HSBC has this week announced that it has launched a new scenario risk tool to manage credit risk more efficiently in its trading portfolio. The Risk Advisory tool runs on Google Cloud and has allowed the global bank to not only reduce the time it takes to run risk simulations, but also run multiple simulations at the same time.
The HSBC news comes ahead of Google Cloud's annual user conference, Next ‘21, where the company will be making a number of product announcements and where customers will be speaking about their use of Google Cloud. You can register to attend the virtual event here, which runs from 12-14th October.
We got the chance to speak to Ajay Yadav, Global Head of Fixed Income & Digital Strategy for Traded Risk at HSBC, about the new Risk Advisory tool, where he explained how risk and trading teams think about credit risk in the bank's portfolio. Yadav said:
"We look for concentration or any position that may be illiquid in our portfolio. So it's that interplay between concentration and illiquid that you really try to understand and manage as best you can. We are a global bank with a trading portfolio with lots of names that you're managing.
The idea is that you should be able to do multiple different scenarios to look at many different outcomes, especially extreme outcomes - these black swan events - and then see how your portfolio has behaved throughout that scenario.
And if some numbers come out that are not within your risk appetite, you should be able to have some mitigating actions in place, so if that event does play out, you are in a much better place. "
A holistic view of risk
HSBC was previously doing this on-premise, but running multiple scenarios, where billions of data points are generated, requires a huge amount of computational power. The bank realized that its speed to decision making could be improved if it was to use cloud technologies. This led it to a collaboration project with Google Cloud and the creation of the new Risk Advisory tool. Yadav said:
"We always run scenarios, that's our bread and butter. But what Google Cloud does is gives us the power of computation. Having a whole lot of simulations run on every single name that you have on your trading portfolio - you can imagine that when you start doing that, with the number of calculations, the power of computation becomes very, very important.
You start generating millions and millions of data points. To start looking into that data requires a huge amount of hardware.
It was taking us a long time to do this, just because of the capacity that we had on-premise. So the cloud basically increased that speed. Something that took us a few hours to do, now takes us less than 15 minutes, purely because of the power of computation. "
Yadav explained that Google Cloud also gives HSBC the ability to do multiple runs at the same time. For example, rather than risk managers running one or two scenarios, the new tools means HSBC can have dozens, if not hundreds, of people running scenarios at the same time. He added:
"The user base is not limited, so now 50 or 60 people for example can run scenarios all through the day, not just the risk people, but the trading people too. So we can scale it as and when we need to.
So we are not only reducing the time it takes to get to the answer, but also increasing the amount of people that can use the tool at any given time. With more and more people running different scenarios, and everyone bringing their information and results into one place, you get a much more holistic view of the risk."
HSBC has been working closely with Google Cloud on this project and Yadav was keen to highlight that thanks to the collaboration efforts on both sides, the speed of delivery was exemplary. In fact, the tool was up and running in less than five months.
Commenting on what he'd learned during the process of getting the tool in place, Yadav said:
"Collaboration is the key. Getting communication and collaboration right is important. There was a lot of unknown, you don't know whether it's going to work or not, but you have to go for it. Having people step up was a big eye opener for me, that my team was willing to do this, and did it - you need to overcome this fear of failure, because it's worth it."
The bank's market risk digital development team is now looking to include the impact of climate risk on the trading book. The HSBC Risk Advisory tool would take into account the rating agencies' ESG scores to assess where trading portfolios may be more susceptible to climate change risk.
Summing up the benefits of launching the new tool, Yadav added:
"Data to decision making, that time is paramount. Especially when you have volatile markets - during the pandemic, markets were all over the place. So that reduction in time from data to decision I think is one of the most important things.
The other thing is increasing the resilience of the portfolio. We are now much more confident that the portfolio is more resilient to many different outcomes, and we can see that and act on that."