Intelligent risk taking

As a leading global financial services organization, UBS faces many challenges to its ongoing success. But the ability to consolidate, identify and classify risk – across all business units, all regions, and all products – is an overriding issue.

“A tremendous volume of risk-related data passes through our enterprise every day,” explains Patrick Hendrikx, Executive Director at UBS AG. “Key long range business decisions, and the day-to-day management of our business around the world, are impacted by our ability to aggregate and understand what that data can tell us.”

To be sure, UBS felt it had excellent transactional risk tools in its discrete business units, but for a firm that operates worldwide, consolidation across units is a required precursor to intelligent operation.

“We had to eliminate data silos, and create a process that would allow us to identify and select risk-related data for all divisions [Investment Banking, Global Asset Management and Global Wealth Management & Business Banking], globally,” says Hendrikx. Management wanted to aggregate all credit risk data across all Business Groups globally, to consolidate across all counter-parties and credit risk portfolios.

The sheer enormity of this challenge can be daunting. UBS has millions of credit risk relevant client relationships with quite complex structures, where each client group consists of multiple legal entities (subsidiaries and branches), each with its own product, regional, and country issues. UBS itself has 70 million financial products, 20 million limits, and 20 million risk mitigants.

“To understand credit risk concentrations and to ensure regulatory compliance, we needed consistent, accurate answers to the identification and classification of risk,” notes Hendrikx. “Clearly, in light of the volume of data, the complexity of our business, and the wide variety of users, that required an automated and robust process based on the principles of business intelligence.”

BI solution

As a leading global institution, UBS has stringent technology standards, especially regarding server deployment, security, integration with the existing network, and scalability. Whatever BI solution UBS considered had also to take account of a variety of other factors, such as:

• The number of people touched by risk information.
  
• Their geographic distribution.
  
• The different levels of users and their individual (as well as collaborative) needs for understanding and acting on risk data.
  
• The wide variety of data sources that would need to be aggregated.
  
• The types of analysis and reporting that had to be performed to generate actionable intelligence.

One notable aspect of risk management at UBS is the consistent application of commonly agreed Risk Management and Control Principles across the whole firm.

Risk managers in various countries and divisions work together to capture risk control requirements, then identify and implement risk principles. To support UBS’s overall goal of excellence in risk control, its BI solution needed to be compliant with the principles and policies to which the company adheres.

“I suspect that some organizations struggle with centralized identification of principles and policies for risk,” observes Hendrikx. “But UBS strives always for the use of best practices, and we believed strongly that an aggregated risk model would be such a practice, because it’s the right way to support global and group risk management. How else can an organization such as ours ensure consistency and buy-in at the divisional level?”

Going forward

Initially, UBS reviewed offerings from several vendors. After careful consideration by the internal solution provider, along with members of the Steering Committee and the senior management team, the decision was made to have the vendor Cognos build and run a pilot.

“In addition to the quality and capabilities of their products,” says Hendrikx, “Cognos demonstrated a strategic understanding of our business and our needs. We also were aware of the collaborative relationship they had established with our retail banking colleagues. All of these things were weighed in our decision.”

The pilot ran for six months, in parallel with the existing system, to establish measurable results in such areas as security, scalability, development (time to market) and performance. “We were looking for nothing less than industry standard outcomes.”

At the conclusion of the pilot, an analysis of the results was presented to the internal project steering committee. This also included independent analytic research to help establish benchmarks for industry standards, and insights into performance of existing implementations in other retail banking areas.

“We chose to move forward,” Hendrikx recalls, “for many reasons. First and foremost, the solution supported our needs extremely well. Just as important, they were compliant with demanding UBS security standards. They were web-client based and had excellent development tools. That all translated to efficient development, quick time to market, and a reasonable total cost of ownership.”

Results of implementation

The BI solution has been in place for three years and, according to Hendrikx, in that time it has consistently produced visible results that are directly in line with expectations. “Data analysis has been accelerated. We have a truly global, consolidated view of risk that requires much less manual aggregation. It is, therefore, a more accurate view and we arrive at it in a very timely manner, reliably.”

Specifically, UBS has experienced several improvements in performance:

Executive decision-making. The Group Chief Credit Officer was a primary driver of this entire project. It was his vision to provide portfolio aggregation views to top counter-parties; outperform regulatory risk and reporting requirements; more clearly understand risk exposure concentrations and to provide accurate visibility to senior risk managers, allowing them to review information more readily and make better credit risk control decisions. “In this area, there is strong satisfaction with the solution.”

Risk provisioning. With the ability to see the same version of risk numbers globally, UBS has significantly increased risk visibility and country level control into operations, aligning them consistently with product, division or customer-centric risk. This has allowed it to make more accurate risk provisions, offsetting risk concentrations and protecting against the calculated expected losses. As Hendrikx notes, “Managing risk across the enterprise across all products allows us to take a country slice of the risk information and make financial provisions against potential defaults across a portfolio of products on a country basis.”

Client service. The accuracy of the risk information is critical for the confidence of senior management, and for those managing senior customer relationships or relationships with external stakeholders, such as regulators, government bodies, and auditors. The ramifications and ensuing political pressure of a country downgrade, for example, can be significant. “Accuracy, transparency and timeliness are all byproducts of this solution,” says Laurence Trigwell of BI provider Cognos. “These characteristics create confidence among UBS executives. In turn, clients and other constituents are more confident in what UBS tells them.”

Regulatory compliance. “It’s quite simple, actually,” Hendrikx observes. “We now have much more transparency into our operations and information. That transparency equates to simplified compliance. In fact, we’re seeing that when compliance is based on such easily seen and understood data, regulators also have more confidence in what we’re telling them. UBS feels it is outperforming regulatory guidelines. “This is a source of pride for us.”

Competitive advantage. UBS has gained a greater degree of control over risk exposure through more timely and well-informed decisions. Around the world, UBS risk managers, controllers, credit officers and others – people responsible for billions in assets – can identify risk against the allowed ceiling, cognizant of what a local decision will mean for the UBS risk profile globally. “If we think a counterparty might default in one country, we understand how that will impact us elsewhere,” says Hendrikx. “It is having a positive effect on our balance sheet, and our competitiveness.”

‘What if’ analysis. UBS can now stress a model portfolio against specific variables to see the outcomes, review those results, and see the expected portfolio loss.

“We appreciate our use of BI,” says Hendrikx. “I am sure that UBS will identify new challenges such as:

• Stress loss.
  
• Country loss.
  
• Collateral concentration.
• Any other concentration risk.
• And also look for ways to improve what we are already doing.

This is natural as we respond to evolving market conditions and new business objectives.”

About UBS AG

UBS is one of the world’s leading financial firms because, at all times, their first priority is the success of their clients. As an integrated firm, UBS creates added value for its clients by drawing on the combined resources and expertise of all its businesses: they are a leading wealth management business; a global investment banking and securities firm; a leading asset manager; and the market leader in Swiss retail and commercial banking. UBS combines financial strength with a global culture that embraces change. The company can be found in all major financial centres worldwide, and employs over 67,000 people.