Impairment and provisioning under IFRS.
Methodology and solution implementation –
– practical experience
Natalia Cierna
Adam Kołaczyk
Bucharest, 11 April 2007
1
Introduction
2
Impairment methodology
3
Experience from implementation projects
4
Impairment methodology
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© Deloitte 2007
Advantages of implementing provisioning under IFRS
Apart from meeting reporting requirements relating to IFRS introduction, implementing provisioning
according to IAS 39 and IAS 37 will result in:
1. Convergence of provisioning methodology with the approach used in credit risk management
and Basel 2 e.g. use of PD, LGD, recovery rates, EAD)
2. Better collateral management, ability to analyse collateral efficiency and credit risk
measurement.
3. More accurate estimation of loan provisions:
ƒ
Accounting for bank’s specifics in the area of exposures, internal credit risk assessment
methods, effectiveness of receivables and collateral collection processes.
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© Deloitte 2007
Our experience
„
Experience in the development of effective interest rate and financial asset impairment methodologies
gained in both local and international financial institutions.
„
Possessing dedicated, tested and working IT solutions – IRR Tool and Impairment Tool – hence we can assure
efficient, competent and timely project realization.
„
Playing active role in Polish Banking Supervision Commission (KNB) and Polish Banking Association working
group developing KNB’s impairment implementation recommendation.
„
Capacity to provide complete services due to possessing a unique team representing comprehensive
knowledge and expertise acquired in local and Central European environment in the areas of IFRS
implementation, financial instrument accounting, Basel II, risk management, and developing own IT tools related
to these areas.
„
Experience in managing projects which covered both development of methodology and implementing it in IT
systems.
„
Experience in implementing integrated risk management systems covering ALM, FTP, Basel 2 and IAS 39.
„
Experience in building and implementing IT solutions which support accounting in accordance with IFRS in banks
and non-financial institutions:
¾ Impairment tool - system for specific and portfolio provisions according to IFRS;
¾ IRR Tool - system for measurement of debt instruments using effective interest rate;
¾ CRD Synergy Engine – integrated IT solution for Capital Adequacy EU Directive (CRD).
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© Deloitte 2007
Our experience
Impairment
Methodology:
ƒ BRE Bank (Commerzbank Group)
ƒ Invest Bank (Poland)
ƒ DZ Bank Poland
ƒ Fortis Bank Polska
ƒ OTP Bank Slovakia & Romania
ƒ EFL Leasing (Credit Agricole Group)
ƒ Santander Consumer Bank (Poland)
ƒ Hypo-Alpe-Adria banks in Serbia & Bosnia
ƒ Cacanska Banka (Serbia)
ƒ GE Money Bank (Czech Republic)
IT supporting tools:
ƒ BRE Bank (Commerzbank Group)
ƒ Invest Bank (Poland)
Effective interest rate
Methodology:
IT supporting tools:
ƒ Raiffeisen Bank Polska
ƒ Raiffeisen Bank Polska
ƒ Bank BISE (Poland)
ƒ Bank BISE (Poland)
ƒ Invest Bank (Poland)
ƒ Invest Bank (Poland)
ƒ DZ Bank (Poland)
ƒ Hypo-Alpe-Adria banks in Serbia & Bosnia
ƒ OTP Bank Romania
ƒ Cacanska Banka (Serbia)
ƒ GE Money Bank (Czech Republic)
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© Deloitte 2007
1
Introduction
2
Impairment methodology
3
Experience from implementation projects
4
Impairment methodology
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© Deloitte 2007
IAS provisioning approach – Terminology
Impairment – a reduction of the asset value (recoverable value) below its book value due to the
increase in credit risk.
Default – inability to fulfill the contractual obligations. A delay in payment over 90 days is an
example of a default indicator.
Loss event – objective evidence of impairment - an event indicating an increased risk of default,
e.g. a breach of contractual obligations, bankruptcy, distressed restructuring.
LGD (loss given default) – loss on a loan that has defaulted (1-LGD = recovery rate).
PD (probability of default) – probability of a loan to become defaulted.
IBNR (incurred but not reported) losses – losses which based on statistical data has already
occurred but have not been identified individually by the bank
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Financial assets and off-balance sheet exposures
concerned
In most jurisdictions IFRS provisioning requirements replace provisioning rules for loans and off-balance
sheet exposures, hence new approach must cover both types of exposures:
On-balance sheet exposures
1.
Extended loans (all types)
2.
Credit card receivables
3.
Forced receivables (for example arising from letters of credit, guarantees, debit cards,
breach of limits etc.)
4.
Breach of limits debits in current and settlement accounts
5.
Current account loans
6.
Interbank loans
7.
Reverse-repo transactions/ buy-sell-back transactions,
8.
Commercial papers
Off-balance sheet exposures
1.
Guarantees
2.
Letters of credit
3.
Undrawn amounts (including credit cards, credit lines, loans, refinancing lines for banks
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IAS provisioning approach – major topics
Main topic areas regarding IAS 39 / IAS 37 provisioning methodology include:
1.
Individual vs. portfolio assessment – individually significant and insignificant exposures
2.
Client segmentation into homogeneous credit risk groups – for example, according to
internal rating, type of product, type of client, past due status
3.
Impairment identification:
ƒ Occurrence of loss events
ƒ Application of PD (Probability of default)
4.
Provision calculation
ƒ Estimating cash flows from payments made by debtor and collateral realizations
(recovery rates, LGD) and calculate provision
ƒ Discounting using effective interest rate
5.
Recognition of interest income on impaired loans, so called „impairment interest”
ƒ No suspended interest concept under IFRS
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Individual vs. portfolio assessment – segmentation
into portfolios
„
The segmentation of assets into those which are
assessed individually and those which are
assessed on the portfolio basis in order to identify
loss event.
„
Individually significant items are assessed
individually.
„
Individually insignificant items are assessed either
individually or on the portfolio basis (portfolios build
based on similar credit risk characteristics)
„
Assessment of significance should take into
account actual management of an exposure
(managed on individual basis or group basis)
„
Those which have been identified as impaired
during individual assessment are excluded from
the collective assessment
„
Collective assessment is not possible if the number
of homogenous transactions is insufficient
„
Need to compare model results with the actual
losses
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© Deloitte 2007
Individual vs. portfolio assessment – segmentation
into portfolios
In order to establish individual significance the following should be considered:
„
Credit risk type of given transaction/portfolio and credit risk management method employed by
the Bank: retail vs. non-retail exposures – when dividing exposures into those assessed
individually and collectively it is important to account for the actual method used to manage
given exposures;
„
Financial report materiality (value of transaction / portfolio – individually / collectively);
„
Number of transactions of a given type and availability of data relating to those transactions –
portfolio approach cannot be used if there is a small number of transactions of a given type.
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© Deloitte 2007
Identification of impairment – examples of loss events
The next step after dividing exposures into those which will be assessed individually and collectively is the
identification of exposures/portfolios where a loss event occurred. Some loss events are universal regardless
of client type and product, whereas some are specific to a given client or product type. A sample list of loss
event for corporate clients is presented below.
„
Past due status in principal or interest payments – past due 90 days or more.
„
Significant breach of contract.
„
Distressed restructuring:
ƒ Change in payment schedule of credit/transaction arising from lack of financial ability on the
part of the borrower to make payments specified in the original contract,
ƒ The Bank has requested payment of the obligation (in whole), but has not started collateral
realization proceedings,
ƒ Contract cancellation (in whole or in part) and /or start of collateral realization proceedings.
„
Decrease in the borrower’s rating.
„
Information regarding account blocked as of the date of the analysis (for significant reasons).
„
Decrease in borrower’s rating (into default category or by two grades or more).
„
Decrease in the value of collateral: increase in LTV (transaction exposure amount / value of
realizable collateral) above a certain threshold for project finance transactions and brokerage loans.
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© Deloitte 2007
Provision calculation – balance sheet exposures
„
Impairment occurs only when a loss event(s) occurring after the initial recognition of an asset
negatively impacts the amount and/or timing of cash flows related to the asset. In this case, the Bank
should measure the potential impairment loss amount and related provisions.
„
Expected losses which may arise due to future events, no matter how likely, are not recognized.
However, need to recognise „incurred but not reported” losses (IBNR).
Impairment loss = Carrying amount – recoverable amount
recoverable amount = PV (expected cash flows from the asset) + PV (expected cash flows
form collaterals) – PV (collection expenses)
„
The discount rate used to calculate PV of expected cash flows is the asset’s effective interest rate at
the impairment measurement date (for restructured assets – effective interest rate from the moment
of restructuring).
„
Under IFRS interest income is calculated and recognized in income statement on impaired assets
(concept of suspended interest is not present in IFRS).
„
If there is a decrease in impairment loss in a future time period which is caused by events which
occurred after the initial impairment recognition, provisions for impairment should be decreased.
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© Deloitte 2007
Provision calculation – off-balance sheet exposures
„
Provision for guarantees, letters of credit and unused credit lines calculated under IAS 39 & IAS 37.
„
The approach to off-balance sheet exposures entails calculating the provision which should be the
larger of two values:
ƒ best estimate of current obligation calculated under IAS 37 or
ƒ fair value as at initial recognition (usually premium received for granting guarantee) adjusted
for amortization of the initial fair value according to IAS 18.
„
Provision amount is decreased by expected recoveries from collateral, unless the collateral
constitutes a guarantee or insurance policy provided by a different entity – in this case the collateral
is accepted only if its realization is „virtually certain”.
„
Credit Conversion Factor (CCF) applied for measuring provisions for off-balance sheet exposures.
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© Deloitte 2007
Book value of a loan under IFRS
Loan
valuLoan
e for
the c
lient
Principal and
interest
payments
Provision
calculation
(Risk)
Origination
fees and costs
Nominal interest
accrual
Interest income at
the contractual rate
EIR Adjustment
Booking
provisions
(P&L + balance
sheet)
Interest income
according to IFRS
Interest adjustment
to impairment
interest level
Loan book value according to IFRS
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© Deloitte 2007
Impairment under IAS 39 – example
„
„
„
„
A bank extended a 2 year loan for 100 PLN. The Bank did not take any commissions at
loan origination. Consequently, the contractual interest rate on the loan of 10% is
equal to the effective interest rate (EIR). The principal is to be repaid in two equal
installments at the end of each year.
One year after loan origination, the loan was identified as impaired (the debtor went
bankrupt). The book value of the loan at the time of impairment amounted to 110 PLN
(100 principal + 10 accrued interest).
The bank assessed the recoverable amount from collateral at 66 PLN to be received in
one year. After discounting the recoverable amount using EIR (10%), the present
value (PV) of the recoverable amount equals to 60 PLN (66/(1+10%)=60).
Consequently, a 50 PLN (110 – 60) provision was created, and consequently the net
book value of the loan after provision amounts to 60 PLN.
From this moment interest should still be accrued using to the original EIR (10%), but
now applied to the 60 PLN basis. Consequently, after one year accrued interest will
equal 6 PLN and the net book value of the loan will equal to 66 PLN (60 + 6), which is
the amount the bank estimates to obtain from the collateral realization.
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© Deloitte 2007
Impairment under IAS 39 – example
1)
Loan principal
100
2)
4)
Accrued interest
10
10
5)
Provision
50
1)
2)
3)
4)
5)
6)
3)
Interest adjustment
to imp. int. level
4
5) 3)
Interest income (P&L)
10
10
4
6
2)
4)
6)
Provision costs (P&L)
50
Loan extension
Contractual interest accrual for first year (before impairment)
Creation of provision
Contractual interest accrual for second year
Interest income adjustment to impairment interest level
Interest income for second year according to IFRS (impairment interest)
Provision calculation:
Principal
Accrued interest
Book value of the loan
Minus: discounted recovery
Provision
Impairment interest:
Contractual interest
Loan net book value
Interest rate
Impairment interest
Interest adjustment
100
10
110
-60
50
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10
60
10%
6
4
© Deloitte 2007
1
Introduction
2
Impairment methodology
3
Experience from implementation projects
4
Impairment methodology
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© Deloitte 2007
Standard scope of impairment projects – methodology
stream
Methodology stream:
„
Analysis of currently used by a bank methodology for assessing and measuring loan provisions in
the light of IFRS provisioning requirements.
„
Verification of sufficiency of data collected by the bank in the light of IFRS provisioning
requirements.
„
Advisory on developing impairment methodology in accordance with IFRS:
ƒ identification of product for which IFRS provisioning methodology should be developed,
ƒ segmentation of portfolio into exposures for which impairment will be assessed on individual
and collective basis,
ƒ methods for creating homogeneous portfolios (for collective impairment analysis),
ƒ defining loss events (objective evidence of impairment losses),
ƒ methods for estimating future cash flows form principal, interest, and collateral for impaired
exposures,
ƒ PD, LGD and EAD parameter calculation / estimation methods,
ƒ methods for impairment loss calculation and presentation including application of effective
interest rate,
ƒ rules for recording impairment losses in the Bank’s books, balance sheet and profit and loss
account.
Methodology developed in the steps described above considers data and credit process limitations.
However, we define necessary data requirements i.e. data that needs to be collected in the future in
order to satisfy IFRS impairment requirements.
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© Deloitte 2007
Standard scope of impairment projects – IT stream
IT stream:
„
Implementation of Impairment Tool supporting identification, assessment and measurement of
impairment losses and IRR Tool supporting effective interest rate calculation and EIR
adjustments or alternatively
„
Supporting internal or external development, implementation, and acceptance test of IT tool
supporting impairment identification and measurement of impairment losses and effective
interest rate.
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Special cases
During implementation there is a need to cover special cases for which IAS 39 does not provide
direct treatment, for example:
„
„
„
Mismatch between currency of loan (e.g. EUR) and collateral value which is usually assessed in
local currency (e.g. RON). Should it be converted using:
ƒ
spot rate or
ƒ
forward rate?
Which interest rate use for discounting of recoveries from a loan after troubled restructuring? IAS
39 requires to use the rate prior restructuring. But what to do if, for example:
ƒ
the rate prior restructuring was floating?
ƒ
the currency of the loan has changed?
Impairment interest on exposures for which IBNR provision has been created.
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© Deloitte 2007
Major implementation obstacles
The major obstacle is quality of data:
„
Lack or insufficient quality of data on historical recoveries, default rates (PD), credit conversion
factor (CCF) – extended use of expert judgement.
„
Too small homogenous portfolios – impossible to apply collective approach.
„
Lack or insufficient quality of data on current collaterals e.g.:
ƒ difficulties in linking collaterals with loans,
ƒ inaccurate collateral value entered in the systems,
„
Difficulties in linking interest rate used for discounting with appropriate loan.
However, there are other problems as well:
„
Changing mindset of staff involved in assessing individual impairment (e.g. sale staff - credit
officers responsible for loans).
„
Interest income after impairment – adjusting contractual interest calculated by core banking
systems – conceptual (e.g. treatment of repayments and other events) and technical
(infrastructure) problems.
Lack of data often enforces need for simplifications to methodology.
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© Deloitte 2007
Additional scope of impairment projects
„
Assistance in calculating provisions at opening balance and any other dates.
„
On going consultations on impairment methodology after completing the project.
„
Organization of the impairment measurement process.
„
Preparation of internal procedures.
„
Data mining – gathering data on historical default rates (PD), recoveries (LGD), collaterals etc.
„
Data cleansing e.g. collateral data.
„
Implementation of validation procedures to assure high quality of data.
„
Implementing work flow for bad debt collection department.
„
Modifying KPI affected by impairment (provisions and interest after impairment).
„
Modifying budgeting and controlling processes affected by impairment (provisions and interest
after impairment).
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Experience from a working group developing National
Bank of Poland impairment recommendations
„
Polish Banking Supervision Commission (KNB) aimed at developing recommendation
(Recommendation R) that would present best practices in implementing impairment requirements
under IFRSs, including:
ƒ defining roles and responsibilities of bank’s Supervisory Board and Management Board in the
impairment process e.g. establishing the process of impairment identification and
measurement and internal controls for this process,
ƒ defining elements of internal impairment identification and measurement rules and
procedures,
ƒ defining impairment methodology, including use of expert judgement, valuation models, rules
for creating homogenous portfolios, valuation of collaterals, validation tests, collecting
historical data,
ƒ defining roles of internal audit in relation to impairment process,
ƒ explaining IAS 39 impairment concepts especially in the areas where IAS 39 does not provide
direct guidance.
„
The Recommendation is not a binding law – approaches other than those presented in the
Recommendation are also acceptable (provided they are in accordance with IFRSs).
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© Deloitte 2007
1
Introduction
2
Impairment methodology
3
Experience from implementation projects
4
Impairment Tool
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© Deloitte 2007
Impairment Tool
Impairment Tool implements a transparent and real life proven concept of IFRS adjustments:
„
„
„
The Tool allows to maintain the existing process related to
transactional systems operation and processing, that are
currently implemented in a bank (IFRS requirements do
not override the need to obtain data using the existing
methods, e.g. tax, legal, business line performance, client
communication).
No significant changes to the bank’s reporting process are
required: the existing reporting systems and the
organization / reconciliation process still apply, but with a
new (not critical) component added.
The output data may be delivered on various levels to
seamlessly integrate with the current bank’s environment:
ƒ analytical data extracts required for reporting,
GL Core system
(local GAAP)
IFRS Tool
(GL adjustments)
„Nominal values”
BBB
AAA
IFRS adjustments
BBB
AAA
10
10
6
6
8
8
4
4
10
10
6
6
ƒ stand alone GL as an adjustment to local GAAP GL,
or
ƒ direct adjustments accounted in the bank’s GL by
using the existing interfaces.
„
„
The solution is focused on events, which have impact on
IFRS valuation (all unadjusted values remain only in the
core systems).
IFRS G/L
AAA
BBB
10
6
6
10
8
4
4
8
10
6
6
10
Effective implementation, fastest processing (less data),
transparent and verifiable, integrated into existing
architecture.
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© Deloitte 2007
Impairment Tool – the core functionality
„
„ Exposure management
Customizable / asynchronous processing
ƒ Covers broad range of Bank’s assets (installment
ƒ Data extraction and loading processes (ETL) for
loans, overdrafts and revolvings, credit card
exposures, collateral and contract/client data are
receivables, interbank transactions) with unified
implemented on the data layer.
set of data for all B/S products and all off-B/S
ƒ The system enables definition of unique processing
products.
calendar based on which of the dedicated EOD,
ƒ Multi-level data access: the system enables to
EOM, EOY processes are performed.
operate on the level of elementary balances
ƒ Build in functionality for systematic management of
(principal, interest, off-balance) as well as on a
results of all calculation processes and their approval.
single transaction or a group of transactions
ƒ Historical application results are backed up for
constituting one client’s exposure. Drill down to
reporting and audit.
individual transaction and its risk parameters (e.g.
ƒ Automatic notification via e-mail, bounded to the
provision) both for individual and portfolio
chosen events.
assessment.
ƒ Dedicated
user
interfaces
for
gathering
supplementary data, to be used directly by the
operational units i.e. defining recovery rates and
cash flow schedules for principal, interest,
collateral and off-balance sheet exposures.
ƒ Collateral management module enabling collecting
actual recoveries to build own database of
historical recoveries.
ƒ Automatic default identification for the portfoliomanaged exposures, and manual for exposures
assessed individually (loss events on the
transaction or client level).
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© Deloitte 2007
Impairment Tool – the core functionality
„
Calculation methods
ƒ Different methods of impairment calculation
enabling convergence with the approach used in
credit risk management (expected cash flows –
individual method, transition matrices – portfolio
method based on risk pools, optional direct input of
risk parameters: PD, LGD).
ƒ Portfolio management basing on characteristics of
the chosen transaction and on the expert model
parameterization.
ƒ Analysis of scenarios and approval of parameters
for calculation (PD, RI).
ƒ Collection of historical recovery data and calculation
of historical LGDs.
ƒ Easily modifiable / extendable (on implementation
level) event handling mechanisms for EOD
processing.
ƒ Preparation of reports for the accounting purposes.
„
Built in GL functionality
ƒ Maintaining history of individual postings,
triggers (events) for postings, account balances
on transaction level.
ƒ Revaluation mechanisms for foreign currency
exposures and other “residential” processes
EOM / EOY on single transaction / account
level.
ƒ Possibility of exporting account balances in
pre-defined structure (file/DB)
ƒ Flexible parameterization (on implementation
level) of accounting schemes for each defined
event
ƒ Recognition of interest income on impaired
loans and adjustments to bring interest income
to the level of impairment interest.
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© Deloitte 2007
System structure and components
The application is centrally-maintained and is available for the end users via an ergonomic WWW
interface (thin client).
The main menu of the system consists of the following sections:
ƒ Administration (available for the technical administrator) – enables the administration of users’
accounts and changes to the databases.
ƒ Exposures (available for the business users) – for the purpose of the individual assessment.
ƒ Calculation (available for the business administrator) – for the purpose of the calculation of
provision for the individual assessment.
ƒ Calculation retail (available for the business administrator) – for the purpose of the calculation of
collective provision.
ƒ Parameters – used to define parameters necessary for provision calculation.
ƒ Work out process (collection process) – allows gathering actual (historical) data on recoveries.
ƒ Reports – for the purpose of the report generation.
ƒ Requests – for the changes of the user rights.
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Individual exposures
„ Suitable user interface enables user to search
(including multiple criteria search), browse and
review of the Bank’s exposures. Available
exposures may be limited based on users
assigned rights.
„ Exposures matching search
criteria listed together with
major transaction details (e.g
default and default acceptance
status)
„ For the chosen exposure the
user chooses the loss-event
from the predefined list
(causing appearance of default
flag).
„ Default has to be approved by
supervisor.
„ Changes made by the user are
stored for supporting of audit
trail.
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© Deloitte 2007
Individual provisions – loss events and recoveries
„ When the user marks the exposure with a
default flag, all other exposures of the given
client are automatically marked with the
default flag.
„ Classification and „default-flagging” of
exposure (including approval process) takes
place automatically for the exposures that
are portfolio-managed and manually for the
exposures assessed individually.
„ For the exposures that are individually
assessed loss-events that can be
automatically derived from transaction
systems (e.g. days overdue) are also
processed automatically.
„ For defaulted transaction the user:
ƒ Estimate estimated recoveries from
principal (repayments expected from the
borrower), supported with presented
contractual repayment schedule.
ƒ Estimate recoveries from interest
(estimated repayments expected from
the borrower).
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© Deloitte 2007
Individual provisions –
off-balance sheet exposures and collaterals
„ In case of off-balance sheet exposure (e.g.
unused credit limit for a loan or issued
guarantee) the user, additionally to
recovery assessment, assess (or use
predefined) CCF parameter (credit
conversion factor).
„ In case of collateralized exposures the
system provides details of collaterals and
the user is required to estimate recovery
from those collaterals (amount and timing).
„ After all recovery data is entered the
system presents transaction and provision
summary based on the provided
recoveries.
„ In case of estimating recoveries from tangible assets collaterals (e.g. property, plant and equipment, inventories)
the system provides functionality allowing for additional verification of estimated recoveries by experts (bank’s
valuators) in particular type of collateral.
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Collective impairment – portfolio parameterization
„ In collective impairment
approach the system enables
definition of new portfolios for
the calculation of PD and RI,
basing on chosen transaction’s
characteristics (product type,
client rating etc.)
„ Each available product can be
assigned to a chosen portfolio.
„ Definition of particular portfolios
is available for the system
administrator.
„ For each type of product
additional parameters can be
defined to be used in the
calculation (CCF, type of the
discount rate).
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Collective impairment – collateral parameterization
„ For each collateral category the
user defines recovery rates and
duration of collection process
(used for LGD calculation based
on discounted collateral value).
„ The system enables collecting
historical data on collateral
recoveries and collection costs,
on which recovery rates would
be calculated by the system.
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Collective impairment – matrixes calculation
„ Calculation of provision is preceded
by the configuration and calculation
of transition matrices.
„ Results of calculation of particular
transition matrices performed by the
system are available for preview and
comparison with each other.
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Collective impairment – provisions calculation
„ Calculation of
provision is based on
given computational
set of data
„ All results of provision
calculation are
available in the
system. The last
accepted provision
could be also seen in
the detailed view for
each separate
transaction.
„ Before generating
final report on
provisions an
approval is required
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Recording of historical recoveries and collection costs
„ The system includes
functionality of collecting
actual recoveries and
collection costs and
linking them to particular
collateral, customer and
exposures. Hence, the
system may produce
analysis of actual
(historical) recoveries
and collection costs in
various breakdowns e.g.
by collateral type,
customer type etc.
„ This functionality enables a
bank to build its own database
of historical recoveries.
„ Data collected on actual
(historical) recoveries and
collection costs are available in
various reports.
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Interest income after impairment – GL module
„ The system generates predefined
postings based on defined at
implementation level configuration of
events, measures and account
definitions.
„ The system maintains history of
individual postings, triggers (events)
for postings, account balances on
transaction level.
„ It uses in-built revaluation
mechanisms for foreign currency
exposures and other “residential”
processes EOM / EOY on single
transaction / account level.
„ Enables exporting account balances
in pre-defined structure (file/DB)
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Interest income after impairment – GL module
„ In-built functionality
enables the user to input
directly information on
account numbers (when
system is unable to
extract it from source
data)
„ The system enables to
manually trigger certain
events both on global
level (EOY) and
transaction level (stop).
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Administration
„ The system enables user and privileges
management, stores users e-mail addresses
and allows automatic notification via e-mail.
„ During processing and computations the
system presents the progress and status of
computations.
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© Deloitte 2007
Additional features
„
„
„
Integration
ƒ
Web user interface can be simply adjusted to different look and feel or translated to a local language
(Custom Style Definition and resource bounding are used). Currently Polish version is available due to the
clients requirements, an English version is planned.
ƒ
Application outputs are available in both an extract file (text, Excel), relational data set, or MQ messages.
ƒ
Either the internal ETL procedures or an external ETL tool may be used to integrate with the data sources.
Security
ƒ
Impairment Tool takes advantage of the company global users repository (e.g. LDAP) to align users
access with global privileges.
ƒ
User’s roles are used to define access to the Tool functionality (specific modules and specific functions in
modules). Restrictions on transactional data scope might also be implemented.
ƒ
Security functions are performed at the application server layer and are configured by a system
administrator. That allows to define user groups (e.g. managers, operators, administrators) and then to
assign users to those groups.
ƒ
The Tool record the users’ activities in a data base log, providing an audit trail option.
Performance
ƒ
The Tool can be deployed on various system configurations scaling their performance to the provided IT
infrastructure.
ƒ
The Tool implements a multi-tier architecture: each tier can be run on dedicated server in order to achieve
the required performance
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© Deloitte 2007
Impairment assessment processes
Automatically
(e.g.
(np. daily)
Source
data
loading
Automatic default
classification
proposal (past due
status or “lost” NB
category)
According to the
working cycle of a
Branch, at least as
often as main
calculation cycle
Regardless
ofod
the
Niezależnie
main
calculation
głównego
cyklu
obliczeń
cycle
(
Classification as
default (on a
proposal basis)
Recoveries for
default
exposures
Verification of
recoveries
from
collaterals for
exposures
classified as
defaults
Main calculation
(monthly cycle –
Główny cyklcycle
obliczeniowy
other frequency
possible)
etap zatwierdzenia
miesiąca wiscyklu
miesięcznym)
Calculation
parameters and
data control
Freeze the
changes in
recoveries till the
end of the month
YES
Provisions
calculation and
results review
OK ?
Results
archiving, start
of the new
month
NIE
NO
Modification of
default
classification,
recoveries,
parameters
Verification and
confirmation of
default
classification
and recoveries
calculation
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NO
YES
OK ?
Confirmation of
the month
© Deloitte 2007
Architecture
Client
Client
Client
•
The Tools are built on Java technology which means it
can be deployed on various hardware and software
platforms.
•
Accessible to the end-users via a thin web based client,
from any workstation in the local or wide area network.
Internet Explorer required only.
•
Presentation tier and the workflow logic run on an
application server (J2EE compliant).
•
The source data is loaded into an internal data store,
with use of the application ETL procedures, or an
external ETL tool.
•
Computations are performed on the Tools internal
operational data store, independently from any banking
systems (does not influence other banking systems
performance nor security). For Impairment Tool,
calculation logic is implemented as SQL procedures run
directly on system’s operational store.
•
Tools have built-in basic reporting functionality. For
further analysis relational data sets are available.
•
Computing results are accessible for any external
system (e.g. for reporting and further analysis) in the
form of relational data sets, extract files, or direct
bookings.
Client layer
Application server
IRR Tool / Impairment Tool
Application layer
Database server
Oracle
Data layer
System 1
System 2
System 3
DATA WAREHOUSE /
TRANSACTION SYSTEMS
ETL procedures are implemented at the
source data layer for Impairment Tool and
at the application layer at IRR Tool.
We suggest use of a data warehouse as the data
source. Obtaining through a data warehouse enables
the system to be implemented and maintained at the
lowest cost. Outputs from the system might be pushed
to a data warehouse as well, to build a single golden
copy for the overall Bank’s reporting.
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© Deloitte 2007
Logical architecture
SOURCE DATA LOADING
„ System has a clear-cut layered
structure that enables effective
functional customization.
DATA LOADING FROM EXTERNAL DATA STORE
MODEL PARAMETRISATION
PD MODULE
LOSS-EVENTS
DICTIONARY
ƒ Adjusting the system to custom
requirements might be done effectively
due to system layering.
IMPAIRMENT AND
REPORTS
PORTFOLIO
DEFINITION
ƒ It is possible to change one aspect of
the system while others are left
untouched.
COLLATERAL DATA MANAGEMENT
COLLATERAL
RECOVERY
DATA
COLLECTION
COLLATERAL
RECOVERY
VERIFICATION
LGD MODULE
BAD DEBT
RECOVERY
DATA
COLLECTION
ƒ It is possible to adjust the system to an
alternative impairment calculation
methodology.
PREPARATION OF CALCULATION DATA
AUTOMATIC
PROCESSES
MANUAL DATA
COMPLETION
MANUAL
VERIFICATION
CALCULATION OF PROVISIONS
PROVISIONS CALCULATIONS
IMPAIRMENT INTEREST RATE
CALCULATIONS
RESULT ARCHIVING
„ The computation process is run
asynchronously, i.e. other functions
are still available to the users while
daily/monthly computations are being
performed.
REPORTING AND DATA EXPORT
REPORTS
DATA SETS
DATA
INTEGRATION
INTERFACE
SCENARIO
ANALYSIS
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© Deloitte 2007
Deloitte
ul. Piekna 18
00-549 Warszawa
Poland
tel. +48 22 511 0077
fax. +48 22 511 0813
Deloitte
4-8 Titulescu Road, 3rd floor,
sector 1, Bucharest, 011141
Romania
Tel. +40 21 222 1661
Fax: +40 21 319 5100
For any questions contact:
For any questions please contact:
Adam Kolaczyk
Natalia Cierna
[email protected]
- 44 -
[email protected]
© Deloitte 2007