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Control your risks. See the bigger picture. Solve margin pressure.
Balance Sheet Management Matters
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contents
Innovate to optimize
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Build a strategic balance sheet management system
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Set your bank apart with integrated stress testing
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Put all your risks where you can see them
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Time is up for legacy systems
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Macro-pressures are reshaping the balance sheet
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Banks still face harsh realities
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Insurance Risk Management without Compromise
Embrace the operating model of the future
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Balance sheet management matters
The last decade has been tough for banks, with the COVID-19 pandemic only adding to a litany of existing challenges. Since the global financial crisis, regulation on the banking sector has progressively increased. Expenditure on risk and compliance operations has skyrocketed while return on equity (ROE) has plummeted. At the same time, regulatory capital buffers have reached a new high and are unlikely to be reduced in the prevailing economic environment. Arguably, the financial services industry is far safer than it was in 2008, but conditions continue to seriously erode banks’ profit margins.
banks still face harsh realities
up 130% to >$87 billion since 2012
Spending on risk and compliance
With so much costly, inflexible IT to manage, your on-site infrastructure could be holding you back.
DID YOU KNOW?
Jonathan Silverman Director of insurance solutions, Microsoft
Insurers are recognizing the value of having access to unlimited compute capacity for risk modeling and . . . making substantial cost savings with infrastructure related to the risk modeling workload.
And all the while, you’ll need to keep taking care of both the hardware and the software that it’s running, as well as managing all the operational risk. Plus, while your staff may get to know the system, when they move on they take their expertise with them.
75%
Leaving infrastructure sitting idle for 75 percent of the time and charging you for the privilege.
computing power needed
5x more
Most risk and regulatory calculations happen at peak times, such as quarter and year ends, when systems may need five times more computing power than in quieter periods.
What are the biggest banking challenges?
• 15%
ROE
pre-2008
in 2018
• 5-10%
• 5-6% of capital
since 2008
• up>300%
Regulatory capital buffers
• 12-14% of capital
The last decade has been tough for banks, with the COVID-19 pandemic only adding to a litany of existing challenges Since the global financial crisis, regulation on the banking sector has progressively increased. Expenditure on risk and compliance operations has skyrocketed while return on equity (ROE) has plummeted. At the same time, regulatory capital buffers have reached a new high and are unlikely to be reduced in the prevailing economic environment. Arguably, the financial services industry is far safer than it was in 2008, but conditions continue to seriously erode banks’ profit margins.
94%
With more calculations to make and more detailed reports with shorter timeframes, actuarial models must be both sophisticated and efficient. But as the modeling environment gets more complex ...
Insurance companies are more aware than ever of the wealth of information at their disposal. Their ability to extract value from data using advanced analytics has become critical to competitive advantage. For actuaries, the pressure is on to gain greater insights from big data and rapidly transform modeling results into business intelligence.
models become more costly to build and run
– Cubillas Ding, research director, Celent
How flexible are your balance sheet management ops?
Ultra-low interest rates mean that margins are currently being squeezed from both sides. The prognosis for interest income remains uncertain, as central banks debate whether or not raising rates can help control inflation in post-pandemic recovery. For the banking sector, the central challenge will be to maintain healthy capital ratios without painful deleveraging or having to drain investment budgets. But along with tighter ALM margins and growing regulatory constraints, banks face other issues, including less funding to drive lending growth and more customers switching to instant access savings accounts. It’s time for a new approach to the critical function of balance sheet management.
“Managing the fallout of the pandemic will give financial institutions plenty to do in the coming years as they look to optimize pricing, funding strategies and the management of risk-weighted assets. But first, they require a more flexible technology infrastructure and balance sheet management function.”
The digitization of balance sheet management is well overdue. As banks increasingly use technology to provide a differentiated customer experience, risk and control functions must also up their game to help meet new service expectations and provide a seamless customer journey. Regulation demands digital transformation too. With large banks more likely than ever to receive supervisory visits and attract higher capital costs, there’s an urgent need to streamline regulatory activities. In the age of cloud-based, high-performance computing, digitization has moved beyond creating efficiencies and cutting costs to driving competitive advantage and improving capital management. And, for the balance sheet management function in particular, there’s now little excuse to maintain a fragmented patchwork of legacy systems. Effective balance sheet management is now more crucial than ever. Are you ready to break down the data silos that have held it back for so long?
“Most forward-thinking firms and executives are now exploring what a digital operating model could look like, including for ALM and balance sheet management. How do these functions use technology advancements to become a more useful resource for the broader business?”
Can you afford to stay analogue?
– Joe Sass, SVP, Risk and Performance, FIS
What should your balance sheet management platform cover?
Risk managers don’t like surprises. It’s their job to minimize the shocks and maximize earnings, whatever the markets are up to. But since early 2020, the markets have been anything but predictable which, in turn, has highlighted the problem with having a siloed view of the balance sheet. Historically, banks have calculated different risks in different systems. And, as the 2008 crisis already showed, stapling together disparate results won’t give you a consistent picture of exposure or help you explain the numbers to executives. Only with a single, seamlessly integrated software platform for balance sheet management can you monitor and manage all your key risks in one place – and get a complete, holistic picture of the markets’ impact on your bank.
“On top of interest rate, liquidity and market risk, hedge accounting and IFRS 9 or CECL impairment, a comprehensive solution will cover supporting areas like capital planning, funds transfer pricing, BCBS 239 and regulatory reporting. With the right combination of flexibility and standardization you can not only apply the same modeling muscle to all these functions, but also trace back results to the original data.”
Until recently, demand for a holistic, integrated approach to balance sheet management has been driven largely by regulatory stress tests. But now banks are beginning to see the business value of integration, too. For senior managers, the main new objective has been to more closely align the risk, treasury and finance functions. As well as allowing you to base your calculations and decisions on consistent scenarios, breaking down silos will help reduce inefficiencies and costs, and capture the dependencies between different risk types. To facilitate enterprise-wide risk management and stress testing, you need all your risk areas to share one cash-flow, valuation, stress-testing and projection engine. But you also need flexibility from your balance sheet management software. With highly standardized and easy-to-configure functionality, your different business units can more rapidly meet both external demands like regulatory stress tests and complex, ad-hoc internal reporting requirements. Plus, with formula-driven simulation and forecasting capabilities, you can model even the most complex interdependencies. Ultimately, you’ll have all tools you need for truly strategic balance sheet management. So, you can not only better identify, quantify and monitor risk, but also improve your business model, your margins and your competitive edge.
– Didier Erne, pre-sales consultant, FIS
“You should be able to run any number of ‘what if’ and stress scenario simulations on the balance sheet, while quickly and intuitively shocking and simulating key process drivers such as interest rates, prepayments, spreads, volatilities, any kind of macroeconomic scenario and related dependencies between risk factors.”
Why not ask “what if”?
Why wait to adjust to the new pace of change?
A modular approach If costs are a concern, modular components mean you don’t have to integrate all your balance sheet tasks in one go and can build your new system step by step. Standardized but flexible functionality While different teams need the freedom to run specialized models, standard off-the-shelf components help reduce the risk and costs of implementation projects. Future-proof technology You should be able to rely on timely updates in the event of regulatory change –and continuous development in terms of software, hosting and performance.
“To adapt to the post-pandemic financial environment, you need to stay agile across your risk, treasury, finance and compliance functions. Forecasting in an integrated environment allows you to test business plans holistically and understand complex relationships in a rapidly evolving world.”
For holistic and consistent management of the balance sheet, you need a centralized system with five key characteristics.
Complete data integrity Robust, intelligent data management capabilities are essential for building a golden source of granular data and providing different aggregated views of risk. A strong simulation engine With one engine allowing you to overlay a full range of scenarios, get a common source of cash flows and a single tool for forecasting the entire balance sheet.
By continuing to harness the latest innovative technologies, banks can get an even greater return on their investment in software. Cloud computing allows you to reduce infrastructure costs by up to a third. With potentially unlimited power, cloud environments also bend easily to the demands of hyper-fast computing, so you can run many more models at high speed. With automation, you can put more of your effort into thinking and analyzing rather than clicking buttons and generating reports. In combination with emerging technologies like AI, these innovations will also help solve one of the most complicated problems in balance sheet management – optimization. There are so many different levers you can pull to help maximize earnings, all subject to their own risk limits and restrictions. With AI-powered machine learning, you can more easily identify the scenarios that are most relevant to your balance sheet and drive optimization deeper into your day-to-day risk management practice.
“The number one responsibility of a risk manager is to be imaginative – to grab a pertinent part of the balance sheet, twist it and see what really happens. You need to be able to discover and explore problems before they actually pop up.”
What could advanced analytics tell you?
Let’s solve margin pressure with advanced analytics and award-winning technology
Secure talented staff without having to recruit and retain them in-house. Improve competitive advantage with continually updated technology.
As winner of the Bank ALM Software of the Year category in the 2021 Risk Technology Awards, FIS? Balance Sheet Manager (formerly Ambit Focus) can help you take balance sheet management to the next level. With a centralized, comprehensive system and highly automated processes, see all your risks and opportunities in real time, develop a consistent approach to stress testing and scenario analysis, and drive optimal executive decisions. Plus, minimize cost and effort with managed cloud services and BPaaS. Get in touch to find out more.
With innovative software, you’re already in a strong position to squeeze more from the balance sheet and ease margin pressure. But are you getting the most value from the software itself? A new generation of managed services can help, by not only hosting and running your IT, but also performing day-to-day operational duties on a business process as a service (BPaaS) basis. Now, you can outsource your whole balance sheet management function to an expert technology and service provider and in turn:
Reduce costs by eliminating tasks that don’t differentiate your bank. Gain flexibility with on-demand infrastructure and consumption-based pricing. Stay in control of decisions and the performance of your service provider.
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FIS is a leading provider of technology solutions for merchants, banks and capital markets firms globally. Our more than 55,000 people are dedicated to advancing the way the world pays, banks and invests by applying our scale, deep expertise and data-driven insights. We help our clients use technology in innovative ways to solve business-critical challenges and deliver superior experiences for their customers. Headquartered in Jacksonville, Florida, FIS is a Fortune 500® company and is a member of Standard & Poor’s 500® Index.
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