Volvofinans Bank Case

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Founded in 1959, Volvofinans Bank supports sales of Volvo products on the Swedish market by providing product and sales financing. (Mer text om vad de gör och hur bra de gör det). In the face of major regulatory changes, FCG was assigned by Volvofinans Bank to help them concretize the meaning of the changes and to develop new calculation models to ensure the best possible basis for risk assessment, capital requirements and not least good regulatory compliance.

As FCG has been involved in 9 out of 10 approval processes of Swedish banks in this phase, we have gained a unique understanding of the process and challenges. Volvofinans Bank was the first of their kind to submit their IRB application in accordance with the new guidelines. The precision of all the models involved has been improved, which among other things contributes to a lower capital requirement and lower safety margins.

The Challenge

A number of new regulations and guidelines have been composed by the European Banking Authority between 2016-2019, that will come into effect in 2022. Being the biggest era of change since the birth of IRB 2007, Volvofinans Bank and other banks are now tasked with thoroughly reviewing their rating systems while making necessary operational changes to comply with new guidelines and regulation. The challenges include interpretation of the legislation and its impact on the business, the development of new and more precise calculation models, and last but not least having to handle major changes in tandem with maintaining the daily operations.

Why are these changes coming, and why now? Changes have come in waves from the financial crisis in 2008-2010 (read more about the actions taken here). All actors must comply with the same regulation, but the interpretation of them has historically been quite different[1]. Thus, Basel and EBA have seen the need to clarify the guidelines, to ensure consistent interpretation. This, the authorities argue, will result in a “Level playing field”. A benchmark portfolio was sent out to a number of banks, to test how their models worked. The results were highly varied, and so the authorities saw the need to streamline their regulation.

CITAT GUNNAR VOLVOFINANS OM NEDAN?

As the new regulation is still open to interpretation, there is great value for banks to bring in external support in interpreting and implementing the new regulations in order to achieve alignment with industry best practice. Knowing how to interpret new regulation might not always be easy – here FCG can help. There is also the resource aspect to bringing in experienced consultants to help with the process. In today’s industry, many risk control departments are “tight staffed”/highly specialized, so when larger changes arrive it might be difficult to maintain daily operations as well as implementing new regulation.

Our combined expertise, both from the industry and the FSA, can be helpful to risk control departments. Regulatory expertise in the risk control area is also a strength, as we can help with the entire process – from regulatory interpretation, analysis, project management, implementation and maintenance.

The Solution

CITAT FCG?

Volvofinans Bank’s decision to work with FCG was based on their extensive experience in the type of application, helped by our deep regulatory expertise and implementation resources. To manage the change, the project was split in several parts, each with it’s own goal and timeline. The cooperation included interpretation and implementation of new guidelines/regulation, as well as supporting the preparation of the application for material changes of bank’s rating systems to the FSA (see figure for an overview of the various steps taken, and the scope of the project). Several competences have been involved to ensure success in each phase/step/part, including kompetenser (exempel). The first approval process was conducted back in 2018 (definition of default). We have developed models and technical documentation, as well as code to create and validate various models.

CITAT GUNNAR VOLVOFINANS?

The Results

Volvofinans Bank were the first IRB bank to send in a complete application package, having tailored and updated their operations and models to comply with the new regulation. Volvofinans Bank has increased their precision in all modeling also taking into account the new guidelines and can now assess their risks in a more precise manner. Having completed and implemented a large number of IRB applications in the past, we are happy to have played a part in Volvofinans Bank’s IRB approval application.

CITAT GUNNAR VOLVOFINANS?

Lägga till vad den ökade precisionen leder till – kapitalkrav, säkerhetsmarginaler etc. Dela upp resultatet i 3-4 kvantifierbara/definierbara delar med tillhörande ikon.

 

Övrigt material

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”Dokumentation av utvidgningar eller förändringar

  1. För utvidgningar eller förändringar av internmetoden eller avancerade mätmetoder som ska godkännas av de behöriga myndigheterna, ska instituten, tillsammans med ansökan, lämna följande dokumentation:
  2. a) Beskrivning av utvidgningen och förändringen, dess bakgrund och mål.
  3. b) Genomförandedatum.
  4. c) Tillämpningsområde som påverkas av att modellen utvidgas eller förändras vad gäller egenskaper mätt i volym.
  5. d) Tekniska dokument och planeringsdokument.
  6. e) Rapporter om institutionernas oberoende granskning eller godkännande.
  7. f) Bekräftelse på att en utvidgning eller förändring har godkänts genom institutets godkännandeförfaranden av de behöriga organen och datum för godkännande.
  8. g) I förekommande fall utvidgningens eller förändringens kvantitativa inverkan på riskvägda exponeringsbelopp eller kapitalbaskraven.
  9. h) Register över institutets innevarande och föregående version av interna modeller som är föremål för godkännande.

 

  1. För utvidgningar eller förändringar som ska anmälas antingen före eller efter genomförandet ska instituten, tillsammans med anmälan, lämna in den dokumentation som avses i punkt 1 a, b, c, f och g.

 

(1)Kan vara värt att här nämna något om ”RWA variability” (stor variation i beräkning av riskvikter/REA mellan banker) som varit en av anledningarna till alla guidelines. Se exempel på detta här: https://eba.europa.eu/eba-publishes-reports-on-comparability-of-risk-weighted-assets-rwas-and-pro-cyclicality