Whatever opinion you may have about the job financial supervisors are doing, you could hardly call them insufficiently inquisitive. Lawmakers, regulators and accounting standards-setters are asking banks and other global institutions to turn over more data more often, and in ever-greater detail.
For many, the change will provide a shock to the system – one that has long required firms to submit static reports at regular intervals, in a standard format, year after year. The watchwords for reporting today are meaningful data assurance and granularity – they will be at the forefront of thinking for supervisors and senior bankers alike.
If there was a ‘big bang’ that ushered in the new era of data management and reporting, the Basel Committee on Banking Supervision (BCBS) ignited it in 2013 with the publication of BCBS 239, Principles for effective risk data aggregation and risk reporting. The document underscores the importance for compliance and good governance of furnishing accurate and timely data, and it has served as a jumping-off point for a host of regional and national endeavours.
Tougher all over the world
This year, the European Parliament is expected to enact updates to the Capital Requirements Directive (CRD V) and Capital Requirements Regulation (CRR II), the primary vehicles by which global standards are adopted into European law. The proposals will be among the most important regulatory developments for banks operating in the European Union in coming years and will demand in-depth analysis.
The European Central Bank’s AnaCredit dataset could pose an even greater challenge because it requires an almost unheard-of attention to detail in the way firms compile data and weave it into existing credit registers. Contract-by-contract information on loans and counterparties is required, with daily updates in some countries. As if that weren’t enough, the deadline for implementing International Financial Reporting Standard (IFRS) 9 is approaching, and firms also face national variations for many global and regional regulations.
Overhauls of Asia-Pacific regulation will require more frequent and detailed submissions. Broad changes are in effect or on the way for the Monetary Authority of Singapore’s (MAS) 610 returns, the Economic and Financial Statistics (EFS) reporting procedures in Australia and for reports required by the Hong Kong Monetary Authority’s more complicated liquidity reporting requirements.
There has been much talk about reducing the burden on US banks, but little action, and authorities are demanding greater specificity in reports covering ordinary activities and stress-test scenarios. Credit impairment, the subject of the new current expected credit loss (CECL) accounting protocols, Federal Reserve systemic risk data (FR Y-15) and liquidity coverage are particular focuses.
Wherever an institution does business, meeting the many new or expanded requirements probably means revamping its reporting and compliance functions. High time, too, for many firms. It is still common practice in some countries to rely on manual or semi-automated data entry when preparing reports. Such methods restrict the amount that can be collected and the depth to which any analysis of it can go, and it raises the risk of inaccuracy.
That is before taking into account the abundance of information to gather, as well as the new methods by which firms will have to gather it. European institutions, for example, will have to run AnaCredit alongside such standards as financial reporting (finrep) and common reporting (corep), which heighten the likelihood of errors creeping into reports, leading to uncomfortable questions – and possibly uncomfortable fines – from the authorities. Indeed, much of the point of imposing different data collection and reporting methods is for each to serve as a check on the others to help ensure accuracy and consistency and sound management overall.
All that data and more
Regtech, with its ability to retrieve and analyse data faster, more efficiently and in greater quantities than ever, is the great hope for the industry, even if it is not clear to some just what regtech encompasses. For some vendors, regtech is a new term for technology they have been selling for years – a way to liven up the packaging without changing what is inside. A general understanding is that regtech features prodigious processing speed and storage capacity, but it is more useful than that. Collecting unprecedented volumes of data solves one problem but creates others.
Being able to generate data down to microscopic levels only matters if it can be aggregated into meaningful packets of information that can be studied, interpreted and applied to regulatory and macroeconomic models. Regulators need accurate readings of key metrics of risk and financial performance to create a true and reliable picture of operating conditions, both current and prospective.
And regulators aren’t the only ones. Bankers need the same information to manage their daily operations, to gain insight into the comparative risks and rewards of different business lines, to understand and inform risk appetite and to permit the creative, long-range planning essential to build a stronger, more profitable company. That’s why the other principal features of regtech systems – agility, flexibility and an ability to be assembled on any required scale – matter at least as much as their retrieval and processing speeds, and why senior management is beginning to view investment in the technology as a worthy business proposition, and not just a way of meeting compliance obligations.
Creating and maintaining such a system requires a focus on data structure and management that permits each piece of information to be understood in the context of others – as a detail when it is necessary to consider it on its own, but also as a piece of a much larger puzzle. That, in turn, demands an approach that is at once fastidious and comprehensive – seeing the wood and the trees equally clearly – and can be applied to the design and implementation of hardware and software, and also to the service provided along the way.
This sort of approach is best achieved by a company that is simultaneously firmly rooted and light on its feet. Wolters Kluwer – with its financial wherewithal, extensive expertise in financial services and established, cutting-edge technology – is a long-standing leader in designing, maintaining and updating data management and risk management systems, and has extensive ties across the banking industry and with supervisory authorities worldwide.
Such a range of expertise is especially important today because the move to more complex, detailed reporting is just one part of a broader trend, also instigated by supervisory authorities but with commercial value as well, to integrate various functions – risk, finance, regulatory reporting – more tightly to facilitate holistic, strategic thinking that puts a greater emphasis on where business is going than on where it is now.
Firms are enlisting regtech solutions in the effort to dismantle the biggest impediment to progress in this area: a compartmentalised organisational structure that tends to lead each department to install its own system, built by a specialist supplier that has limited expertise beyond its niche. It would be a mistake to replace that antiquated technology with regtech systems purporting to be the next big thing but created in the same old way – by a small enterprise with limited understanding of the wider commercial and technological world beyond its area of specialisation.
Tech of all trades
Regtech architecture permits the configuration of a system that can be scaled up and adapted to multiple uses. The traditional every-silo-for-itself alignment of technology – each producing results that were precise within its business segment and perhaps nowhere else – already carried an unacceptably high risk of generating inconsistent data; when combined with the wider variety of required reporting methods being implemented, the risks can only be multiplied.
The new supervisory order demands a data management structure that is modular, allowing it to be dropped in anywhere within a firm – for any function, at any point in its hierarchy – while being sufficiently pliable to appear to be custom-designed for each employee. The data each user produces and consumes must be co-ordinated and reconciled with the output from other departments to create a consistent, uniform picture of the business on all key criteria.
Other necessary features of regtech architecture include an ability to respond swiftly to pop quizzes from regulators, which may ask banks to provide copious data and detailed analysis of it on any subject with as little as 72 hours’ notice. The agility and flexibility, plus the raw processing power, of a single overarching solution is the only effective tool to meet all these requirements.
One final capability of the most advanced systems, without which the others would be far less effective, is a user-friendly interface that permits compliance and reporting officials to see the data they need to see – not everything there is to see – while ensuring its quality and reliability. This is where state-of-the-art compliance features such as Smart Cubes come in.
An initiative of the Austrian National Bank, intended as a way for financial firms and central bankers to make sense of all the data that will be required under the Basel guidelines and the various European supervisory frameworks, Smart Cubes are standardised, automated formats for representing, validating and reporting compiled datasets. They are multidimensional matrices that permit data to be presented and interpreted more clearly, with individual items available to be reused for different purposes, ensuring greater consistency and flexibility and lower cost.
That the development of Smart Cubes was spearheaded by a central bank may seem ironic; often they are the ones that devise problems and leave it to financial institutions to find solutions. But, if the expanding reporting obligations imposed by zealously inquisitive authorities persuade institutions to overhaul their outdated systems and install fast, agile, adaptable regtech solutions that help make their businesses more efficient and profitable, then the regulators will have done them an even greater favour.