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Counterparty credit risk: Advanced data analytics and reporting

Banks can improve their ability to make prudent business decision by employing counterparty credit risk (CCR) capabilities.

Overview

One of the fundamental lessons shared by banks following the recent financial crisis is the importance of robust counterparty credit risk (CCR) management. During the crisis, inadequate CCR capabilities hindered banks’ ability to respond to the rapid changing market environment and exacerbated systemic risks across the financial industry. In addition, banks were challenged by the limitation of data availability and analytics tools, which obscured early warning signs of the crisis and resulted in losses from indirect exposures that were neither well-managed nor well-understood.

To help improve banks’ ability to make prudent business decisions under both normal and stressed market conditions, banks need access to accurate CCR exposure data and comprehensive CCR reporting practices. 

Moreover, as regulatory expectation around counterparty exposure limits control and capital reserves increases, banks that want to remain relevant within a changing regulatory environment need to be particularly aware of the current state of their CCR analytics.

Banks that have developed industry-leading CCR analytics capabilities have typically approached the challenge in a strategic way, addressing the capability from multiple angles. Many high-performance banks, driven by a need to monitor counterparties in various industries, use a range of products in different geographies to focus on coverage and ensure that exposures are both well-managed and well-understood.

Background

One of the fundamental lessons shared by banks following the recent financial crisis is the importance of robust counterparty credit risk (CCR) management. During the crisis, inadequate CCR capabilities hindered banks’ ability to respond to the rapid changing market environment and exacerbated systemic risks across the financial industry. In addition, banks were challenged by the limitation of data availability and analytics tools, which obscured early warning signs of the crisis and resulted in losses from indirect exposures that were neither well-managed nor well-understood.

Since the crisis, banks and regulators have placed significant focus on improving the identification, measurement and management of CCR. While banks have been identifying deficiencies in their current CCR capabilities, regulators have also placed emphasis on improving such capabilities. As the global standard-setter for the prudential regulation of banks, the Basel Committee on Banking Supervision (“Basel Committee”) has introduced a series of new and revised methodologies to standardize how banks measure and report their CCR exposures in recent years. Many banks are gradually adapting to new regulatory standards, not only to assess emerging risks and prevent future loss events, but also as a way to better manage risk-weighted assets (RWAs) and optimize capital.

Analysis

To help improve banks’ ability to make prudent business decisions under both normal and stressed market conditions, banks need access to accurate CCR exposure data and comprehensive CCR reporting practices with respect to the complexity of their operations. Accurate and complete risk data can provide increased visibility to counterparties’ overall health, allowing the banks’ management to make better strategic planning and resource allocation decisions.

In addition, as regulatory expectation around counterparty exposure limits control and capital reserves increases, many large banks are moving to more active CCR management models that resemble market risk management models in terms of methodology and complexity. To remain relevant within a changing regulatory environment, banks may want to assess the current state of their CCR analytics capabilities and determine a feasible target state, given regulatory expectations around risk data aggregation and risk reporting.

Recommendations

Reporting tools for CCR exposure should be flexible to help produce different types of reports from various data sets, depending on the business uses of reports.

Most high-performance banks perform historical data trending to establish benchmarks and what can be considered business as usual. However, to conduct investigations into more subtle data movements, drill-down capabilities may be needed. Drill-down capabilities allow a more granular view of a specific set of the data and can help investigate and resolve the causes of unusual movements.

Additionally, data analytics can be performed around project releases affecting CCR exposure and capital numbers. These releases typically occur twice per project:

  • Pre-release impact analyses can be used to anticipate changes in data due to fixes and releases when projects hit the production environment. Separate releases are often tested in separate environments to eliminate noise and conflated results. End-to-end testing may also be performed in a separate environment if multiple releases will be in production at the same time, to understand and anticipate noise and deliver a final set of results.

  • Post-release impact analyses can be used to confirm that actual changes in data during the production phase are consistent with what was anticipated in pre-release impact analyses. Project releases in this case may require heavy credit risk technology support and involvement by quantitative analysts and modelers to analyze testing results and provide sign-off before the release of the projects into production.

Authors

Chris Thompson
Chris is a managing director, Accenture Finance & Risk Services, Capital Markets lead. Based in New York, Chris is specializing in complex, large-scale finance and risk programs. He works with some of the world’s leading retail, commercial and investment banks. Chris brings his nearly 20 years of broad-based experience in financial architecture, risk management, performance management and trading to organizations determined to become high-performance businesses.

Amit Gupta
Amit is a managing director, Accenture Finance & Risk Services. Based in India, Amit has over 15 years of risk consulting and capital markets industry experience delivering strategic solutions in a wide variety of client situations. He has extensive experience in assessing market risk and credit risk capabilities and helping clients enhance their risk governance, risk processes, analytics and implementing risk systems. Amit helps clients in their efforts to increase their organizational focus on proactive risk measures and to better leverage their enterprise risk management capabilities.

Jeff Jamison
Jeff is a senior manager, Accenture Finance & Risk Services. Based in Philadelphia, Jeff has over 10 years of consulting and industry experience in the financial services and the risk management space with clients across North America. His extensive experience leading strategic assessments of risk management functions, enhancing credit risk and compliance capabilities, defining business architecture and operating model strategy, and improving risk controls, reporting and governance helps executives and their firms become high-performance businesses.

Harpreet Behl
Harpreet is a senior manager, Accenture Finance & Risk Services, based in San Francisco. Harpreet has over 10 year of consulting experience in capital markets and risk management with clients across North America. He has extensive experience in assessing market risk and credit risk capabilities, enhancing risk governance frameworks, defining risk processes and implementing regulatory requirements imposed by the Basel Accord.

Industry & topics highlighted

Financial Services