Advanced simulations and 'stress-proof' models to successfully navigate uncertainty scenarios

Interview with Roberto Russo, Chief Risk Officer of Banca Progetto.

A number of new players are emerging on the global banking scene. These are not just FinTech start-ups, but also real credit institutions, which have two main features:

1. marked vocation towards the extensive use of technologies to enable all banking processes, whatever they may be;
2. strong nature of specialization in very specific products/services.

Banca Progetto is one of these players. Born in 2015 as a turnaround of former Banca Popolare Lecchese by the Californian fund Oaktree, the bank operates in the household and corporate credit market mainly through the digital channel and an intensive commercial network of agents and credit brokers present throughout the territory, without branches.

The Bank has a business model that is as simple as effective: it collects liquidity mainly through deposit accounts in Italy and some European countries and provides only two credit services, namely m/l term loans assisted by a public guarantee fund to SMEs and salary/pension backed personal loans to individuals. A choice that has positive impact either in terms of risk management implications or on the bank's "capital health".

But what characterises Banca Progetto even more is its continuous investment in technological innovation. This is the first Italian bank that has completely outsourced its IT infrastructure to a public cloud, passing all supervisory controls and obtaining the green light from the control and guarantee authorities. This choice allows the bank to be very agile and flexible in its day-to-day operations and to concentrate on core activities, including risk management which, again, relies on the use of advanced technologies such as SAS Scenario Impact Simulator.

What are the main characteristics of Banca Progetto in the current Italian financial landscape?

The high rate of technological innovation is one of the main features. We are the first Italian bank to have chosen - and obtained - the option of moving all our IT infrastructure to a public cloud environment.

This choice allows us unlimited operational capacity in terms of volume, flexibility and availability of "state of the art" technology and substantial control over operations (governance and responsibility for applications and data remains entirely in the hands of the Bank). Not having to manage "the hardware" is an element of great agility for the Bank, also in economic terms.

Contrary to what one might think, having chosen a "strong" partner in the public cloud market becomes an important risk mitigation factor. This is due to the guarantees on service levels and also to the fact that it is a player that has necessarily invested in the construction of data centres in Europe. This is a mandatory step in order to comply with all the strict European regulations, and offer high guarantees to customers (for example, we have a redundant Business Continuity system on three sites - so-called "regions" -, one of which is in Italy and the other two are located in the EU).

The process was not a simple one. Bank of Italy, our supervisory Authority, "didn't let us get away with it", and I’m proud to say that it was a rigorous, firm and very thorough investigation into all the aspects of risk analysis. We showed that we were aware of the "world we were heading towards", and how to govern it..

In recent months, the banking sector has faced an unprecedented crisis. In your experience, how will risk management change after this crisis? What has already changed?

In my opinion, instability, volatility and uncertainty will increasingly be the norm. "The only thing that will be certain is the Change. In such contexts, it is more important than ever to modify the approach to risk management by focusing on advanced simulations and modelling of reality, moving away from the deterministic approach towards more sophisticated and effective predictive analysis models".

We have to start from the assumption that there will never be any model that can predict exactly what will happen in reality; however, navigating through scenarios of uncertainty requires pragmatic but innovative approaches. In this sense, the very role of risk management must be “redesigned”, moving from a function of mere control to a function of decision making to support the business.

In our case, we have evolved the traditional approach to risk management based on deterministic models. We have realised that, both for short-term decisions and for those to be assessed with a more prospective view in the medium-long term, it is necessary to equip ourselves with advanced analysis tools. We are already carrying out advanced simulations to analyse possible scenarios up to 2022. Having such sophisticated and effective risk management tools at our disposal is also a plus for the business in cultivating a constant long-term vision..

What are the reasons that led you choose the SAS Scenario Impact Simulator solution?

SAS has been a leader in advanced analysis and risk management tools for years and has a strong reputation in finance;  I've really appreciated SAS' vision and ability to create a tool "suited to the times we live in" in the right timeframe. The company proved to be fast in proposing technological solutions that, on the one hand, take away the burden of programming, building and fine-tuning the necessary tools from the operators, and, on the other hand, offer very advanced and effective functionalities with respect to the objectives of those who use the tools themselves (i.e. understanding where to go, how, with what risks, ...).

From a business point of view, we chose the SAS solution because it allows us to understand what decisions to take with the greatest possible awareness. It's a very sophisticated and rich platform, and one of the advantages I highlight is the support of the SAS people who help us - through training and advisory - to understand how we can make the most out of the technology.

Today we mainly use it to check the sustainability of operational and strategic business plans, simulating different future scenarios and then analysing all impacts in these "possible scenarios", from the consequences in terms of risk to the analysis of income, assets and liquidity.

We will also be using it shortly for capital planning, the document that will be used by shareholders to determine what further investments to make to support the bank's development: the better we are at simulating and understanding the impact of risk on our prospective portfolio, the more efficiently we will use capital..

Having advanced analysis models and 'stress-proof' simulations is proving to be crucial in managing the impacts of such a volatile economy. In this direction, does it still make sense to talk about stress tests?

Stress tests, in my view, are crucial components of simulations and scenario analysis. They allow us to understand how predictive models we use are "stress-proof" in contexts of high volatility and uncertainty. Stress tests are considered key elements for sound and prudent bank’s management, and this will increasingly be the case as we move into a world where informed decisions will have to be made under conditions of limited rationality. 

They are, and will continue to be, increasingly important in the future, especially if they are part of a much broader approach to analysis which, as I have mentioned, must have the capacity for forward-looking vision as its true differentiating value.