THE BUSINESS ISSUE
The client - the institutional arm of a big four Australian bank - had recently secured Basel II accreditation. This meant that there was a significant shift in the calculation of the Credit Risk Weighted Asset (RWA). At a transaction level the Credit RWA value is a key determinant of profitability. At a portfolio level the Credit RWA was a key driver for the capital reserves the bank had to set aside as part of its regulatory compliance and risk management strategy.
The desired business outcome was to enable front line staff understand the key inputs for the RWA numbers. This would enable them to make necessary changes e.g. re-pricing deals, secure additional collateral etc. to preserve profitability. There were therefore the twin requirements of providing the RWA information in a clear and concise manner and at the same time education the users understand the key drivers for the RWA. To deliver the desired business outcomes three main challenges had to be overcome:
- There was limited local business unit expertise in the new methodology
- The required information was not readily accessible since the IT infrastructure was still evolving
- The Basel II RWA calculation was complex - formulae like the one shown below were widely used and needed to be explained in business terms
The success of a business intelligence project requires a clear understanding of the business requirements. In this particular context however the lack of local knowledge meant the user requirements could not be determined with a high degree of certainty. In light of this and other constraints it was decided to adopt an agile implementation approach - whereby requirements could be iteratively refined and delivered.
d2e played a key role on three fronts - setting up the user reference groups based on clustering common requirement and business function; designing and delivering the user education content; leading the in-house project team to design and develop the reports. The implementation was designed to use as much of the existing reporting platforms as possible (to keep the delivery cost effective). To maximise user friendliness a range of pre-canned reports were created to answer frequent questions - month to month changes, visibility of the key RWA drivers, grouping related transactions (see example wireframe below). Super users were provided the flexibility to customise their own reports - reducing the up-front project cost.
- With the roll-out of the education session there was a greater understanding of the key drivers of the RWA numbers. This enabled the optimisation of the RWA position at the portfolio and transaction level e.g. matching of idle collateral, reduction of unused limits, netting of transactions with the same counterparty
- As the true cost of a transaction became transparent the front line bankers were in a position to implement cost reflective pricing of the deals
- The reporting closed the feedback loop by making the input data available back to its originators. This lead to the identification of data quality gaps and the initiation of appropriate remedial measures