Wolters Kluwer Financial Services will be supporting the 3rd Annual Stress Testing Europe 2015 in London this September 29-30, 2015. Ahead of the Congress CFP spoke to Ioannis Akkizidis, Global Product Manager Risk at Wolters Kluwer Financial Services on aligning risk, treasury and finance departments for better interpretation and regulatory oversight of stress testing.
Q1) Ioannis, please tell us a little bit about yourself and your background, as well as the types of financial organisations that are your clients?
As Global Product Manager for OneSumX Financial Risk Management at Wolters Kluwer Financial Services, based in Zurich, Switzerland, I work closely with our Market Management and Product Development experts to offer our clients leading financial risk solutions and services that meet the regulatory and business demands of today and tomorrow.
Wolters Kluwer Financial Services is a leading worldwide provider of comprehensive compliance, risk management and audit solutions for the financial services industry. We effectively help financial firms manage risk, finance and compliance, helping them grow profitably by providing them software, expertise and services which help them make critical business decisions.
Working in an environment where market expertise and innovation are a must, I have authored several financial books including “Unified Financial Analysis, the missing links of finance”, “Integrating Market, Credit and Operational Risk”, and the forthcoming “Marketplace Lending, Financial Analysis, and the Future of Credit: Integration, Profitability, and Risk Management. Next to my position at Wolters Kluwer Financial Services, I am also a visiting professor at the Universität Zürich and the ETH Zürich.
Q2) What do you see as the key obstacles to the alignment of the Risk, Treasury, and Finance departments?
Among their duties, finance departments are focused on maximising profit and minimising losses; thus they must be able to understand and optimise the risks they are exposed to.
Risk departments, meanwhile, identify and measure the risk value and liquidity of existing and new credit portfolios, considering the evolution of integrated reference risk factors. Risk departments also define economic and regulatory capital against losses.
Treasury departments consider adjustments, over time, in portfolios’ value and liquidity, via XVA analysis, by understanding the evolution of risk factors. They are then able to hedge the current and future positions, absorb and mitigate losses, ensure capital adequacy, managing liquidity.
The complementary role of the three departments is to share common information, ensuring consistency in analysis, results and reporting.
Firms should be encouraged to standardise data definitions, employing unified analysis and reporting.
Q3) At Stress Testing Europe 2015 we will be discussing the alignment of Risk, Treasury and Finance departments for better interpretation and regulatory oversight of stress testing. What do you believe are the key benefits of aligning these departments?
As I mentioned, Risk, Treasury and Finance departments have complementary roles. By aligning these roles institutions, markets and regulators will benefit from the following:
• Alignment of the business evolution with the evolution of financial risks where credit portfolios are exposed
• Understanding all underlying risk factors across different accounts and portfolios, performing consistent stress testing
• Maximising profit by optimising the exposures to financial risks
• Adjusting expected returns (profits) by measuring and considering the economic capital under both normal and stress conditions
• Minimising regulatory capital by optimising exposures to financial risks under real world probabilities
• Consistently adjusting the value and liquidity of credit portfolios by applying XVA analysis
• Absorbing and mitigating losses based on the current and future business evolution under stress financial risk conditions
• Providing consistent analysis and results, including stress testing, and thus increasing market and regulatory confidence and solvency
Q4) What are the main challenges faced with implementing and using consistent models across multiple silos?
The main challenges all refer to data and calculations. The usage and the sharing, across the organisation, of the same unified information data for all model parameters e.g., referring to counterparty credit risk factors (Ratings, PDs, Spreads), is a big challenge.
Data aggregation may also result in modification or loss of information, while data aggregation is used as input in the models as well as for providing the reports from the model result sets.
The biggest challenges refer to inconsistencies, such as inconsistency in model algorithms as every model (e.g. from estimating NPV to VaR) has its own unique way for handling its parameters; e.g., interpolation, scenario generation, day count methods, etc. This explains why the results from the calculations are in many cases inconsistent. Other inconsistencies will occur in viewing and reporting the result sets and in applying stress scenarios.
Q5) How do you overcome the challenge with understanding the behaviour of variables whilst having a lack of experience with stress episodes?
This can be achieved by having a unique calculation engine that considers and handles all variables, in a unified manner, will provide a systematic way for employing and comparing consistently any kind of stress scenario. Different deterministic or stochastic scenarios will provide outcomes that can be shared and used, across the institution, which will evaluate the real world probabilities applied in underlining risk factors. In addition, there will be a need for a unified reporting system that contains all behaviours of different variables.
Q6) How do you see the role of the stress testing professionals changing over the next 6-12 months?
More integration will be needed first of all – at least in regards to systems and methods and approaches e.g., XVAs – within finance and treasury departments. There is also an evolution going towards unified stress testing (involving also other professionals and departments) across the organization. Professionals employing stress testing will become more involved in profitability analysis i.e., managing risk for increasing profitability and robustness of the financial system. Moreover, they will receive a better understanding of financial technology and the opportunities that may bring to banking industry. And finally, I also see a change to more direct and simpler communication to both markets and regulators.
Hear more from Wolters Kluwer Financial Services and over 20 senior stress testing professionals at CFP’s Stress Testing Europe 2015
