Bank Hapoalim

Streamlining risk management and cutting the number of trade limits

Published on 08-Jan-2013

"While IBM Algo Market Risk undoubtedly enables us to have a solid foundation for risk management, its value clearly extends beyond that scope. By using it throughout the bank in numerous ways, we’ve realized far more advantages from the solution than we had anticipated." - Haim Fischer, Head of Market Risk, Bank Hapoalim

Customer:
Bank Hapoalim

Industry:
Banking

Deployment country:
Israel

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

Overview

Established in 1921, Bank Hapoalim is Israel’s largest bank and a financial market leader with operations around the globe. In Israel, the Bank Hapoalim Group includes financial companies involved in investment banking, credit cards, trust services, and portfolio management. Overseas, Bank Hapoalim operates through branches, subsidiaries, and representative offices that primarily serve as wealth management hubs and trade enablers. With over 13,500 employees around the world, the bank has a significant presence in global financial markets.

Business need:
As the pre-eminent banking franchise in Israel, Bank Hapoalim runs simulations on the nearly 70,000 deals it manages every day. To ensure comprehensive risk management and liberate its traders to pursue new opportunities, the bank wanted to empower risk managers to easily assess risk and set meaningful limits on trades.

Solution:
Bank Hapoalim selected IBM® Algo Market Risk to facilitate sophisticated risk management and establish a common language between risk managers and trading floor dealers.

Benefits:
Makes it simpler for management to gain a comprehensive understanding of risk and determine meaningful limits, empowering the trading floor and management to clearly communicate risk. Helps to prevent unsanctioned trading. Traders are not allowed to trade or take a position in an instrument if it can’t be loaded into the system.

Case Study

Established in 1921, Bank Hapoalim is Israel’s largest bank and a financial market leader with operations around the globe. In Israel, the Bank Hapoalim Group includes financial companies involved in investment banking, credit cards, trust services, and portfolio management. Overseas, Bank Hapoalim operates through branches, subsidiaries, and representative offices that primarily serve as wealth management hubs and trade enablers. With over 13,500 employees around the world, the bank has a significant presence in global financial markets.

Ten years ago, the bank was a pioneer when it came to trading currency options for the Israeli market. However, while its trading floor was innovative and introduced new financial instruments, it lacked adequate tools and systems for risk management. According to Haim Fischer, Head of Market Risk for Bank Hapoalim, “We struggled to ensure that our trading activity was within limits and in line with our risk appetite.”

Struggling to calculate risk
Lacking anything more sophisticated, the bank used spreadsheets to analyze output from the trading floor in an attempt to calculate risk. This method ultimately proved to be insufficient.

“Our management understood that increasing the trading activity in derivatives would necessitate upgrades to our risk management concepts and tool box. As well, they felt that a new risk management language should be implemented,” explains Fischer.

At the same time, Bank Hapoalim was obligated to manage market risks using the Value at Risk (VaR) model per Directive 339, as mandated by the Supervisor of Banks. By late 1997, financial institutions, including Bank Hapoalim, were required to report according to the VaR model.

When combined with said regulatory requirements, these factors were strong drivers for the bank’s decision to bring its risk management to the next level, which involved the implementation of a sophisticated risk management system and the establishment of an independent market risk management unit.

Signing up for expertise and a proven solution
With a deeper understanding of what was required to facilitate comprehensive risk management, Bank Hapoalim created a risk management unit and began seeking a suitable solution. After evaluating various vendors, the bank chose a leading risk analytics solution that is now known as IBM Algo Market Risk.

Fischer states, “In addition to the vendor’s reputation, we were impressed with the analytical capabilities in IBM Algo Market Risk. We were also swayed by the expertise of the vendor’s consultants. In fact, one of the consultants had direct experience on a trading floor, which was important to us.”

Based on their experience in the financial industry, the vendor’s consultants shared best practices for developing new models to determine and assess market volatility. Guided by these experts, the bank proceeded to install IBM Algo Market Risk in its central office for the market risk management unit. In 2000, Bank Hapoalim became the first bank in Israel to implement a market risk management system, gaining important recognition from the Bank of Israel.

Today, Fischer and his team use the software to track and monitor about 40 instrument types, 300 portfolios, nearly 4,000 risk factors, and 70,000 deals, mainly from the Tel Aviv trading floor. Technical support and internal development of the system is provided by a dedicated group in the bank’s IT division that works closely with the market risk team.

Driving better business decisions
Using IBM Algo Market Risk, the bank’s market risk team runs a daily batch process overnight by extracting data from the dealing room. Running a scenario-based Monte Carlo simulation, as well as historical VaR, the software performs calculations to help Fischer and his team to evaluate trades and risk.

The team also runs stress tests on an as-needed basis. At the end of the process, data is exported to other systems, such as those used to monitor credit lines and collateral. The firm’s risk unit also shares the output with traders and management via the intranet or in VaR reports. The bank now runs a daily risk analysis batch process for all positions in all portfolios, which allows it to deliver accurate information to managers on a consistent basis.

Each morning, the managers on the trading floor review daily risk analysis information. In addition to helping them to analyse risk, these insights allow trading-floor managers to know if they are within limit on trades. If they are not within limit or require further data analysis, the managers consult the risk management unit for assistance. For example, Fischer’s team might run simulations via IBM Algo Market Risk to determine risk that is based on various scenarios.

At the end of every week and month, the market risk team also performs statistical calculations using the software and generates a report that helps management compare productivity and risk. “With this understanding, we gain better insight into our profitability,” continues Fischer.

Gaining comprehensive insight and control
Before using IBM Algo Market Risk, the only people within the bank who really understood market activities were Bank Hapoalim’s trading-floor dealers. With the IBM Algo solution, it is simpler for management to gain a comprehensive understanding of risk and determine meaningful limits.

Fischer goes on to discuss organization-wide benefits, “By implementing IBM Algo Market Risk, we established a language that empowered the trading floor and management to clearly communicate risk.”

The development of this risk language enabled Bank Hapoalim to cut the number of limits used. “This frees our dealers to pursue more opportunities, allowing us to trade in instruments that did not have the performance capacity to quantify risk,” adds Fischer.

While IBM Algo Market Risk has given the bank additional latitude, the software has also helped it to prevent unsanctioned trading. Traders are not allowed to trade or take a position in an instrument if it can’t be loaded into the system.

Extracting full value from IBM Algo Market Risk
In order to take full advantage of its methodology for market risk and the software’s capabilities, Bank Hapoalim is always seeking new applications in different areas of the bank. As one example, it uses IBM Algo Market Risk to monitor counterparty exposure.

The computations from the system are used as the basis for determining collateral required by customers. In fact, the software is used to monitor counterparty risk with the bank’s largest customers in order to calculate future credit exposure.

Fischer explains the competitive advantage this provided, “When we were the first in Israel with a methodology and system for risk management, we had an edge over other banks in the country because we better understood counterparty risk.”

If a bank unit handling the transfer and monitoring of a Credit Support Annex (CSA) has doubts about the accuracy of the data, the risk management unit provides a calculation of the CSA portfolio. As well, the bank’s accounting group uses calculations from IBM Algo Market Risk to value derivatives.

IBM Algo Market Risk is also used to monitor exposures of Bank Hapoalim’s banking book and asset and liability management on a regular basis. Once per month, Fischer’s market risk team extracts cash flows from the banking book and data from its trading books and calculates the overall market risk, which it then reports to the bank’s executive committees.

“While IBM Algo Market Risk undoubtedly enables us to have a solid foundation for risk management, its value clearly extends beyond that scope. By using it throughout the bank in numerous ways, we’ve realized far more advantages from the solution than we had anticipated,” concludes Fischer.

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.

For more information
For further information please visit ibm.com/business-analytics

Products and services used

IBM products and services that were used in this case study.

Software:
Algo Market Risk

Legal Information

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