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Industrialization of Risk and Regulatory Processes in Banking , The way forward

I had, in my last blog, said “The objective of Industrialization is to drive innovation and efficiency by reengineering the value chain to add measurable value. In this blog, I take a deeper dive into process of Industrialization with Stress Testing platform as the use case to illustrate the point.

The regulators are demanding consistency across reports as well as transparency and line-of-sight into all data, risk & regulatory processes. Banks are challenged both on consistency across reports given the siloed approach, as well on transparency and line of sight as there are multiple manual interventions trying to stitch together processes that are piece meal automated. Echoing this, a study states that “86% of institutions face challenges with risk data aggregation capabilities, overarching governance framework and connected infrastructure”. This chasm between expectation and reality of “connectedness” sets a strong business case for Industrializing the critical processes of Risk and Regulation with an active Process Orchestration capability.

It is pertinent to point that implementation of an industrialized approach is most effective when done on a use case basis.  I have chosen Stress Testing platform as the use case for three reasons - a) It is both a regulatory and an internal requirement with regular occurrence at periodical interval, b) Is a huge cost, and c) It is a great example to illustrate the benefits of industrialization because it answers all the below qualifying questions with a resounding “Yes”.

  • Does it have a critical mass in terms of Volumes?
  • Is the current process resource intensive?
  • Are there manual interventions at multiple points?
  • Is there a sizeable opportunity to reduce cost and increase revenue if the process is streamlined and automated?
  • Is it a critical process for the organization?
  • Can it be automated?

First step, post use case finalization, is to identify the building blocks that are required. Given our use case, the building blocks needed are

  • Data Preparation that includes
    • Data Sourcing and movement
    • Data Quality and reliability enhancement
    • Data Governance layer that looks at Controls, Key indicators, Assessments, issues and action management.
    • Creation of a clean, consistent and comprehensive “Regulatory Hub”


  • Modeling tools and techniques
  • Stress approach methodology and Stress scenarios.
  • Computational steps for arriving at Stressed Capital under different stress scenarios

Having identified the building blocks the next step is to define a lean operating model or Process Model. The challenge and the opportunity here are to identify and eliminate redundancies / duplications; spotting the synergies/ commonalities; reducing manual interventions to the minimum and reuse of data and process artefacts where appropriate.

The question I have encountered most often, is should the process models for similar use case be the same for all banks – the answer is “NO”, just like the operating model of two car manufacturer are not identical at all steps. The building blocks will be largely common though, given the common objective – the difference would be in how the problem is approached and solved.

Let me illustrate this using two samples of process models of banks designed for calculating Stress capital – the first wants its platform to be designed on the regulatory requirement representing the regulatory flow covering Actual, BAU (Business as Usual) and Stress scenarios. It stresses its models say PD, LGD and EAD with the stress values (GDP Fall, adverse Interest rates or Forex rates etc.) and uses the model outputs to arrive at stressed capital.

The second takes a more fundamental approach of stressing the balance sheet and P& L components based on the stressed market and economic scenarios, then calculate PD, LGD and EAD values and arrives at Stressed Capital. Which is the more appropriate approach – well both have their rationale. Can the same bank have both approaches in an industrialized model – the answer is yes – have a common flow for the data preparation block and then branch off into two models – One regulatory the other as internal. This capability not only saves cost but builds in great operational efficiency while providing the flexibility required. 

Once the lean process model is defined and approved it can then be automated with appropriate technology that provides unified analytical platform. The objective is to stitch together the different building blocks allowing seamless flow of the data, process in a transparent and auditable manner (remember, this is the risk and regulatory platform that must be audit and regulatory scrutiny enabled.)

The above is the preparatory phase. The dynamic part is when the process is executed and is to be monitored - through “active Process Orchestration”. One of my banker friends, calls this as “The central master piece” for an industrialized approach as it enables banks to actively monitor, control and manage the process such that it delivers not just cost savings but measurable value through standardization, automation and traceability.

Summing up, Industrialization of Risk and Regulatory processes in banks is not just a process for process sake but one that will make strategic contribution to the organization by delivering sustained measurable value.



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