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GOING WITH THE FLOW – HOW ALPHA INSIGHT STEERED A MAJOR CITY INVESTMENT BANK TOWARDS COMPLIANCE WITH THE BASEL COMMITTEE’S BCBS 239 REGULATION

GOING WITH THE FLOW – HOW ALPHA INSIGHT STEERED A MAJOR CITY INVESTMENT BANK TOWARDS COMPLIANCE WITH THE BASEL COMMITTEE’S BCBS 239 REGULATION

The Basel Committee on Banking Supervision’s new regulation BCBS 239, requires G-SIBS (Globally Systemically Important Banks) to show compliance with its principles by January 2016.

Marlon Arthur

Marlon Arthur

This has many banks undertaking large programmes with uncertain outcomes, as the regulation is based on compliance with a set of principles, rather than hard metrics or precisely-defined benchmarks.

Whilst it avoids defined metrics to measure and strengthen a bank’s risk data aggregation capabilities and internal risk reporting practices, BCBS 239 focuses on principles within four key topics:

  • Governance and infrastructure
  • Risk data aggregation capabilities
  • Risk reporting
  • Supervisory review

In common with all global investment banks, Alpha Insight’s client was obliged to draw up and define its own approach to achieving and demonstrating compliance with these aims within the tight deadline laid down by the Basel Committee.

Faced with this significant task, the bank engaged Alpha Insight to help it meet all the new regulation’s requirements in as thorough and pain-free manner as possible.

Risk Data Aggregation and Risk Reporting – Accuracy, Timeliness and Completeness

Alpha Insight set about building a BCBS 239 control framework which monitored, measured and visualised the bank’s risk data aggregation and risk reporting capabilities, based on the regulation’s principles of accuracy and integrity, completeness and timeliness.

Like many of its city competitors, the bank had an unwieldy, compartmentalised IT estate built in response to specific challenges and complicated by extensive outsourcing.

This presented a number of obstacles to fulfilling BCBS 239 requirements on risk data aggregation and reporting, as there was no effective end-to-end visibility of processes – a key prerequisite for monitoring and measuring compliance.

The small Alpha Insight team found that the understanding of the various risk management processes carried out by the organisation varied widely. While staff supervising market risk were well-informed, they were nonetheless presenting their data manually on spreadsheets. Operational risk staff, however, lacked the same overview and their reporting was ad hoc and not conducted coherently. In between these two, in terms of risk insight and reporting, was the treasury department.

Establishing critical steps

Alpha Insight’s proposed approach was to analyse the business processes and IT architectures that underpinned the production of the bank’s key risk metrics and risk reports.  Once done, ‘flow diagrams’ would be created and control points defined as the basis of discussion with both IT and business sides of the bank.

‘Flows’ are summarised versions of business processes such as Value at Risk, looking only at the critical process steps and showing how they relate to the underlying technology. Control points are measurement points or KPIs within the flow, that can be used to determine that it is operating within the expected tolerances and targets.

Once the accuracy of the flow diagrams and control points was agreed with the bank’s business and IT experts, Alpha Insight used its monitoring and compliance expertise to establish how the flow and each control point could be monitored through the underpinning IT systems. Thresholds were established for each control point to indicate whether the flow was operating within the required tolerances. Alerts were created to notify the appropriate parties (IT and/or business operations) when exceptions or breaches occurred.

Pilot project

The bank agreed to perform an initial two-month pilot project focusing chiefly on the BCBS 239 principle related to timeliness of risk data and risk reporting for one of the treasury department’s daily risk reports.

Alpha Insight established the flow and agreed the set of control points relevant to establishing the ‘timeliness’ of the risk data and reports. Both the flow and the control points were then placed in the Alpha Insight iControl data repository and a set of ‘monitoring points’ and thresholds were defined to monitor and measure whether the flow was operating within the tolerances defined by the bank.

To monitor the control points, Alpha Insight leveraged the bank’s existing investment in IT monitoring tools, in this case ITRS’ Geneos product.  Storing the flow, control points and thresholds in the Alpha Insight solution (iControl) enabled the bank to manage, configure and calibrate (e.g. change threshold values, re-certify, add, delete or modify) the control points going forward.

A real-time, interactive dashboard was also produced by Alpha Insight, visualising the flow and its interaction with IT systems.  In the event that any of the control point thresholds were breached (through a late input file-arrival, for example) the breach would be reflected on the dashboard by highlighting the part of the flow, or system within the flow, that was impacted, with a RAG (Red, Amber, Green) status. Such a breach event would also be stored in iControl and an optional alert will be sent to relevant teams.

Success leads to expansion

The successful pilot led to a larger programme to cover the full range of the bank’s BCBS 239 risk metrics and risk reports.  Working with the bank’s business and IT teams, Alpha Insight defined the flows, control points and monitoring solutions in support of the risk data aggregation and risk reporting principles of timeliness, accuracy and completeness.

However, Alpha Insight experts discovered that many of the bank’s risk controls were performed manually, outside their IT systems.  In order to ensure that these controls were incorporated within the Control Framework, Alpha Insight added functionality to iControl to allow manual data entry, allowing staff to enter information related to manual controls for processing, evaluation and subsequent reporting.

Altogether, approximately 1,700 control points across 40 risk metrics and reports have been defined to determine BCBS 239 compliance. The thresholds defined for each one have been set in line with the risk appetite and tolerances defined by the bank’s board, which is ultimately accountable for meeting the Basel Committee’s regulatory requirements.

A truly flexible solution

Given the varying frequencies required (daily, weekly, fortnightly, monthly, etc.) the bank decided it only required real-time dashboards and alerting for risk metrics and reports that were reported daily.  For other metric frequencies the bank wanted the control points measured in real time, but with reporting and visualisation made available the following business day in their own visualisation tool of choice.  To facilitate this Alpha Insight provided an API that would enable the bank’s visualisation tool to be fed the control point results, events and RAG statuses once per day, with the option of viewing these events and statuses in real time via iControl.

Other requirements that were included during the project included:

  • The ability to aggregate control points by classification (such as accuracy, timeliness, completeness), by risk metric or by division (e.g. market risk);
  • The ability to add comments to or override a RAG status under specific conditions
  • The ability to indicate if a control point measure or observation is missing
  • The ability to indicate whether a metric has been calculated using old data.

The outcomes

Having successfully designed and implemented a governance solution within the deadlines set by the bank, it was fine-tuned in preparation for the January 2016 BCBS 239 deadline.

The bank now has greater confidence that it will meet Risk Data Aggregation and Risk Reporting Control Framework requirements of the regulation, having for the first time, a central repository for all its BCBS 239 risk controls, which have each been defined and assigned owners.

From having an opaque IT estate which it partially understood in relation to its operations and risk management, it now has a true understanding of what is crucial to the business within its systems and how they function.

Not only can the bank fulfil the regulators’ requirements, it can also be confident of demonstrating precisely and convincingly how this is achieved, which is a key aspect of compliance.

“It was challenging to handle so many risk metrics and controls and to meet changing requirements within a timescale that cannot be moved,” said Marlon Arthur, Client Relationship Manager, Alpha Insight.

“However, we pride ourselves on being flexible and getting things done. There will be further tweaks, but the bank is now able to face the BCBS 239 deadline with confidence, being able to show how it has implemented the principles that inform a regulation that will shape banking for the foreseeable future.”

Banking

It’s all relative: Older generations feel helping out the family financially is more important since the Covid-19 outbreak

It’s all relative: Older generations feel helping out the family financially is more important since the Covid-19 outbreak 36

Before Covid, 23% of people prioritised helping younger generations out financially, that increased to a third as a result of the pandemic

A recent survey* conducted by Hodge has revealed that the Covid pandemic has led to more people wanting to help younger family members financially.

A third (31%)** of those questioned said that since the Covid outbreak giving a financial gift to children or grandchildren is more important to them, compared to 23% who said it was a priority before the pandemic.

The traditional “Bank of Mum and Dad” is still very much open for financial help, with parents being responsible for 72% of the gifts, but the study also revealed that financial gifts can come from all corners of the family – including children (14%) and siblings (14%).

The survey also found that a third of people have received a financial gift from family, with those aged between 25-34 as the most likely to receive

The most popular reason for gifting money to family is for special occasions such as a quarter of gifts were given for weddings and birthdays but 11% of people have received money to help with big purchases such as cars and houses. In addition, 19% of people have received help with day to day finances, with around 14% of those receiving a gift have done so to pay off debt.

Emma Graham, Business Development Director at Hodge, said of the research: “Our study showed that, as a nation, we all want to help our family out when it comes to money. And whilst we all think of the Bank of Mum and Dad or Gran and Grandad as a traditional source, we were surprised to see that 14% of brothers and sisters are also helping out.”

The findings come from a recent intergenerational study conducted by Hodge, who interviewed over 3000 people about their attitudes towards finances and their aspirations for the future. The full research findings can be found at https://hodgebank.co.uk/2020/05/19/money-its-all-relative/.

As part of the study, people were also asked about paying back the gift, with 40% of beneficiaries expecting to pay their parents back, but this dropped to 28% if the gift came from grandparents.

From the gift donor’s perspective, 26% expect the gift to be paid back, however just 15% of grandparents expected the money back.

Hodge has produced a set of guides on how families can navigate the tricky subject of giving financial gifts within a family, as well as the considerations and steps that be families should think about taking before a gift is given, such as is it a loan or a gift and thinking about contingencies if the family member’s circumstances change. The guides can be found here: https://hodgebank.co.uk/news/

Emma continued: “It’s clear that families feel strongly about offering financial support to each other if they are able and this has increased since the Covid pandemic. Before Covid, 23% of people prioritised helping their families out financially in the next five years. Since the Covid-19 outbreak that has increased to a third of people saying helping a family member financially had become more important.

“So, it is clear that the Covid-19 lockdown and subsequent predicted economic downturn, has led to more families looking to share wealth to help younger children or grandchildren during this difficult time. Many people may look to Later Life mortgages, where many products have reduced their rates and have flexible lending criteria, to help out a loved during these difficult times.”

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Banking

New report identifies the factors which will determine SMEs’ chances of a successful COVID recovery

New report identifies the factors which will determine SMEs’ chances of a successful COVID recovery 37

·         Analysis of the performance of over 1,000 UK small and medium-sized businesses by Allica Bank provides roadmap for SMEs 

·         Regular training, an openness to innovation, and a clear vision all contribute heavily to an SMEs’ chances of success  

·         Allica Bank has launched a programme of free workshops to expand on the findings and support business owners 

Business bank, Allica Bank has combined data and insight from over 1,000 UK SMEs with a multiple regression analysis to determine what factors most closely aligned with an SMEs’ chances of success and separated the highest-performing businesses from their peers. These ‘rules for success’ have been compiled from the research data to support British businesses as they look to chart a course to post-Covid recovery.  

The full report identifies six behaviours for small and medium businesses to follow, to maximise their chances of a successful COVID recovery. The six top-line rules emphasised by the data were: 

Rule 1: SMEs should regularly train staff 

Of the top-performing businesses analysed, 47% provided training for employees at least on a quarterly basis, compared to just 32% of other businesses. Regular employee training was linked closely to success by the model.  

Despite this, many small businesses have neglected training and nearly half (46%) of the small businesses analysed only provide training for employees about once a year or less often. This included 15% that never provide employer-funded training. This discrepancy could represent a significant opportunity for small businesses to unlock the potential of their employees and thrive in the post-Covid economy. 

Rule 2: SMEs need to focus on innovation and technology 

Looking again to the best performing businesses, 76% were found to either continually (39%) or often (37%) be considering new opportunities for technology in their business. This is compared to only 51% for businesses considered to be outside of the top ranks, out of which only 27% admitted to continually looking for new technology opportunities. 

Rule 3: Small business must have a formal, long-term vision  

Nearly two thirds (66%) of the most successful businesses in the survey had a formal, long-term vision, compared to just 50% of businesses outside the top 100. Looking to the businesses that scored the lowest on the SME Performance index, only 37% claimed to have a formal, long-term vision. 

Rule 4: SMEs should broaden their customer reach and find new markets 

Of the top-performing businesses, 65% of these have overseas customers compared to just 40% of the worst performing businesses. Among the best performing SMEs, over a third (34%) identified international expansion as one of the top three drivers for their success. 

Rule 5: SMEs need to develop reinvestment plans 

22% of the best performing SMEs reinvested some of their profits into the business in the past three years with an average 9% of profits being redeployed. Tellingly, this is nearly double what other businesses admit to reinvesting in their business (5%). 

Rule 6: SMEs should engage with local business organisations and networks  

Of the top 100 SMEs, 30% had obtained external credit to expand over the past three years (compared to 24% of other businesses). Meanwhile, only 16% of all other SMEs had engaged with local enterprise partnerships or growth hubs in the past three years (compared to 23% of the top 100 SMEs). 

Chris Weller, Chief Commercial Officer, Allica Bank, said: 

“All small businesses are different, as are all small business owners, but one trait they share is an innovative resilience. Whilst the coming months and years will undoubtedly continue to present extreme challenges, there is no doubt that small and medium sized businesses across the UK will rise to meet them head on.  

“To give them the best chance to succeed, though, they need to be equipped with the right tools. There is certainly no silver bullet or panacea for every small business, but as this study has found, there are a number of common factors found in the most successful businesses that allow small enterprises to thrive and that they can consider individually for their business.  

“This research has identified common ‘rules for success’ that speak to every aspect of running a business, not just the financials. Once we saw these results, we wanted to use them to help small businesses begin to re-build and prosper, by outlining common factors and then examining how best they can be practically applied to businesses in all sectors of the economy.  

“Small business owners and their employees have been hit hard by the crisis, but they have the drive and resourcefulness to breathe new life into the economy and bring energy to post-Covid Britain. Our commitment at Allica Bank is to give them the support they need to do so, every step of the way.”

The full report contains a wealth of additional data and insight into each of these topics. As part of its mission to empower small businesses, Allica Bank is making the findings freely available and running a series of free online workshops with relevant partner organisations for businesses to attend.

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Banking

New research finds that financial wellbeing should be at the heart of banks digital experiences as the UK enters recession

New research finds that financial wellbeing should be at the heart of banks digital experiences as the UK enters recession 38

MullenLowe Profero have today launched a new report focusing on two communities who will be hardest hit by the recession: 18-25 year olds and small businesses. These communities need financial wellbeing support at the core of an increasingly digital relationship. MullenLowe Profero partnered with Censuswide to survey 1,004 18-25-year-olds and 504 small businesses.

Concern around financial shocks is harming individual’s wellbeing

The survey finds the ability to absorb financial shocks being the critical worry affecting wellbeing and 40% of 18-25-year-olds are sometimes afraid to look at their bank account.

They are seeking financial education to relieve worries

With over two-thirds of respondents demanding financial education in order to find peace of mind and 40% of 18-25-year-olds state that thinking about their money has a negative impact on their wellbeing the report highlights the audience are open to more active support from banks. 60% of the audience feel banks should help them have the capacity to absorb a financial shock.

When our bank is in our pocket reminding us of our anxieties, is there now a duty of care to support our wellbeing?

The survey finds that the digital experience is now the number one reason for choosing a bank for 18-25 year olds.

With this shift in digital preference, people are expecting banks to play a bigger role in wellbeing. 58% of those worried about their money want banks to help them take control.

More than half of 18-25 year olds agree that a bank’s role is now to:

  • provide education on money management
  • help them keep on top of financial goals
  • help them save enough money to cope with the ups and downs of life

People are feeling closer to local communities, but there is a gap in how brands should engage communities in a digital world

Half of 18-25 year olds agree that in the last few months the importance of their local community to them has increased. 40% agree they’ve engaged more with their local community in recent months. There’s a tension between how to engage a community as 60% agree they prefer a bank with better digital tools over a bank that offers more local branches. However, 60% feel banks need a branch presence to support local communities.

The importance of Global Wellbeing rises

Over half of 18-25 year olds agree that the events of the last few months have made them seek out brands that do better for the world. The research findings show that what they want most is to be recognised for their positive behaviours. 56% of the audience highlighted that they would find rewards and benefits for purchasing ethically and sustainably most useful.

Banks digital experience today lack empathy

In this time of reset, the survey found a third of customers and small businesses are considering changing banks in the next year as a result of the impact of the pandemic. The report concludes that brands that will win will champion financial wellbeing in the digital experience through empathy and emotional intelligence.

For the full report, get in touch with MullenLowe Profero at [email protected]

Howard Pull, Head of Digital Transformation Strategy at MullenLowe Profero, said: “Our findings are a wake up call for digital innovation in banking relationships.  With digital experience being the number one choice for selecting a bank, there’s a huge opportunity for banks to support individual wellbeing at scale by understanding and responding to our goals and anxieties to build better money habits.”

Methodology

The research was conducted by Censuswide, with 1,004 18-25-year-old current account holders and 504 small businesses with business bank accounts and annual revenues up to £2m between 23.06.2020 and 29.06.2020. Censuswide abides by and employs members of the Market Research Society which is based on the ESOMAR principles.

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