Enhancing Compliance: How a U.S. Regional Bank Transitioned to a New Regulatory Capital Framework for Market Risk

THE CLIENT: A regional bank based in Texas focused on Capital Markets

USERS: The investment risk management team 

This regional bank based in Texas is a diversified specialty lender offering a broad range of banking services, with a strong focus on capital markets activities. The bank has a growing trading portfolio that includes credit spread derivatives, investment securities, and interest rate instruments, used for effectively managing credit risk.

The bank's Investment Risk Management team initiated a project to comply with the Federal Reserve's Market Risk Rule (MRR)¹ for regulatory capital requirement calculations. Their primary goal was to implement a Value-at-Risk (VaR) based approach for determining Market Risk Capital requirements. Additionally, the team sought to integrate scenario analysis to gain deeper insights into potential risk factors. By leveraging these methodologies, they aimed to accurately estimate capital requirements while enhancing their strategic planning capabilities.

The Investments Risk Management team faced difficulties in determining capital requirements for their varied portfolio, which encompasses multiple asset classes, including credit spread derivatives, investment securities and interest rate swaps, highlighting the complexity of their trading environment. In their effort to establish a consistent framework for addressing all exposures, they identified a gap in their ability to fully revalue the portfolio for capital requirement calculations, as they were relying solely on the Standardized Approach.

Pain Points

During our discussions, we evaluated the current workflows related to risk reporting and capital calculations. The Investments Risk Management team faced difficulties in determining capital requirements for their varied portfolio. They sought a fast and agile framework that would be fully compliant with FED’s regulatory requirements and effectively address their internal risk management use cases. The goal was to identify solutions that could overcome the following obstacles:

• Need for Comprehensive Risk Reports: They faced significant difficulties in generating comprehensive risk reports, which hindered their ability to make informed decisions. Additionally, they struggled with accurately capturing essential risk metrics, such as Historical VaR, critical for effective risk management.
• Dual Approach to Risk Aggregation (Top-Down and Bottom-Up): There was a strong desire to create both Top-Down and Bottom-Up risk reports that clearly outline various risk types and their associated factors across different asset classes. To achieve this, the client aimed to implement a structured process for generating these reports, ensuring consistency and accuracy.
• Cost Efficiency: For this initiative, the bank faced budget constraints and sought solutions that provided costs aligned with the size of its portfolio, ensuring value while maintaining quality standards.
• Need for More Powerful Risk Modeling: To improve their reporting capabilities, the client recognized the necessity of including key risk metrics such as standalone, incremental, and allocated Historical VaR. Incorporating sensitivities and capital calculations into their reports was also essential for obtaining a holistic view of risk exposure.
• Regulatory Compliance: The importance of regulatory compliance was paramount, as the client emphasized the need for transparency throughout the reporting process. A well-documented approach was critical to meeting regulatory requirements and maintaining stakeholder confidence.
• Need for Consolidated Platform: To tackle their challenges, the client required enhanced processes for calculating VaR effectively. Additionally, they needed to manage multiple data sources efficiently while ensuring adherence to evolving regulatory demands to maintain robust risk management practices.

The Solution

Recognizing these needs, S&P Global stepped in with a tailored Risk-as-a-Service solution, designed to provide a comprehensive array of risk measures across multiple asset classes. The bank's challenges were significant; they struggled to generate comprehensive risk reports, faced difficulties in accurately capturing key metrics like Historical VaR, and needed a consistent framework to address their diverse portfolio. Moreover, budget constraints made it imperative to find a solution that was both effective and cost-efficient.

Our advanced risk modeling capabilities became a cornerstone of the solution. We enabled the bank to perform full revaluation of derivatives and structured products, which was crucial for gaining deeper insights into their risk exposures. The flexible aggregation and drill-down capabilities allowed the bank to dissect their risk landscape, providing clarity and facilitating informed decision-making. Leveraging industry-leading data was another pivotal aspect of our approach. By integrating premier market and reference data with proven risk analytics, we enhanced the bank's risk infrastructure. This seamless integration ensured that their existing systems operated more smoothly, allowing the bank to manage its diverse portfolio effectively while adhering to evolving regulatory demands.

At the heart of our solution was a flexible VaR methodology, specifically designed to support the bank's regulatory capital calculations under the Federal Reserve's MRR. This methodology allowed for segmentation into standalone, incremental, and allocated metrics. Customizable parameters—including look-back period, return type, percentile, and decay factor—empowered the bank's team to generate tailored reports that aligned with their specific requirements. This flexibility was essential for improving their risk assessment capabilities and ensuring they could respond swiftly to market changes.

Regulatory compliance was paramount for the bank, and our VaR methodology provided the assurance needed to navigate the complex regulatory landscape confidently. As they worked diligently to meet the MRR requirements, S&P Global stood by them, reinforcing their commitment to transparency and thorough documentation throughout the reporting process. Cost efficiency was another critical factor. Our cloud-enabled technology allowed the bank to pay only for what they used, significantly reducing the administrative burden associated with deploying and maintaining a risk solution. This approach not only preserved flexibility but also aligned perfectly with the bank’s budgetary constraints. We understood that our role extended beyond just providing a solution; we were committed to empowering the bank's team with knowledge. Comprehensive technical documentation detailing methodologies and model performance was provided, ensuring that the team could fully grasp and implement the frameworks effectively.

Additionally, we offered tailored assistance for regulatory inquiries, positioning ourselves as a valuable partner in their compliance efforts. This collaboration not only fulfilled the immediate needs of the client but also set the stage for their future success in managing a diverse trading portfolio. As the bank embraced the comprehensive the S&P Global Traded Market Risk solution, they found themselves better equipped to navigate the complexities of the capital markets. Their enhanced risk management practices, combined with the confidence of regulatory compliance, reinforced their reputation as a reliable player in the financial landscape. Together, we forged a path toward resilience and success, ensuring that the bank was well-prepared to face the challenges of tomorrow while effectively executing their strategic plan.