Desafios na Implantao dos Modelos Avanados para Risco Operacional no Ita Unibanco 3.

Seminrio Internacional Febraban Modelos Avanados para Risco Operacional

Ita Unibanco Holding S.A.

The Merger

The Merger

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Ita-Unibanco
The Merger

Main Efforts 2009

9 Integration of operations, several teams and areas.

2010
Migration: the big change will consist of the merger of the network comprising one thousand branches of Unibanco into the Ita platform.
9 Platform

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Ita-Unibanco

9 103,835 Employees

9 37,612 Points of Service

9 3,933 Branches

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Ita-Unibanco
Overview

9 Payroll credit portfolio totaled R$ 6,714 million

9 Real estate credit portfolio amounted to R$ 9,368 million

9 Itaucard, Unicard and Hipercard offer a wide range of products to 23.8 million customers

9 In capital markets, markets Ita BBA is the bank with the highest number of transactions, transactions with a market share of 75%

9 Insurance: Porto Seguro and Tempo Participaes agreements.

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Ita-Unibanco
Vision

Beingtheleadingbankinsustainableperformanceandclientsatisfaction

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Ita-Unibanco
Organizational Structure
RiskManagementResponsibility:decentralizedmanagementandcentralizedcontrol

CENTRALIZED CONTROL

DECENTRALIZED MANAGEMENT

AROE

ACRF

Legal & Compliance

Technology

WMS

Small/Middle S ll/Middl Companies

IBBA

Operational Risk Management Internal Controls Efficiency y Ombudsman & Quality Corporate Security Loss & Risk Data

Financial Control Risk Control Capital Calculation Operational p Risk Control

Vehicle & Real State Credit

HR & External Units

Treasury Funding, Trading, & Research

Consumer Credit

Insurance & Marketing

Treasury Banking, ALM, Products & Clients

Retail Bank Comercial & Products

Investment Bank

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Basel The Merger 2 Project

Basel II Project

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Basel II Project
Work Fronts

Coaching

Strategy

Methodology

Documentation and Reporting

Management Tools

Processes

Risk DB

Internal LDB

External LDB

Systems /IT

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Basel II Project
Work Fronts

Coaching
CultureAssimilation

Strategy

Methodology

Documentation and Reporting

Management Tools

Processes

Risk DB

Internal LDB

External LDB

Systems /IT

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Basel II Project
Work Fronts

Coaching

Strategy
TimeLineDefinition Definingtheareasinvolved inthemanagementandtheir responsibilities OrganizetheCommittees Structure OpRisk concepts Developmentofoperational riskmanagementpolicies

Methodology

Documentation and Reporting

Management Tools

Processes

Risk DB

Internal LDB

External LDB

Systems /IT

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Basel II Project
Work Fronts

Coaching

Strategy

Methodology
Elaborating measurementmodels SelfAssessment methodologies Developing methodologiesof CapitalCalculation

Documentation and Reporting

Management Tools

Processes

Risk DB

Internal LDB

External LDB

Systems /IT

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Basel II Project
Work Fronts

Coaching

Strategy

Methodology

Documentation and Reporting

Definingrequirements Collectionandanalysis Assessdocumentation process Elaboratingreporting structure

Management Tools

Processes

Risk DB

Internal LDB

External LDB

Systems /IT

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Basel II Project
Work Fronts

Coaching

Strategy

Methodology

Documentation and Reporting

Management Tools
Mappingmanagement toolnecessitiesand responsibilities Currenttool functionalityassessment andimprovedtool design Elaboratingoperational riskmanagement policies

Identifying the process of Processes the bank D Defining fi i a methodology th d l t to indentify and categorize risks (risk dictionary, decision trees) Undertaking a mapping of the risks from the processes

Defining criteria to Risk DB categorize risk and events M Management t and d storage t of f risks, indicators and control data

Data model

Storage and processing of d t data Data quality Account Reconciliation Aligning with management vision

Internal LDB

ORX association

External data processing

External LDB

Identification and Systems documentation of/IT systems that support pp OR management in the business areas Identification and documentation of systems that support the loss and risk DB Identification of the interfaces Assuring systems integrity and reliability

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Basel II Project
Work Fronts

Coaching

Strategy

Methodology

Documentation and Reporting

Management Tools

Processes
Identifyingthebank processes Undertakingamapping oftherisksfromthe processes

Risk DB

Internal LDB

External LDB

Systems /IT

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Basel II Project
Work Fronts

Coaching

Strategy

Methodology

Documentation and Reporting

Management Tools

Processes

Risk DB
Definingcriteriato categorizeriskand events Managingandstoring datarelatedtorisk eventsandindicators BEICFsData

Internal LDB

External LDB

Systems /IT

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Basel II Project
Work Fronts

Coaching

Strategy

Methodology

Documentation and Reporting

Management Tools

Processes

Risk DB

Internal LDB
Datamodel Storageandprocessing ofdata Dataquality AccountReconciliation Aligningwith managementvision

External LDB

Systems /IT

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Basel II Project
Work Fronts
C Coaching hi St t Strategy M th d l Methodology Documentation and Reporting M Management t Tools T l

Processes

Risk DB

Internal LDB

External LDB
Consortiumassociation Externaldataprocess

Systems /IT

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Basel II Project
Work Fronts

Coaching

Strategy

Methodology

Documentation and Reporting

Management Tools

Processes

Risk DB

Internal LDB

External LDB

Systems /IT
BusinessAreasManagement: mappingandcataloguing supportivesystems RiskandLossDB:mappingand cataloguingsupportivesystems Identifyingtheinterfaces Assuringsystemsintegrityand reliability

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The Merger

Quantitative Methods

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Quantitative Methods

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Quantitative Methods

Inputs

Losseventsperrisktype

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Quantitative Methods
Frequency and Severity Model

Inputs

Losseventsperrisktype

Bestfitforfrequency distribution(Poisson, BinomialBinomial Negative) Bestfitforseverity distribution(Weibull, Lognormal,Exponential,etc.)

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Quantitative Methods
Frequency and Severity Model

Inputs

Calculating VaR

Losseventsperrisktype

Bestfitforfrequency distribution(Poisson, BinomialBinomial Negative) Bestfitforseverity distribution(Weibull, Lognormal,Exponential,etc.)

MonteCarlosimulationto accessconvolutedloss distributionandVaR (99,9%/1 year) Obtainingexpectedand unexpectedlosses

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Quantitative Methods
Frequency and Severity Model

Inputs

Calculating VaR

Losseventsperrisktype

Bestfitforfrequency distribution(Poisson, BinomialBinomial Negative) Bestfitforseverity distribution(Weibull, Lognormal,Exponential,etc.)

MonteCarlosimulationto accessconvolutedloss distributionandVaR (99,9%/1 year) Obtainingexpectedand unexpectedlosses

Aspectstoconsider:
Widerangeofdistributionsandadjustmenttechniques Mitigationtechniques Possibilityofincorporatingexternaldata
Probability of Loss

Capital calculation and distribution

Mitigation risk strategies

BackTesting

Total Loss Severity Per Period

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Quantitative Methods
HeavyTails As single g eobservation obse at o may aydramatically d a at ca ychange c a gethe t eestimation est at o

Number of events

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Quantitative Methods
HeavyTails As single g eobservation obse at o may aydramatically d a at ca ychange c a gethe t eestimation est at o

Density

2e-04

Density 5000 10000 15000 20000

1e-0 04

0e+00

0e+00 5000

1e-0 04

2e-04

3e e-04

3e e-04

4e-04

4e-04

10000

15000

20000

Losses Loses

Losses Loses

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Quantitative Methods
ConfidenceInterval:
NumberofObservationsmatter

ConfidenceIntervalfor1000 observations

F re q u e n c y

1 0 0

2 0 0

3 0 0

1000

2000

3000

4000

5000

6000

Loses Losses

F re q u e n c y

ConfidenceIntervalfor10000 observations

1 0 0

2 0 0

3 0 0

1000

2000

3000

4000

5000

6000

Loses Losses

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Quantitative Methods
DataGenerationProcess: IIDassumptiongenerallydoesnotholdforalongperiod

550

Freq quency

De ensity 2000 2001 2002 2003 2004 2005 2006 0.000 0.005

450

50 00

0.010

0.015

450

500 Frequency

550

600

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Alternative Approaches

Alternative Approaches, such as Scenario Based Analysis, and the use of Business Environment and Internal Control Factors are useful tools.

Implementation can potentially be a beleaguered task. However, the long term benefits from capital allocation and risk management will overcome short term difficulties and needed adjustments

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Conclusion

Itau Unibanco faces a challenge to meet Basel II regulatory requirements. However, Basel II Project Work Fronts increase efficiency in its processes, systems and risk management.

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