The third and final speaker at the October 18, 2012 GARP webinar on the Basel III burden on profitability was Alyson Bailey-Flynn, Director in Global Analytics and Financial Engineering at Scotiabank. She had a good news story to share.
“Improved risk management meant improved decision-making,” she said, prior to delivering a brief survey of the implementation of risk management at Scotiabank.
When it came to market risk calculations, management was both for and against spreadsheet usage. (“For” because it meant ease of use; “against” because it meant lack of control.) Ultimately Scotiabank chose an in-house batch risk engine powered by Algorithmics Risk ++.
In 2009, Bailey-Flynn said they undertook an overhaul of counterparty credit risk, bringing in real-time credit exposure calculations of energy derivatives. The change was overdue, she said, because the credit value adjustment (CVA) did not incorporate cross-product netting. Scotiabank has achieved tangible benefits because it has been able to reduce potential future exposure (PFE). Improved decision making occurs because of better analysis and “what if” tools.
In response to a question from the audience, Bailey-Flynn indicated that reductions in PFE were achieved through consolidations. “For example, ten-year and two-year transactions have very different profiles.” As well, CVA and PFE are further reduced through the netting benefit between different asset classes.
An unresolved issue with Basel III adoption and implementation is the arbitrage between different regimes, Bailey-Flynn noted.
An internal model project for default risk and CVA capital has been started at Scotiabank, she said. New desktop tools are being developed.
Basel III will link credit and market risk models. Counterparty credit exposures are evaluated for stress and non-stress market events.
There are key business changes afoot, said Bailey-Flynn. “Most importantly, there will be greater collaboration among stakeholders going forward.” ª
The webinar presentation slides can be found at: http://event.on24.com/r.htm?e=523101&s=1&k=4D7D88CA0CFABFBB6A010851712841BF>