Regulation – overcoming the challenge

In Europe, most banks have already implemented Basel II. The next step is complying with Basel III, which has significant add-ons compared to its predecessors – including much higher capital and liquidity requirements – specifically shining a torch on the so called global systemically important financial institutions (GSiFis). In the US, the Basel III compliance process is further complicated by the concurrent implementation of the Dodd-Frank financial-overhaul legislation.

 

Regulations these days are coming in faster than in the past, some within just 15-18 months. They require more complex, frequent and granular reporting. Effectively, regulators are asking the banks to share with them the same type and level of information that they would show to their top management.

 

This poses a challenge for banks. They have to implement new processes in shorter timeframes, while still maintaining business as usual. Many banks are still using very old technology solutions to create and manage their regulatory reporting and compliance.  As the changes get more complex and start touching whole new business areas, implementing them becomes increasingly difficult, thus increasing delivery time and costs.

 

We see banks suffering from data overload.  Siloed data repositories, legacy systems, inflexible and hard coded reporting programmes are the reality in most banks. Off-line spreadsheets and other manual records are still often the primary source of information, especially for liquidity risk management. This issue is particularly pertinent at smaller bank subsidiaries as many of them still rely on spreadsheets for their operations.

 

So is there a way for banks to report in a timely and cost effective manner?

 

A harmonised approach

A flexible approach to support changing regulatory requirements is vital. Banks should be seeking to harmonise the data gathering process to enable this to be done efficiently, irrespective of geography.  Regulatory reporting and compliance solutions should work across jurisdictions.

 

Forward thinking institutions will use technology investments to their own advantage. Meaningful regulatory data can add value to management decisions, help manage risk and improve market positioning. In this way, increased information demand can also become a revenue opportunity.

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  •  

    I agree that there are many difficulties and challenges for banks that report across multiple jurisdictions. But in the current environment regulators are expecting banks to be able to communicate the risks inherent in their books via a series of one size fits all regulatory templates, which is not a good starting point. These templates are the view of the bank the regulators see, compare and judge an institution on. 

     

    The point you make about regulators expecting banks to share the same type of information provided to top management is a good one, and it is interesting that you feel it will not happen. The FSA approach to the liquidity crisis of 2008 was to prescribe a series of new regulatory returns, which many bankers failed to understand or see the purpose of. Yet the FSA clearly felt that the information was of a type that an organisation should need internally to run its business effectively, and they were unwilling to relent on the new requirement. The submission of this information has allowed the UK to monitor the Liquidity Coverage Ratio before the observation period, while other European regulators are still struggling to overcome the challenge of monitoring from the due date.

    Could this be the shape of things to come, at the end of next year, under the new Financial Policy Committee regulator, where they intend to act proactively to remove risk from the market? 

    The problem the regulators have is it is hard to ask banks to build up liquidity buffers and capital during a market downturn. All it will do is contract lending further and prevent growth, increasing the likelihood of prolonging the downturn. Many issues such as those that you mention may not be addressed under such conditions, but it remains to be seen if they will addressed when times improve. 

     

    Banks have little alternative but to try and meet the Basel requirements, as they have been mandated, but they can work with and challenge the regulators to build trust and help them understand the risks and problems you mention. Harmonisation of data collection coupled with informed debate can only help overcome the challenges.

  • As written : Banks should be seeking to harmonise the data gathering process to enable this to be done efficiently, irrespective of geography.  Regulatory reporting and compliance solutions should work across jurisdictions.

     

    Thoughts …

     

    Makes sense in a straight forward world, harmonization would seem the most logical way forwards and transparent reporting between regions would be a wonderful thing or would it? Aggregated reporting with transparency at a group level comes with lots of hurdles and different banks seem to approach these issues in alternate ways, I have taken to list four difficulties banks face, but there are many more.

     

    1)    What currency do you report in?

    A large UK bank with an offshore trading book say in Korea may have a considerable number of open positions for Yen / Won Swaps just as an example.  The bank would normally show this exposure in the relevant settlement currencies for the local branch.  As soon the bank repatriates this portfolio exposure back into the home currency (in this example that would be sterling), the risk will be skewed. Why?

     

    There may be inherent curve volatility between YEN/WON forward positions and sterling.  This risk is not real but it is difficult to explain.

     

    2)    Are offshore locations subsidiaries or onshore branches?

    There can be both, one or the other in each offshore location and they will need to be treated differently because group level exposure is sensitive to the onshore entity type.

     

    3)    The Bank Secrecy act requires some street facing positions to remain completely private and within local reporting only. 

     

    4)    Booking models are different for alternate instruments. A single composite deal may be separated out into multiple trade sets, where each trade set may be booked across multiple systems and locations. There may also be back to back internal trades sitting between the onshore and offshore books to link up the composite deal book. 

     

    Why do banks do this?

     

    There are many reasons. Normally it allows the bank to take advantage of different tax rulings across jurisdictions however it complicates aggregated reporting.

     

    I fair the best approach for bank’s is that they should really try and meet Basel II Pillar II and Basel II Pillar III reporting.   If a bank can achieve this Basel level approach and at a consolidated level, then global transparency on the risks a bank has on its books will become considerably more transparent.

     

    So where are we at with the following requirement - Regulators are asking the banks to share with them the same type and level of information that they would show to their top management.

     

    I can't see that happening and I am not sure the regulators would have the resources to gather a committee together for understanding the uniqueness each bank has with just the four items I have listed above.

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