Overview:

• The model was used successfully, and subject to regulatory approval, the client will use similar simulations across its entire organisation.

Challenge:

A global investment bank had recovered well from the 2008 economic crisis, due to decisive and strong management. The crisis did highlight, however, some defects in their risk models, leading to some wildly inaccurate projections. They approached Challenge Advisory to contribute to an overhaul of their risk management strategy, including a comprehensive redesign of their Value-At-Risk (VAR) model and stress-testing frameworks—as well as to help set up and scale up the program, run the program-management office, and ensure stakeholder alignment.

The Revelation:

Challenge Advisory’s risk team structured a blueprint which allowed for more accurate risk management programs. This blueprint was split into four facets for a comprehensive risk management strategy; methodology, market data, IT implementation and process. An early test of the project served as a proof of concept.

Overhauling the client’s method for handling stress, the risk team designed a framework that modelled a number of shocks that could have a wide economic impact. Working with the client, a number of scenarios were modelled by randomising these shocks at varying levels of severity using a user interface.

Previously, this had taken the client two weeks to set up; this modelling process took Challenge Advisory one day, and could thus be used for day-to-day risk management. Challenge Advisory also collaborated with the client’s IT project managers in order to establish an operating model, implementing IT systems and integrating the new frameworks and models. A key objective for the client was to use a comprehensive system that calculated risk across the entire portfolio, which would enable the client to send out a market outlook that was consistent and reliable.

Challenge Advisory’s risk team collaborated closely with all stakeholders at all times throughout the project, keeping them updated with respect to important developments. The risk team also helped the client to address any interdependencies between the market-risk transformation program and other initiatives. Challenge Advisory’s risk team helped the client to set up the program, and after 12 months, the team handed over responsibility to the client’s internal change agents.

Outcomes:

The VAR model constructed by the risk team was used by the client for a successful pilot program that involved several interest rate products. The model was used successfully, and subject to regulatory approval, the client will use similar simulations across its entire organisation.

Challenge Advisory is continuing to work with the client on related projects, including a review of its pricing-model control processes and implications for model risk.