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Risk Management & Compliancethe way we do itEnterprise Risk ManagementResponsible risk-taking that maximizescorporate performanceThe financial crisis proved extremecomplexity is the new normal. Now,banks must recalibrate how theymonitor and manage risks accordingly.In October 2009, a group of seniorfinancial supervisors from five majornations reported that, despite progresson risk management, banks still need“.a full and ongoing commitment torisk control by management, as well asthe dedication of considerable resourcestoward developing the necessaryinformation technology infrastructure,”to close gaps between actual andrecommended risk practices1.In an earlier report2, the same grouphad already identified various firmwide risk management practices askey differentiators leading to betterperformance among banks in thefinancial crisis, so the latest conclusiononly added to the attention being paidby regulators to the need for enterpriserisk management (ERM). In fact, ERM isfast being positioned as the best practicefor banks seeking to thrive in a postcrisis global financial system.

ERM Practitioners Had an Edge in the CrisisEnterprise risk management practices were cited as a key differentiator by the SeniorSupervisors Group* in its 2008 report Observations on Risk Management Practices duringthe Recent Market Turbulence.Firms that “demonstrated a comprehensive approach to viewing firm-wide exposures andrisk, sharing quantitative and qualitative information more effectively across the firm andengaging in more effective dialogue across the management team” tended to deal moresuccessfully with the ongoing market turmoil (at least up to that point), said the group.More specifically, the Senior Supervisors Group said four firm-wide risk managementpractices differentiated better performance from worse among banks in the financial crisis.Those four practices are: Effective firm-wide risk identification and analysis, Consistent application of independent and rigorous valuation practices across the firm, Effective management of funding liquidity, capital, and the balance sheet, Informative and responsive risk measurement and management reporting.* The Senior Supervisors Group consists of 10 agencies representing 7 countries.U.S. Federal Reserve Board ChairmanBen S. Bernanke has publicly stated that“.policymakers must insist that thelarge financial firms they supervise becapable of monitoring and managingtheir risks in a timely manner and on anenterprise-wide basis.3”ERM is a Must Given the Evolutionof Financial Markets and RiskThe financial crisis demonstrated exactlyhow complex and interrelated riskshad become—and how ill-preparedmany banks were to monitor their ownexposures, especially across the firm.In the past, credit and market risk werecertainly less interrelated, with a crisisin one sector at times spilling overinto another but rarely underminingmultiple segments simultaneously. Themost recent financial crisis changedall that. Instead, the recent crisis wasmarked by the contagion effect amonginterdependent markets and players.Simple risk-diversification strategies oftendid little to mitigate losses, and certainproducts—such as derivatives like creditdefault swaps—relied on such a complexand interrelated web of counterpartiesthat all parties suffered when conditionschanged for underlying products.Given the changing shape of globalfinance, it is perhaps not surprising thatday-to-day risk-management practiceshave failed to keep pace. Unless yourbank takes to heart the lessons learnedfrom this financial crisis, it will be illprepared for the next.ERM can provide your bank with thecapabilities needed to:Accurately map and monitor thedifferent dimensions of risk andreturns across your entire organization Establish accountability for those risks/returns; and Institutionalize a risk appetite thatprovides your firm with a consistentprism through which to pursueprofitable and ‘opportunistic’ risks andavert hidden threats. 1Risk Management Lessons from the Global Banking Crisis of 2008, Senior Supervisors Group (SSG), October 21, 20092Observations on Risk Management Practices during the Recent Market Turbulence, Senior Supervisors Group, March 6, 20083Financial Reform to Address Systemic Risk, Ben S. Bernanke, Speech to the Council on Foreign Relations, March 10, 2009

Risk Management & ComplianceYour bank needs a degree of risk insightthat can only be achieved via ERM tooperate profitably in today’s complexglobal markets. In fact, without ERM,it will be increasingly difficult for yourbank to retain a competitive edge,return value to shareholders, or adaptto shifting demands around high-profileissues like compensation practices.Addressing Today’s RiskImperativesIn the face of the market and regulatoryrealities, the case for ERM seemsoverwhelming, but the evolving risklandscape has clearly created enormouschallenges for Chief Financial Officers(CFOs) and Chief Risk Officers(CROs) who must manage the actualimplementation of new risk systems orrecalibrate existing ones.There are numerous strategic issueskeeping bank CFOs and CROs awake atnight, but underlying almost all of thoseconcerns lies fundamental challengesin addressing issues of informationtransparency and data strategy.Regardless of whether your bank has anenterprise risk system in place, you stillneed to:the way we do itAchieve greater transparency, whichrequires a foundation of enterprise riskinformation; Elevate risk-data governance to astrategic business objective; Institutionalize integrated, reliablerisk applications at all levels ofmanagement. These three initiatives form criticalbuilding blocks in a sound ERMapproach. Without them any ERMapproach would be hard-pressedto either mitigate risk or maximizeopportunity in today’s complexoperating environment.With a robust, integrated data strategy,your bank will be better positionedto establish an enterprise view ofrisks so you can view, and activelymonitor, exposures across businesses,counterparties and risk dimensions. Thispicture lets your bank extract maximumvalue from each of the risks you takeon, identify the degree to which any riskexposure needs to be actively managed,and spot concentrations and otherhigh-risk exposures that exist or couldemerge as circumstances change.6 Key Data-Related Risk ChallengesAmong the top data-related challenges for many banks:1.Data is trapped in silos, e.g., after M&A, hiding firm-wide risk accumulations (andpotential portfolio off-sets).2.Inconsistent valuations and reference data exist across different parts of the firm.3.Few standards have been established for data (e.g., Are there clearly defineddefinitions/standards for risks/risk types?)4.Data-governance models are often inadequate (e.g., Who owns data and updates?Who verifies data? What policies ensure adherence to protocols?)5.Risk systems do not allow for proper analysis of firm-wide exposure across riskdimensions, counterparties, etc.6.Models generate incorrect forecasting of potential outcomes (e.g., models are toobackward-looking and not dynamic enough).

Capgemini’s Solutions to AddressRisk & Market ChallengesCapgemini offers solutions for EnterpriseRisk Management that give your bankthe tools and frameworks you needto optimize your risk managementcapabilities and integrate riskmanagement framework into strategicdecision-making processes.Our risk management offerings focuson developing a more integrated,transparent and predictable riskframework. Capgemini’s EnterpriseRisk Framework is highly flexibleand outlines a set of risk managementpractices that can be fully adoptedor adapted to your existing riskframework. Capgemini’s solutions canbe implemented as individual modulesor an end-to-end package to:Assess and analyze your firm’s existingEnterprise Risk Model; Develop your Enterprise RiskManagement Strategy covering keyareas such as loss forecasting, creditrisk scoring models and referencedata & semantics; Identify and support InformationStrategy & Architecture, Governance& Metadata, Customer DataIntegration and Master DataManagement; Build custom-tailored ERMDashboards and Reporting solutionsfor a holistic and comprehensive viewof risk exposures, including marketrisk models and methodologies andintegrated forecasting; Perform software selection,implementation and applicationsupport for Enterprise RiskManagement package solutionsfeaturing vendor partnerships withIBM, SAS, Oracle, Fermat, SunGard,Oracle and FinArch. Capgemini also understands thatespecially during tough times, financialservices organizations need quick returnswith minimal investment. Based onour experience with large global banks,Capgemini developed two highly focusedsolutions for enterprise risk managementthat bring quick benefits while alsohelping banks establish a roadmap fora longer-term ERM program.

Risk Management & ComplianceEnterprise Risk MaturityAssessment: Learn WhereYou StandWith our proprietary MaturityAssessment model, Capgemini can helpyou assess and analyze your bank’scurrent risk frameworks, includingthose for credit and operational risk.The assessment provides your firmwith an understanding of where youstand compared with industry bestpractices, regulatory standards andrecommendations, and gauges thedegree to which your existing datainfrastructures are adequate and scalableenough for future ERM needs.Capgemini’s Sigma Map lets you map risk types to the balance sheetAssetsBalance iskLiquidityRiskReputationRiskLoans &LeasesSecuritiesLiabilitiesDepositsGovt. Funds& ReposBorrowingsSubordinateNotesEquityAt the end of our assessment, Capgeminiwill deliver:An assessment of models for credit,market and operational risk; An evaluation of your Basel IIpreparedness, IT architecture andorganizational structure as it relatesto risk; A future-state roadmap for enterpriserisk management.the way we do itEconomic Capital Measures Enterprise Risk Dashboard: Seethe Whole PictureFor effective enterprise riskmanagement, your bank needs aclear understanding of the completerisk exposure and the impact of yourexposure on stock price valuations.Capgemini’s proprietary Sigma Map framework lets your bank capture anenterprise-wide view of risk positionsacross critical business dimensions soyou can proactively manage and controlthe entire risk profile. Through SigmaMap , we can help you map thebalance sheet to risk types and measurethe combined impact on stock price.Capgemini can help your firm developan enterprise risk dashboard that:Presents a holistic view of all risk typesfaced by your organization; Defines the risk/return trade-offs usingbest-in-class Key Risk Indicators; Integrates reference and market databenchmark performance; Lets you review changes in exposuresand evaluate the potential impact oncapital allocation; Provides a wealth of different reports; Supports loss forecasting and scenario& trend analysis. Using our real-world experienceimplementing risk managementdashboards for top 10 banks in theUS and across the globe, Capgemini’sERD is built on a proprietary PortfolioReporting Framework that leveragesour extensive experience. We can helpyour bank implement dashboards usingyour own data in a Capgemini-hostedenvironment or entirely within yourown infrastructure.