Published on 13-Dec-2012
"Everything we do is about managing complexity and IBM Algo software is good at the complexity management issue: it allows you to fit your working process inside your risk management architecture – many end users can use the system." - Paolo Sironi, Director of Risk Management, Banca Intesa
Algorithmics Solutions, Business Analytics, Managing Risk, Transforming Business
Note: this case study was originally published in 2004. Since that time, Banca Intesa has merged with Sanpaolo IMI to become Intesa Sanpaolo – the leading banking group in Italy, with 5,600 branches and 10.8 million customers. IBM Algo software remains at the heart of its risk management strategy.
Banca Intesa required a truly unique and enterprise-wide solution to satisfy all of its growing risk management requirements. The bank turned to IBM to tackle the ambitious goal of consolidating its risk management practice.
Banca Intesa has implemented IBM® Algo Market Risk for market risk across both its Intesa and Caboto operations. The bank is currently working on extending the solution’s underlying Mark-to-Future (MtF) architecture to handle credit risk in trading portfolios. Plans are also underway to incorporate IBM Algo Credit Exposure for an integrated market and credit risk management framework.
As the first Italian bank with an internal model for market risk approved by the country’s central bank, Banca Intesa has propelled itself into a leading role for financial risk management. The solution supports information retrieval and allows management to perform comparisons of issues that users may not have explored before.
Banca Intesa, Italy’s largest banking institution, is a world leader in financial risk management. Banca Intesa resulted from two mergers; first between Banco Ambrosiano Veneto and Cariplo in 1996, then with Banca Commerciale Italiana (BCI) in 2001.
The breadth, scope and complex nature of the new corporate entity meant that Banca Intesa required a truly unique and enterprise-wide solution to satisfy all of its growing risk management requirements. The bank turned to IBM to tackle the ambitious goal of consolidating its risk management practice.
Using an IBM Algo enterprise risk architecture, Banca Intesa became the first Italian bank to have its internal model for market risk approved by the Bank of Italy; BCI’s internal model was initially approved in 2001 and it was extended to the new entity in 2002.
The IBM Algo risk system was also extended to Banca Caboto, the fully owned Capital Markets entity during 2003, and it too recently received formal approval. Banca Intesa’s enterprise-wide risk management strategy has won it significant competitive advantage in terms of capital savings.
Banca Intesa has implemented IBM Algo Market Risk for market risk across both its Intesa and Caboto operations. The bank is currently working on extending the solution’s underlying Mark-to-Future (MtF) architecture to handle credit risk in trading portfolios. Plans are also underway to incorporate IBM Algo Credit Exposure for an integrated market and credit risk management framework.
As the first Italian bank with an internal model for market risk approved by the country’s central bank, Banca Intesa has propelled itself into a leading role for financial risk management.
“Intesa is amazingly well positioned because no other Italian bank has come through to this stage. We were able to achieve this by 2000-2001 so there is a long history of experience,” says Paolo Sironi, Director of Risk Management at Banca Intesa.
The bank’s investment in IBM software has paid dividends to its shareholders over the past couple of years. In terms of cost recovery, Sironi says, “Early on, the value that the technology brought to the organization more than covered the costs of the investment and you can easily measure it in EVA terms.”
Sironi says it was a simple decision to choose IBM because IBM Algo Market Risk and its Mark-to-Future framework could extend to accommodate evolving requirements. Scalability was imperative as Banca Intesa operates globally with branches in London, New York and Hong Kong as well as several subsidiaries in Eastern Europe and Italy. With 100,000 positions and 3,000 scenarios, the bank needed a system that could also scale vertically as more derivative pay-offs were added.
“We didn’t simply have risk management ambitions; we had enterprise-wide risk management ambitions. I feel that IBM is the only company with the flexibility to deliver this as a solution,” says Sironi.
Today, Banca Intesa is able to reap the rewards of a fully scalable system. As a corporate governance tool, the framework consolidates all of the individual financial contracts, positions and market data that are needed for risk analysis.
According to Sironi, “The implementation is different from the risk management we perform on the trading floors. The local implementation mainly drives the sensitivities and the profit and loss (P&L) while the IBM Algo Market Risk risk engine consolidates information fully into one framework from New York to Hong Kong.”
This is a key business advantage because Banca Intesa has many regulatory obligations to fulfill, not only reporting risk figures to the Bank of Italy but also satisfying the regulatory requirements of the countries in which it operates.
Further, these entities often require completely different sets of information. According to Sironi, “The internal model is not conceived as an exercise for regulators; our duty is to fulfill the regulatory needs as well as chief officers’ and CEOs’ requests. We frequently get asked to perform non-standard analysis across the board, for example, on equity versus credit exposures and the effects on P&L given various ‘what-if’ scenarios. If we had several front-office systems in the organization it would be impossible to deliver a full picture but through IBM Algo Market Risk we surely can.”
Information that can be used to maximize returns and secure capital savings is becoming an increasingly important factor in the Italian capital markets. Over the past two years, the balance sheets of some of Italy’s largest banks have shrunk because of intensifying competition in the industry.
The ability to free up capital for investments is crucial to remain profitable, especially in an environment where the average return for a trader tends to be smaller. Using the IBM system, Banca Intesa has been particularly successful in this endeavor.
One of the key features of IBM Algo Market Risk that has proven valuable at Banca Intesa is the capability to perform forward-looking scenarios and stress tests. A truly successful risk solution must be able to help financial institutions understand the implications of a major event. For example, the September 11, 2001 terrorist attack on the World Trade Center in New York City was one such instance where this was put to the test.
“Put it this way, I have a graph above my desk that goes from 1997 to 2003 showing our VaR history with the effective P&L used for back testing. You can really see the impact of September 11th on the risk profile and its evolution. Just after September 11th we managed to run cross the board analysis to restructure our books in order to reduce, to a certain extent, our hot spots and keep compliance with operational limits.
“We were not blind, we knew where we were going. Gaining an understanding of what would have given us the biggest trouble and what was giving us the biggest P&L contribution in terms of volatility was critical because we were able to select a few strategies to mitigate the risk profile,” says Sironi.
Banca Intesa now has a market risk solution where several users can conduct live, concurrent historical analyses and look at the changes in any portfolio on a daily, monthly or weekly basis. The system supports information retrieval and allows management to perform comparisons of issues that users may not have explored before.
“The working flow and process we have is really interesting, which has given us some challenges because the complexity is very high,” says Sironi. “Everything we do is about managing complexity and IBM Algo software is good at the complexity management issue: it allows you to fit your working process inside your risk management architecture – many end users can use the system.”
Having implemented IBM Algo Market Risk across the various business lines and operations of the new bank, Banca Intesa has turned its attention towards extending its risk architecture to integrate market and credit risk with Mark-to-Future.
With MtF, says Sironi, “We will be able to plug in the credit risk of the bond portfolio and counterparty risk first and then tackle credit risk in terms of portfolio management as a next step.”
According to Sironi, “When considering a truly enterprise-wide solution to financial risk management, Mark-to-Future is a good way to do it, in fact it is the most advisable way to do it.”
Data management is another area where Mark-to-Future proves its worth. Sironi refers to MtF as the catalyst or the “house pipes” that direct the data or “water”, and provides the structure for the system or “house”. He then adds that it is “the quality of the water that you pour into the pipes that helps you decide whether you will drink it or not.”
Sironi says that the combination of MtF and strong market data management allows the bank to treat its risk system like a “time machine”, thereby enabling it to perform risk analyses on portfolios both forward and backwards in time.
“Currently most banks have systems that are closer to history books than time machines. The past, as we see it today, is not as it was, which will cause problems when performing stress tests or other analyses,” he remarks.
Over the years, the relationship between IBM and Banca Intesa has continued to grow. Says Sironi, “We chose IBM because the global partnership was the only thing that gave us a fighting chance to be truly enterprise wide. By enterprise wide, I mean being consistent across business units and zones. The fact is that the capital markets are changing continuously and this has prompted different pay-offs and asset classes to be introduced into these systems.
“Risk management is a highly IT-oriented framework that needs stability and design. However the internal model is not an IT process, it is a highly professional and analytical one requiring both structure and flexibility. IBM Algo Market Risk can help you to deliver just that.”
Sironi concludes, “I believe the risk architecture is one piece of the puzzle coming out of a merger situation and, as you know, consolidation is always around the corner. It allows top management to see the whole bank in an ingenious, cohesive and consistent way. This is why the CEOs perceive the implementation of the IBM Algo solution to be a critical achievement.”
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