growth
Cognitive regulatory compliance, impact assessment & reporting
Expanding capability into new horizons
Developing breakthroughsAdjacent Transformational
Optimizing existing business mandatesCore
Figure 2: Outcomes map across core, adjacent & transformational categories
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In regulatory reporting, AI has been used in managing and validating
data, validating results against predetermined criteria and monitoring
overall compliance. Representatives from several large banks explained
that they are now running elaborate data management and validation
programs using strong machine learning (ML) and related analytical
frameworks.
In financial crime risk management (FCRM), respondents see the
greatest benefits in anti-fraud, anti-money laundering (AML) and
cybersecurity applications, with KYC an area of growing interest. Client
screening using external risk factors and alert prioritization frameworks
for sanctions screening and transaction monitoring are providing greater
resiliency in the management of financial crime signals.
0 10 20 30 40 50 60
Others
Don't know /Prefer Not to Say
None of the above
Analytical Calculations
Compliance Monitoring
Data Validation
Data Preparatio/Mapping
Regulatory impact Management
Mapping Rules & Requirements to Business Process
0 10 20 30 40 50
OtherDon't Know/Perfer Not to Say
Not Generally ApplicableP & L Analytics
Reporting & VisualizationData Quality
Risk AggregationsCorporate Bond valuation
Portfolio StructureStatistical Calculations - Market Risk
Early Warning CapablitiesDefault Risk Calculations
Stress Testing
Source: Chartis & TCS research
Greatest perceived benefits for institutions in implementing AI tools for risk management, by area of enterprise risk management (%), n=101
12.9%
4.0%
5.0%
2.0%
4.0%
40.6%
7.9%
8.9%
3.0%
5.9%
0.0%4.0%
2.0%
30.7%
30.7%
31.7%
54.5%
35.6%
33.7%
3.0%
5.0%
1.0%
Source: Chartis & TCS research
Greatest perceived role for AI, by place in the regulatory chain (%), n=101, with 228 responses
0 5 10 15 20 25 30
Other
Don't know / Prefer Not to Say
None of the Above / Note Generally Applicable
KYC / Due Dillgence
Watchlist / Sancitions Monitoring
Communication Servelliance
Trade Survelliance
Anti-Money Launching
Anti Fraud
Cybersecurity /Cyber Risk Management
0 5 10 15 20 25 30
Other
Don't Know / Prefer Not to Say
None of the Above
Conduct Risk
IT Risk
Security / Cybersecurity Risk
Internal Audit
Third-Party Vendor Risk Management
Model Risk Management & Governance
Operational Risk
GRC
23.8%
23.8%
5.9%
4.0%
26.7%
5.9%
3.0%
0.0%
6.9%
0.0%
23.8%
20.8%
13.9%
11.9%
26.7%
25.7%
17.8%
15.8%
27.7%
12.9%
4.0%
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In operational risk, quantifying has traditionally been extremely
challenging. Standard statistical models have struggled with the
relative paucity of data and lack of deep statistical processes. However,
in our discussions with banks and other FIs, three key trends stood out:
Widespread digitalization has effectively solved the data paucity
problem
External and internal networks can now be monitored in much
greater detail
There are broad uses for AI in non-financial and operational risk
management contexts, although one quarter of respondents are
not engaged.
Source: Chartis & TCS research
Source: Chartis & TCS research
Usage of AI tools, by area of the non-financial and operational risk management (%), n=101 with 200
Greatest perceived benefits from implementing AI tools for risk management by area of financial crime risk management (%), n=101
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CROs’ evolving influence in a client-centric ecosystem to deliver growth and transformation
CROs are gradually moving toward a user journey-driven operational
model that’s focused upon client centricity. Initiatives like improvement of
customer data view, including hardships and dispute analytics, enable
insights for a more informed and empathetic decision making by the
frontline. This model also requires reimagination of business services and
processes to improve throughput and risk management efficiency.
Moreover, in the time of crisis, strengthening workforce availability and
effectiveness in forbearance, and restructuring cases and guidance on
alternate products is imperative to expand operational capacity and
ensure business continuity. CROs are looking at strengthening risk &
compliance capabilities to deliver insights and value-added services, like
ratings and hedging advisory for SME clients, and defensive measures like
improving customer data protection against cyber-attacks and financial
crime, to create competitive advantage in the marketplace.
These factors, coupled with an expanding profile of a CRO, necessitate a
larger ecosystem to mitigate the expanding risk profile of financial
institutions. Figure 3 shows different enablers participating together in
a conducive ecosystem:
Accountability of Prudent Risk Management at the board level
Shared Utilities & Services across FIs
Cross Industry Data Sets for Fin
Crime Mitigation
Customer at the centre of Investments
FinTech’s
Alt Data Sources
IT Services
Academics, Analysts &
Think Tanks Regulatory Convergence
Personalized Services
ReputationManagement
Digital Enterprise
Artificial Intelligence
Agile
Cyber, Data & Analytics
IOT
Blockchain
RPA
Cloud
RelationshipFocus
CROs Sphere Of Influence to
Differentiate & Deliver
Expanding CROs role in delivering competitive advantage by Monetizing Risk Data / Insights, &
enabling business decisions
Drive Continuous Cost Reduction via digitization of core & extended functions
Deliver Forward Looking Operational Resilience
Protect the organization by proactively managing reputation risk
Drive a risk culture of promoting value creation in close partnership with business
Figure 3: Risk ecosystem view
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Horizon for CRO initiatives (6 to 8 quarters)
We are witnessing a sudden surge in risk clusters and their interplay,
which has never been observed before in recent history. While we have
had pandemics in the past, the potential impact of a pandemic has
increased exponentially, due to the sheer size of today’s global banking
system, and an ever increasing reliance on the infrastructure to conduct
day-to-day transactions. In such an environment, prioritizing remediation
initiatives is proving very challenging for CROs. Figure 4 visually
represents this horizon of prioritized initiatives.
In summary, the pandemic presents unique challenges and opportunities
for the FIs in adapting to a new normal of delivering business continuity
in a remote operation’s dominant setup. Risk & compliance organizations
have so far responded well, in delivering client centricity and operational
resilience, wherein FIs are going above and beyond their traditional
mandates, with value-added services for customers while continuously
adopting newer design patterns. Capability uplifts in areas like conduct
risk mitigation, reputational risk management & early warnings for
shifting left, are emerging as priorities, with a customer centric use
journey approach, to deliver client protection and enablement.
_____________________________________________________________iTCS, “The State of AI in Risk Management: Developing an AI roadmap for risk and compli-ance in the finance industry,” 2019, https://www.tcs.com/content/dam/tcs/pdf/Indus-tries/Banking%20and%20Financial%20Services/State-of-AI-in-Risk-Management.pdf
Mitigate Prepare for the new normal
Stra
teg
icO
per
atio
nal
Now 3 months
Recalibrate mitigation plans, Ensure proactive communication of sameDesign proactive and configurable reports
Digitize Compliance Activities Ensure Data readiness for regulatory reporting
Identify new risks, Update Risk Appetite Statements
Improve Controls diagnosis, effectiveness & Indexing
Re-Imagine Credit - rating models & approval
RWA Optimization
Improve AML effectiveness & Anti-Fraud Capability
Embed BCP/DR into GRC
Re-Calibrate Scenarios & Models across risk typesContinue Improving on Climate risk quantification & mitigation
Real time Credit Monitoring
Cyber Risk Quantification (CRQ) & Digital Forensics
Track data, collate and classify gaps across key risk types
Behavioral Analytics for proactive mitigation of operational risk
AR / VR adoption for compliance & customer experience
12 months 24 months
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