By Doriana Iovino, Director of Credit Risk and Analytics, Metro Bank
Doriana, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?
I joined Metro Bank 5 years ago, it has been an incredible journey in an incredible company. I love to be part of Metro Bank’s ambition to bring the revolution to the banking sector and my team tries to contribute to this Vision! I manage the department responsible for credit risk reporting, impairment, modeling, prudential risk and credit risk policy for both commercial and retail lending.
Before joining Metro Bank I worked for various Tier 1 Banks and gained exposure in the management of multiple product portfolios in UK and across Europe, specializing in analytics driven credit risk strategy formulation and planning. I started my career as economist for the Pirelli-Telecom Italy Group, I hold an MSc in Economics and Social Science from University Bocconi in Milan. I am married and have 2 children; the youngest is 5 months old and I am currently on maternity leave.
What, for you, are the key considerations when implementing effective internal governance of IFRS 9 processes to ensure a smooth day operationalism?
With IFRS 9, complexity is increased together with volatility of the output, however the timeline to report monthly impairment remains extremely tight.
The models need to be embedded in the business behaviors, we invested an incredible amount of time in training the first line (especially in the mortgage and commercial businesses) so they can understand how to manage customers and their exposure.
At the same time we created a new suite of data and processes and a target operating model that is fairly detailed to identify roles and responsibility almost by the hour. Automation of processes and reporting together with a strong change governance framework is key to ensure frictionless operationalisation.
For example, the monthly reconciliation process is automatically performed and the sign off by the business and credit leads happens ahead of the model run. The business owners are provided with top movements every month and they are asked to provide commentary about the customers ahead of the impairment committees.
How can risk professionals best manage gaining board and committee buy-in and understanding sign off?
A few things… let’s start with the main principle: clarity is far more important than complexity.
Sometimes analysts feel that more formulas and convoluted concept there are in a paper cooler they are going to look. This is true, within the analyst community, doesn’t work with board and committees. In the team, the principle we apply is that any document needs to be complete, self contained and written in a way that also colleagues without a PhD in Physics can understand.
Secondly, when writing a paper start with the end in mind and then build the reasons that support your request.
Third, never surprise committee’s members and board members. Work with your team and the first line to test and trial the request you are making and ahead of the request for formal approval.
Finally, remember if you work in risk you don’t really own the models, the regular involvement of the business is necessary to understand the models and explain their results.
Please can you provide an overview of the governance around macroeconomic data and future forecasts and key things to remember?
Metro Bank decided to acquire macro economic data from a well known 3rd party, this gives the bank the ability to access to multiple scenarios and understand the weight associated to each scenario.
The Bank choice was driven by its size and the absence of an internal economic department. The decision to use external data automatically lifted some of the key issues around the governance of scenarios weights.
Additionally, Metro Bank decided to build IFRS9 together with IRB, the Bank started from scratch a new suite of: data warehouse, models and target operating model. we didn’t save a lot of what was in place before, consciously deciding not to build legacy. This was a courageous decision but made the model governance easier as we apply IRB governance to IFRS9 and Stress testing.
With respect to the macroeconomics, I suggest limiting the scenarios to three to five and creating a macroeconomic risk appetite that helps committee and board to understand the macro movements and the impact on impairment on a monthly basis.
How do you see the impact of IFRS 9 evolving over the next 6-12 months?
I would definitely expect some convergence of bank’s approaches and in some cases further simplification of the models. Additionally, I am expecting the PRA to get closer to the model methodology and governance specifically in relation to the integration of the models into Stress testing.
Finally, I expect Banks to invest on integrating the IFRS9 models in the decision making processes.