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Case Studies

Case Study

IRRBB Methodological support and strengthen the operational process efficiency

FOCUS ON: Case studies,
THE CLIENT

The client is a subsidiary of one of the largest European Global Systemically Important Banks (GSIB) with banking activities, treasury and trading.

THE CONTEXT

The client was looking to improve its IRRBB measurement framework to better integrate it in its ALM strategy. On top of this, an ECB on-site inspection focusing on IRRRB framework has been conducted at the Group level leading to a set of areas of improvement on the methodology used for computing IRRBB metrics and its operational processes.

THE CHALLENGE

Avantage Reply has been requested to provide subject matter expert support to design and implement IRRBB metrics. Facing key areas of improvements in terms of IRRBB measurement, there were several challenges with different layers like risk identification, risk quantification, methodology implementation, data availability, information system dependence for the risk department impacted by this activity.

APPROACH AND SOLUTION

The mission started by conducting an in-depth analysis at both local level and group level for governance, policies, procedures and operations required to be implemented for all local levels within the Group. A four step, top-down approach was applied:

1. Set properly target required by the Group;

2. Highlight current state’s findings;

3. Point out gaps between targets and findings;

4. Analyze gaps with several actions to perform in order to set a general roadmap with a global action plan.

Due to the specific context, each step was performed around different axes of analysis: 1 – Risk perimeter; 2 – Activities perimeter in terms of Group Treasury (GT) monitoring; 3 – Methodology review; 4 – Operational process review; and 5 – Information systems and data.

A short term tactical solution was adopted for Group Treasury (GT) reporting & analysis to strengthen the existing reporting process by capitalizing on the Group expertise via Murex development. Long term strategical solutions were adopted to review structural issues related to the balance sheet’s assets modeling for all business lines outside of Group Treasury.

RESULTS AND BENEFITS

The completion of the project allowed the local entities to comply with the Group’s minimum standards and methodological requirements. This will improve 1 - IRRBB metrics measurement; 2 - efficiency in the reporting process and 3 - the risk analysis and its understanding in the evolution of IRRBB metrics over time. The mandate has been successfully completed regarding the design of all the key steps for implanting the reinforcement of IRRBB risk metrics through strong methodology usage. Additionally, efficiencies were created through the implementation of a new operational process for the reporting and the analysis which is currently in-progress and planned for integration into the internal risk management and steering process.

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IRRBB – Support the transition of the IRRBB metrics computation tool and reconciliation exercise between both outcomes regarding EVE (Economics Value of Equity) and NII (Net Interest Income).

The Client, a huge international bank, request the support of Avantage Reply to further understand and quantify the differences arising between both of their IRRBB metrics calculators. The first, is a hand-made tool provided by the headquarter and the second is a well-known risk software solution used locally. Avantage Reply helps isolating and assessing each of the differences, and in case of materiality, set processes in order to compute overlays. Avantage Reply further helps to add and validate missing products. Validations cover parametrization of the tool, alinement of IRRBB inputs (margin and reference rate) and models (non-maturing products, prepayment, caps, floors,..)

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The customer is a retail belgian bank focusing on mortgage loans and consumer credit. Following the implementation of the IFRS 9 ECL calculator, the need arised to implement a control framework to ensure timely and quality calculation and bookings, and integration in the accounting and reporting platforms. Avantage Reply helped the client bridge the distance between different departments to identify the right responsibilities at the right moment in the process to increase its reliability.

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