How is balance sheet management evolving and what market challenges does the discipline face?
question 1
Today’s banks are under more pressure than ever to streamline their operations and optimize their costs. As a result, our clients are moving away from their traditionally siloed systems and processes to a more consolidated and integrated approach
to balance sheet management.
With a complex range of risks and regulations to navigate,
you also expect balance sheet management systems to do
more than they have in the past.
Mark Neukomm:
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That means going beyond core asset liability management (ALM) to support a greater range of funding and hedging decisions throughout your different functional areas – from treasury, risk and finance to compliance and the front office.
Calculations must now be run more frequently, too: daily or even intraday rather than quarterly or monthly.
Your risk management solution should give you a holistic toolset to manage ever-growing market and regulatory pressure. What could you achieve if yours did?
FIS® risk and performance experts Anna Bielenka, Mark Neukomm and Aaron Sänger explain how an integrated platform for balance sheet management can help you optimize your risk/return profile – and which capabilities are critical to its success.
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And through automation, software also delivers the speed, power and scalability that you need to process higher volumes of complex calculations at peak times, whether overnight, at the end of the month or at the end of the quarter.
Balance sheet management software can help treasury, risk, finance and other teams break down their silos and measure, manage and report on risk consistently.
With a 360°, enterprise-wide view of key metrics, modern solutions allow you to align your data, modeling, calculations, scenarios and reports across different departments and business lines.
Anna Bielenka:
That’s a lot to handle. How can a software solution for balance sheet management help?
question 2
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You need the ability to load data into your software only once and then carry out any transformations, aggregations, testing and analysis in the same data layer, with complete visibility and auditability of intermediate results.
Some of our larger clients are already applying these practices; others have implementation projects underway. One of the main challenges they’ve faced along the way is a reliance on IT teams to transform, enrich and correct their data for balance sheet management analysis and reporting.
The answer has been to give business teams more control over the data, with flexible, user friendly tools that allow you to quickly view and transform golden source data sets without specialist technical expertise. With no need to wait days or months for IT resources, you can prepare all the data you require for routine calculations or ad-hoc analysis in hours or minutes – and all from the same underlying data set.
Internally, you’re grappling with higher volumes of data and relying more on granular data analysis and modeling to shape strategic decisions. But to meet the data requirements of different departments, you must do a lot of work on your raw data – correcting missing fields, enriching data sets with additional or derived attributes, or transforming them for specific calculations or reports.
Externally, there is regulatory pressure to track data lineage. Specifically, the BCBS 239 guidelines on risk data aggregation and reporting require you to prove that you base all balance sheet management calculations on the same input data and can readily trace back or recalculate the results.
For regulators, spreadsheets are no longer an adequate tool for this purpose, as it is too easy to manipulate spreadsheet data and results. You’re now looking to provide both a single source of truth for your data and a complete audit trail of any changes to numbers and models.
Mark Neukomm:
You mention data. Why is the financial services sector paying so much attention to data management now – and what are the implications for balance sheet management?
question 4
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In turn, a single platform allows you to integrate a wide range
of balance sheet management processes, including for ALM
and interest rate risk in the banking book (IRRBB), funds transfer pricing (FTP), liquidity management and stress testing, regulatory reporting, IFRS 9 impairment, hedge accounting, stochastic modeling, market risk management and capital planning. That makes it easier to consistently simulate the balance sheet into the future and optimize your risk/return profile.
Plus, with common data, coherent models and comprehensive results for risk, treasury, finance and other departments, you’re
in a stronger position to support business decision making and reduce total cost of ownership.
We’ve noticed a lot more appetite for integrated solutions, and there are very good reasons for that.
First, a single, integrated platform for balance sheet management is key to achieving the cross-functional consistency and alignment we’ve just talked about.
When different functions share the same cash flow, calculation, valuation and simulation engines, you can
not only get consistent calculated results and compare the outputs but also model the interdependencies between different risk areas. This is crucial for global, enterprise-
wide risk management and stress testing.
Aaron Sänger:
So, what type of software is better –
an integrated platform or a point solution?
question 3
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Ultimately, the bank as a whole should be working from the same simulations and results. But with flexible software, it can also handle different views of those results.
For example, a prepayment model could be used across all key metrics and scenarios to forecast everything from cash flows to net interest income and liquidity ratios. Meanwhile, the various recipients of these calculations can make their own overlays or area-specific adjustments, such as for liquidity-specific stress tests or balance sheet optimization.
It depends on the balance sheet management system you’re using – and whether it can offer the right balance of flexibility and standardization.
On one hand, you need flexible tools to help you manage multiple complex model types and redefine mathematical formulae according to their analytical needs. On the other, the modeling framework must be standardized enough to streamline risk management processes and make it simple to not only set up different models but also share the results.
Anna Bielenka:
If several departments are using a single data set, how can treasury, risk, finance and so on still meet their very different modeling requirements?
question 5
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As well as making hedging and funding recommendations, the latest balance sheet management systems incorporate FTP tools to help you analyze and optimize your profitability.
FTP enables you to separate the effects of interest rate risk from the performance of your business units, so you can really understand what’s affecting your earnings. By isolating the main sources of your margins and the components of net interest income, you can establish a comparable and transparent performance measurement system within the bank, effectively assess levels of profitability across products and business units, and create the right incentives for profit centers.
Yes. As we said before, banks are looking to their balance sheet management systems to support a broader spectrum of business decisions beyond ALM – on investments, funding, hedging and other optimization strategies.
Previously, the processes involved in optimization would
have taken a great deal of manual effort. But now it’s perfectly possible to automate the calculation of required funding or investment under multiple business rules and constraints.
Aaron Sänger:
Optimization isn’t what you’d call a core ALM activity. Is this really something a modern balance sheet management system can support?
question 6
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The same principles apply if you need to rapidly set up an ad-hoc calculation, such as to meet an urgent request for management information. Here, dynamic scaling will allow you to temporarily reallocate power from running a routine calculation to support your higher-priority task.
The better a solution can scale dynamically throughout a process, the greater the benefit in the cloud. And with cloud environments providing ever-increasing capacity for big data and powerful analytics, even computation-heavy processes can only get faster.
No, not when your underlying technology is
sufficiently scalable.
Even if you’re running a stress test with several scenarios or generating end-of-month reports, a high-performance system will be able to scale dynamically to manage the increased calculation loads. That means automatically drawing on additional computing resources to finish the calculations in time.
Mark Neukomm:
That’s great. But all of these dynamic simulations are computation-heavy processes.
Will it take long to generate the results?
question 7
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And through automation, software also delivers the speed, power and scalability that you need to process higher volumes of complex calculations at peak times, whether overnight, at the end of the month or at the end of the quarter.
Make sure that the technology comes backed by a team of experts, who can bring functional and technical knowledge and proven practices to your implementation. Experience will speak for itself, so you’ll want to see a strong track record of successful deliveries and satisfied clients.
To future-proof your bank against further regulatory and market requirements, it also makes sense to engage an established technology provider with a steady stream of investment, a well-served and close-knit community of users, and a clear roadmap for its solution.
Anna Bielenka:
I’m sold in theory, but I’ve heard that implementing or modifying a system takes time and effort. What’s the best way to minimize implementation risk?
question 8
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In this case, as well as hosting your solution in the cloud, the technology provider will maintain the software and cloud environment as a single service, deliver round-the-clock support, and enable faster calculations with pay-per-use computing power and a highly scalable platform.
With additional services available for managed upgrades, testing and data transformation, you can further simplify your operations or even hand over the performance of routine tasks to a business process as a service (BPaaS) offering. By simply moving your system to a cloud service, you can save up to 30% of your usual IT costs for balance sheet management.
By choosing this kind of integrated, standardized and user friendly toolset, you’ll quickly lower the cost of ownership with streamlined, consistent balance sheet management operations, save time and effort on installation and setup, and find it easier to carry out daily tasks such as setting up new scenarios and training new staff. So, the solution alone will help optimize your costs.
The even better news is that you can make further cost savings by outsourcing the running of your system to a managed cloud service.
Aaron Sänger:
Last but not least, what about the costs?
You said that banks are looking for cost optimization – how can technology save us money?
question 9
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