Strategic planning: act now to reduce the peak in modelling workload

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Strategic planning: act now to reduce the peak in modelling workload

The Road to Basel IV

Banks are often underestimating the enormous increase in modelling workload caused by implementing new sets of regulations. A clear insight into how the modelling process is outlined, will certainly help to avoid planning problems, such as missing the ECB deadlines, long-term maintenance of capital add-ons, and high development and validation costs. It is vital to act now, to create transparency and reduce the expected peaks in resources.

Multidimensional planning challenges

In the upcoming years, the banking sector will be facing multidimensional planning challenges. These are the result of increasing quantity and quality requirements for models, in combination with comprehensive modelling activities. Many modelling activities will come together in a perfect storm, leading to a huge workload. The modelling activities are to some extent the result of the regulations and guidelines for Credit Risk models, published by the European Banking Authority. These publications set thresholds for the performance of models with strict deadlines. Relevant cases of these publications are the "Guidelines on the application of the Definition of Default" (DoD) and the "Guidelines on PD estimation, LGD estimation, and treatment of defaulted exposures".

ECB deadlines and strategic planning

Deadlines resulting from those publications impact all parties involved. If a bank fails to meet these deadlines this can have major consequences for its capital, due to imposed add-ons. Banks are currently challenged to solve recent TRIM and/or IMI findings and obligations, validation findings, and the implementation of improvements or high priority requirements. Timely and clear strategic planning of deadlines and priorities is strongly recommended in order to prevent a shortage of employees or missed ECB deadlines.

Three angles

To tackle the multidimensional planning challenge strategically, each challenge should be considered from three angles: priorities, parties involved, and interdependencies. These angles will change over time, so they need continuous monitoring. Consider the transition of a particular model to the STA approach, or the link with the data recovery programs. The changes will affect the planning of the bank. Hence, a bank needs a clear overview and must take the possible impact into account. In order to present the most recent overview of the strategic planning, an agile and quick response is necessary.

1. Priorities

Determining the bank’s priorities is the foundation for strategic planning. If the priorities are “clearing imposed capital add-ons as soon as possible”, then all choices within the strategic planning should be aimed at supporting that goal. If the priorities are “implementing the relevant regulations and solving current obligations as much as possible”, then that goal should be central in decision-making. Having a clear goal in mind when the strategic planning is determined will help to create a clear decision-making base for the future. The bank will know what to do first and will save precious time.

2. Parties involved

Next, a clear overview of the parties involved is pivotal. Usually, several departments are involved in implementing a set of regulations (e.g. the Data department, Model Development department, and Model Validation department). Examples of projects are: implementing a new Definition of Default (DoD) or redeveloping all your models based on the new Guidelines on PD & LGD Estimation. These projects are first managed by program management, which is responsible for managing the involved team and the entire chain, from gathering data to the delivery of the report to the supervisor. The department managers must be aware of the impact of those projects on their teams, so they can act adequately and on time, and manage the peaks. They need insight into FTE peaks from all projects for which FTEs from their departments are involved, a few months before the peak actually starts. This will allow them to contemplate the matters at hand, e.g. a decision to reschedule, expansion of the current workforce, or even descoping (parts of) the projects.

3. Interdependencies

The third and last angle consists of the interdependencies. The ideal situation creates a clear overview, an easy decision making process and no surprises. However, the actual situation might be different, as these topics are technical and complex by nature. Creating an overview of the most important known interdependencies, how they might impact the bank’s strategic planning and deciding up-front how to handle them when they occur, is the best recipe for success.

 

Acknowledging the complex and multi-dimensional planning problem at hand is the first step. The next one is to create an overview and insights and continuously plan, and monitor it. With the current regulatory landscape, upcoming Basel IV regulations and the challenges that the banks are facing it is not the question if FTE peaks will happen, but when. Through preparation, precise planning, and by acting now, many problems can be prevented and is the key to success!

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