Liquidity Risk Management powered by SAP HANA

Liquidity Risk Management
powered by SAP HANA

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© 2012 SAP AG. All rights reserved. 2

Agenda

What is HANA?

Challenges in Liquidity Risk Management
LRM@HANA Overview


Banks face an information availability problem

Data volume
? ?
?Calculation speed
is exploding is stagnating

Requirements on information availability are increasing

Traditional approach of OLTP and OLAP fails


Boundary conditions for high performance computing

CPUs do not get faster Number of cores on the rise

CPU clock speed – memory bandwidth –
Memory and storage prices (1955-2010) memory latency


In-memory computing – the time is NOW

The elements of In-Memory computing are not new. However, dramatically improved hardware
economics and technology innovations in software has now made it possible for SAP to
deliver on its vision of the Real-Time Enterprise with In-Memory business applications.

HW Technology Innovations SAP SW Technology Innovations

Multi-Core Architecture Row and Column Store
(8 x 8 core CPU in one server)
Massive parallel scaling with
many blades Compression

+
One blade ~$50.000 =
1 Enterprise Class Server
Partitioning
64bit address space
max at 2TB in current servers
100GB/s data throughput
Dramatic decline in No Aggregate Tables
price/performance


SAP HANA appliance software

SAP
BusinessObjects SAP NetWeaver Other query tools
SAP HANA™ tools
In-Memory software + hardware
(HP, IBM, Fujitsu, Cisco, Dell) SQL BICS SQL MDX

Data Modeling and Data Management
SAP HANA
Real-time Data Replication
SAP BO Data Services for ETL capabilities from SAP HANA Studio and Modeler
SAP Business Suite, SAP Business Warehouse
(SAP NetWeaver BW), and 3rd Party Systems SAP In-Memory Database
SAP NetWeaver as In-Memory app. server
Calculation and Row & Column
Planning Engine Storage
Capabilities Enabled
Analyze information in real-time at unprecedented
speeds on large volumes of non-aggregated data SAP Business
Real-Time Data
Objects Data
Create flexible analytic models based on real-time Replication
Services
and historic business data
Build new category of applications (e.g., planning,
simulation) to significantly outperform current
SAP NetWeaver
applications in category SAP Business
Business
Other data
Suite sources
Minimize data duplication Warehouse


Memory in TB area is becoming available on
commodity hardware

32 bit Systems 2^32 = 4.294.967.296
4GB limit per CPU

64 bit Systems 2^64 = 18.446.744.073.709.551.616
Only constraint by physics (64/128 modules)

Capacity per module grows Price per module shrinks
with new production processes with new production processes
(8GB – 16GB – 32GB) (-30% with 32nm)

1 blade with 64 modules can hold up to 1TB (16GB)


Thinking in-memory

Delegation of data intense operations to the in-memory computing

High performance apps
delegate data intense
Application Layer operations to the
in-memory computing

Today‘s applications
execute many data Data Layer
intense operations in
the application layer

In-Memory Computing Imperative
Avoid movement of detailed data –calculate first, then move results


SAP HANA in action – tier 1 bank
(see below for SAP LRM-specific performance results)

Standard System

73
GB

In-Memory
System

5,2 GB

60 minutes 10 seconds


How HANA helps banks
Opportunities for your business

Sales, Service,
Human Resources Corporate Services Finance & Risk Transactional Banking Marketing

Strategic Workforce Advanced and Fast and accurate Transaction history Sales Analysis
Planning and optimized Finance Reporting and advanced across all channels
Reporting Purchasing analysis capabilities
Liquidity Risk Customer
Invoicing analysis Management Real time fraud segmentation and
and acceleration Accelerated detection & action exploration for cross-
Accounting Loan portfolio selling and marketing
analysis campaigns
Integrated
Profitability Monitor mission Know your customer
Management critical processes by a consistent,
up-to-date 360° view


Categories of usage scenarios of SAP HANA

AFI RDL Extension
CO-PA Accelerator

Accelerators

Transaction History BW on EDW for SAP and
Financial Reporting Reporting HANA Non-SAP data
Database

Analytics on High Liquidity Risk
any data source Technology Performance Management
Applications Fraud
SAP HANA
Management

Business Suite
on HANA


Available usage scenarios of SAP HANA for banks

CO-PA BW on AFI RDL Fraud
Technology Accelerator HANA Extension Management

Q1/2013
Q3/2012
Q4/2011
Q4/2011
Q2/2011 …/…
Q4/2012
Q1/2012
Q4/2011
Q3/2011 Planned

Transaction FI/CO Accelerated Liquidity Potential
History Accelerator Financial Risk Future
Reporting Management Functions

Not exhaustive


SAP HANA™ provides the solution to the information
availability problem

Manage high
? ?
?Increase
data volume calculation speed

Reduce information latency

Next Gen Platform for SAP Apps integrating OLAP+OLTP


Challenges in Liquidity Risk
Management

Funding Liquidity Risk
Internal Risk Management

Risk that the firm will not be able to meet efficiently both
expected and unexpected current and future cash
flow and collateral needs*
A first step of a funding liquidity risk calculation consists
in calculating the Forward Liquidity Exposure in terms of
the Legal Cash Flow Gap.
In a second step hypothetical cash flows should be
taken into account as well. These simulations should be
driven by market development, customer behavior and
bank strategy to generate a more realistic
Economic Cash Flow Gap.
If liquidity gaps are detected when analyzing the
economic cash flow gap, a third step consists in
calculating the Counterbalancing Capacity. All assets
like bonds or committed lines are used to resolve
potential liquidity bottlenecks.

* Basel Committee on Banking Supervision – BCBS 144 Principles for Sound Liquidity Risk Management and Supervision


Market Liquidity Risk
Internal Risk Management

Risk that a firm cannot easily offset or
eliminate a position at the market price
because of inadequate market depth or market
disruption*.
This risk could come up in conjunction with OTC
trades or when solving liquidity gaps with the
release of huge positions exceeding usual trading
volumes.
Market Liquidity Risk is currently not in focus.

* Basel Committee on Banking Supervision – BCBS 144 Principles for Sound Liquidity Risk Management and Supervision


Funding Liquidity Risk to be based on cash flows
being the least common denominator

Funding Liquidity Risk Management needs to be done comprehensively, all
on- and off-balance sheet positions have to be taken into account.
Cash flow view supports New Product Procedure in terms of flexibility.
Relevant reporting and steering could be done on Cash Flows.
Cash Flow roll out for complex instruments to be done by dedicated systems.
– Consistency with other risk categories crucial (e.g. different risk types based on the same
curves).
– Actual market data needed, due to illiquidity traders’ expertise sometimes required
– Complex pricing algorithms needed, difficult to replicate
– Banks often do not want to disclose pricing algorithms


Liquidity Risk Management
Regulatory requirements

Issue date/
issuer 2008 2009 2010
BCBS BCBS 136 Liquidity BCBS 155 Principles for sound stress BCBS 188 Basel III:
(Basel Committee Risk: Management and testing practices and supervision International framework for
on Banking Supervisory Challenges BCBS 157 Enhancements to the Basel II liquidity risk measurement,
Supervision) BCBS 144 Principles framework standards and monitoring
for Sound Liquidity BCBS 158 Revisions to the Basel II
Risk Management and market risk framework
Supervision BCBS 159 Guidelines for computing capital
for incremental risk in the trading book
EBA CEBS (CP 28) Guidelines on Liquidity CEBS (CP36) Guidelines on
(European Banking Buffers Liquidity Cost Benefit
Authority) CEBS (CP 31) Guidelines on aspects of Allocation
the management of concentration risk
CEBS (CP 32) Guidelines on Stress
Testing
UK FSA CP 08/22 CP 09/13 Strengthening liquidity BIPRU Chapter 12:
(Financial Services Strengthening standards 2: Liquidity reporting Liquidity standards
Authority) liquidity Standards CP 09/14 Strengthening liquidity
CP 08/24 Stress and standards 3: Liquidity transitional measures
scenario testing
US Dodd-Frank Wall Street
Reform and Consumer
Protection Act


BCBS 188: Basel III
Intern. framework for liquidity risk measurement, standards and monitoring

Level 1: Cash, Sovereign and Central Bank Debt
High Quality (usually 0 % Risk Weight*), …
Liquid
Assets Level 2: Sovereign and Central Bank Debt (usually 20 %
LCR Risk Weight*), AA- or higher rated bonds, …
Ratio:
Net Cash Cash Outfllows: Retail deposits, Unsecured Wholesale
Outflow Funding, Repos, CCLs, Derivative Outflow
(30 D
Cash Inflows: Reverse Repos, Obtained Credit Lines,
Horizon)
Other Inflows
Liquidity
Risk
> = 100 %
Regulatory Capital
Available
Stable
(Less) Stable Deposits, Wholesale Funding
Funding
(Sources)
All other Liabilities
NSFR
Ratio:
Cash, Securities, Debt, Off-balance Sheet Exposures
Required
Stable
Bonds, Equities, Gold, Specific Loans
Funding
(Uses)
All other Assets

* Risk Weights could be retrieved from SAP Basel II Credit Risk Solution


Challenges in Liquidity Risk along
different dimensions

BASEL III requirements
New Liquidity Rules under Basel III
Reduzierung des
Ut enim ad
Moving Target as full Basel III Implementation runs to 2018
minimBASELZeithorizontes
veniam, III
quis Market

LRM Environment
Market situation nostrud exercitation
Mortgage crisis, European debt crisis, what´s next?
Increasing costs for refinancing and liquidity procurement
LIQUIDITY
Organization & processes Organi- RISK
Data
Strong collaboration between different LoBs required zation & MANAGEMENT
volumes
Change in liquidity management processes possible processes
Aktualität der
High data volumes Planungsgrundlage
mit entsprechend
Cash flow orientation causes huge data volumes
konkreten
Analytics
How to handle these volumes for ad hoc steering purposes? Zielvorgaben
Analytics
Simulations, predictive analytics, scenario analysis required
A solution needs to cover compliance, analytics and steering

Multidimensionality impacts the entire banking and liquidity arena


SAP LRM@HANA meets the challenges

SAP LRM@HANA content supports Predict liquidity needs on basis of
Basel III compliance scenarios, simulations and stress
testing in real-time
Ut enim ad
Reduzierung des
minim veniam,III
BASELZeithorizontes
quis Market
nostrud exercitation

Intuitive User HANA technology allows
LIQUIDITY
Interfaces Organi- RISK for intraday processing
Data of large data volumes
Collaborative zation & MANAGEMENT
volumes
processes support processes ... in atomic granularity
Aktualität der
holistic handling of Planungsgrundlage
liquidity risk mit entsprechend
konkreten
Analytics
Zielvorgaben

Stress testing, scenario analysis and simulations
Seamless drill-down from group-level results to individual cash-flows


LRM@HANA –
enabling real time Liquidity Risk Management

Extreme aggregation of 200+ Mio. cash flows in 1 second
performance real time load and analysis

extensible architecture for modeling of customer
Open platform for specific logic
specific models extensive configuration capabilities for complex
filtering, aggregation and calculation rules

what-if analysis on behavioral and market
Ad-hoc simulation parameters
and drill down single contract level including full drill down


SAP Liquidity Risk Management Test Results

>60 minutes

290M
Cash
Flows 4000x faster

Aggregated
& Selected

<1 seconds

Standard System In-Memory System


Product Scope LRM 1.0

SAP LRM@HANA, enables banks to perform real time,
high-speed liquidity reporting and risk management on
large volumes of individual cash flows
The application allows for pooling all types of cash
flows, including operative, simulated, and stressed
data from various SAP and non-SAP source systems
Framework to calculate risk key figures including
regulatory requirements like Basel III ratios
Users can apply basic stress factors to the data, for
example to gauge the effect of varying haircut and
run-off rates, or the re-classification of certain assets
Intuitive UIs enable business users to analyze and
compare scenarios


SAP Liquidity Risk Management 1.0 Architecture

BI Comprehensive Liquidity Risk
Reporting

Netweaver High Performance Cash Flow
SAP Liquidity Risk App Aggregation and Key Figure
Calculations
ETL
SAP HANA

Cash Flow Pool (non-SAP) SAP Bank Analyzer Upload of Stressed / Unstressed
Cash Flow Engine
SAP Cash Flow Engine/ Cash Flows for Current and
Strategy Analyzer
Simulated Business

Operational Systems (SAP and non-SAP)
Loans Deposits Securities Derivatives


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