Mizrahi Tefahot Bank establishes a competitive edge with an integrated risk management system

Published on 31-Oct-2012

"We gain a tremendous competitive advantage being able to manage our risk on an intra-day basis. Plus, we can now take positions on many more exotic instruments, enabling us to pursue new business. And having a strong risk management system in place is critical to winning new customers." - Boaz Leibovitch, Head of Risk Control, Mizrahi Tefahot Bank Ltd.

Customer:
Mizrahi Tefahot Bank

Industry:
Banking

Deployment country:
Israel

Solution:
Algorithmics Solutions, BA - Business Analytics, BA - Risk Analytics, Big Data & Analytics, Big Data & Analytics: Risk, Smarter Planet

Overview

Founded in 1923, Mizrahi Tefahot Bank Ltd. is Israel’s fourth largest banking group. The bank serves corporate, private banking, and retail banking customers in Israel, and offers a full range of financial services and products internationally, including mortgages.

Business need:
Mizrahi Tefahot Bank is one of the foremost players in the financial services space in Israel. In addition to serving local banking customers and offering products internationally, it is considered a leading force in the capital market. When the bank wanted to satisfy Basel II requirements and establish a best-practice risk management system, it chose to work with IBM.

Solution:
Mizrahi Tefahot Bank chose IBM® Algo Credit Regulatory Capital and IBM Algo Market Risk to gain an integrated solution that addressed its range of risk management needs.

Benefits:
With the IBM solution in place, Mizrahi Tefahot is able to calculate capital in accordance with Basel II. IBM Algo Market Risk enables the bank to calculate risk automatically, on a daily and intra-day basis.

Case Study

Founded in 1923, Mizrahi Tefahot Bank Ltd. is Israel’s fourth largest banking group. The bank serves corporate, private banking, and retail banking customers in Israel, and offers a full range of financial services and products internationally, including mortgages.

In 2004, the Bank of Israel – the country’s banking regulator – mandated that all banks make plans to satisfy Basel II requirements. Specifically, banks would need to produce their first Basel II reports by April 2009 based on fiscal year 2008 data.

“We viewed the mandate as an opportunity to implement a consistent, industry-leading approach to risk management. With that in mind, we set about to meet the challenges of Basel II head on and establish a best-practice risk management system,” explains Boaz Leibovitch, Head of Risk Control for Mizrahi Tefahot Bank Ltd.

Enhancing risk management measures
In order to maintain its top place in the capital market, Mizrahi Tefahot constantly develops advanced technological tools and innovative financial instruments, and takes all necessary measures to manage its risk exposure. It manages its risk on a day-to-day basis, in accordance with the Bank of Israel’s directive.

Moreover, it established a risk management department in 1999 and a risk control sector in 2006, charged with oversight of market risk, liquidity risk, capital market exposure, and asset and liability management (ALM). Considering risk control and management to be one of its core competencies, Mizrahi Tefahot is constantly striving to improve these practices.

The bank recognized an opportunity for improvement when it found itself calculating risk using spreadsheets. Because of the challenge of aggregating data manually, reports were generated only once per month.

“Without access to daily reports, our managers struggled to make timely decisions. Furthermore, we were only able to cover five currencies – implementation of exotic instruments was very limited. We knew we needed to fully understand our risk across all products and counterparties, and recognized the opportunity to establish a competitive edge by simultaneously addressing this along with the Basel II requirements,” says Leibovitch.

Seeking an integrated solution
The bank began preparing for application of the Basel II recommendations in 2006. Knowing that it wanted an integrated system for risk, Mizrahi Tefahot began talking to others in the industry.

“A number of banks in Europe were using an integrated enterprise risk management solution from IBM. Once we investigated the solution, we saw it fit our strategy of implementing a single, integrated solution rather than separate solutions requiring integration and lots of governance,” explains Dikla Avi-Aharon, Mizrahi Tefahot’s manager of the IBM project.

Mizrahi Tefahot engaged IBM to assist with the gap analysis required to apply the Bank of Israel’s directive for Basel II. IBM consultants brought vast experience to bear in helping the bank identify gaps, as well as the best technology and approach.

“IBM supplied us with a dedicated team of consultants that applied best practices learned from projects around the world. This – along with teaching us testing methodologies – enabled the project to go smoothly,” continues Avi-Aharon.

Satisfying Basel II requirements
With the IBM solution in place, Mizrahi Tefahot is able to calculate capital in accordance with Basel II. In fact, Mizrahi Tefahot was the first bank in Israel to produce reports – including COREP or Common Reporting – to satisfy the Bank of Israel’s accord for Basel II. “IBM modified the COREP report to meet the Bank of Israel’s requirements,” explains Leibovitch. Local customizations were made by the IBM Tel Aviv team to meet the precise requirements by the regulator.

The IBM solution is now used to produce the Basel II reports for Mizrahi Tefahot on a quarterly basis, which the bank submits to the Bank of Israel. As the bank requires updates – such as to account for subsidiaries – the IBM software makes the necessary enhancements to the reports.

Benefiting from automation and insight
To comply with Basel II market risk requirements while supporting real-time decision-making – and to satisfy other directives of the Bank of Israel, such as computing VaR values and stress test values on a monthly basis – Mizrahi Tefahot relies on IBM Algo Market Risk. This solution supports the three VaR calculation methods commonly used: the analytic method (parameters), the Monte Carlo simulation method, and the historical simulation method. Moreover, it supports a new VaR calculation method developed by the bank, which implements a combination of multiple, generally-accepted calculation methods.

Utilizing the integrated solution, Mizrahi Tefahot successfully calculates its derivative portfolio in IBM Algo Market Risk. These results are used as input for the values of these deals for Basel II reporting.

“IBM Algo Market Risk makes it possible for us to improve the responsiveness of the VaR to the degree of volatility in financial markets,” explains Keren Shitrit, Head of Risk Control Unit for Mizrahi.

Furthermore, IBM Algo Market Risk enables the bank to calculate risk automatically, on a daily and intra-day basis. For example, in just 2 hours, it produces 70 daily market risk reports that include all limits and stress tests across 60,000 transactions valued at over USD1.2 billion. It also produces a daily benchmark for liquidity and ALM, and runs two intra-day calculations in mere minutes.

It can even calculate its VaR on an hourly basis, to provide managers with a more granular view into its option portfolio. The automation decreases the chance of operational risk, and ensures that managers and directors receive timely, relevant reports that include all limits.

The automation decreases the chance of operational risk, and ensures that managers and directors receive timely, relevant reports that include all limits. “Now we can control and manage risk across multiple asset classes and risk factors with support from a complete range of advanced risk analytics and scenario capabilities. And because IBM Algo Market Risk reflects our true, dynamic risk profile, we are able to make more informed decisions,” continues Shitrit.

Moving forward with confidence
In addition to automating manual processes, gaining better insight into risk, and improving its decision-making process, Mizrahi Tefahot has benefited from the IBM implementation in other ways.

“We gain a tremendous competitive advantage being able to manage our risk on an intra-day basis. Plus, we can now take positions on many more exotic instruments, enabling us to pursue new business. And having a strong risk management system in place is critical to winning new customers,” explains Leibovitch.

Additionally, the purchase of IBM Algo Credit Economic Capital, IBM Algo Asset Liability Management (ALM) and IBM Algo Liquidity Risk – all implemented in an integrated manner within the same platform – allows the bank to have a wider view of its total risk and manage it in a more accurate and consistent way.

With a commitment to continually improving its capabilities, Mizrahi Tefahot intends to broaden use of IBM Algo Credit Regulatory Capital.

“Additional bank units will use the solution for control and profit calculations. Moreover, we have a foundation in place to migrate to an IRB approach at a later date,” concludes Leibovitch.

About IBM Business Analytics
IBM Business Analytics software delivers data-driven insights that help organizations work smarter and outperform their peers. This comprehensive portfolio includes solutions for business intelligence, predictive analytics and decision management, performance management, and risk management.

Business Analytics solutions enable companies to identify and visualize trends and patterns in areas, such as customer analytics, that can have a profound effect on business performance. They can compare scenarios, anticipate potential threats and opportunities, better plan, budget and forecast resources, balance risks against expected returns and work to meet regulatory requirements. By making analytics widely available, organizations can align tactical and strategic decision-making to achieve business goals.

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© Copyright IBM Corporation 2012. IBM Israel Ltd, 94 Derech Em-Hamoshavot, 49527 Petach-Tikva, Israel. Produced in Israel. November 2012. IBM, the IBM logo and ibm.com are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might be trademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at “Copyright and trademark information” at www.ibm.com/legal/copytrade.shtml This document is current as of the initial date of publication and may be changed by IBM at any time. Not all offerings are available in every country in which IBM operates. The client examples cited are presented for illustrative purposes only. Actual performance results may vary depending on specific configurations and operating conditions. It is the user’s responsibility to evaluate and verify the operation of any other products or programs with IBM products and programs. THE INFORMATION IN THIS DOCUMENT IS PROVIDED “AS IS” WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND ANY WARRANTY OR CONDITION OF NON-INFRINGEMENT. IBM products are warranted according to the terms and conditions of the agreements under which they are provided. The client is responsible for ensuring compliance with laws and regulations applicable to it. IBM does not provide legal advice or represent or warrant that its services or products will ensure that the client is in compliance with any law or regulation.