Banking Risk and Financial Integration
What if we treated regulators like clients?
Managing regulatory risk is more important than ever for banks. Data integration across silos such as Risk and Finance may be the key to keeping risk in check by giving regulators the same red-carpet treatment top clients receive and in turn achieving competitive differentiation.
Is there any question that regulators hold more sway over banks today than at any time in recent memory? Still, many banks are giving them the same treatment as always, as if nothing has changed — inefficiency is the rule rather than the exception when it comes to providing integrated data to different regulatory stakeholders. Regulators such as the SEC, FDIC and OCC generally receive different data sets from banks, even when they make the same request, that too often don’t reconcile with one another. In fact in February 2010, Daniel Tarullo, member of the Board of Governors of the Federal Reserve System, testified on systemic risk before the U.S. Senate, regarding the need for improved data integration and standardization for institutions as well as across the industry:
“The recent financial crisis revealed important gaps in data collection and systematic analysis of institutions and markets.... Greater standardization of data than exists today is required. Standardized reporting to regulators in a way that allows aggregation for effective monitoring and analysis is imperative”1
While regulators obviously don’t provide revenue, they have a big impact on capital, liquidity, brand and reputation. Regulatory provisions such as Living Will in the Dodd-Frank act or Basel II/III economic capital calculation require data integration across silos such as Risk and Finance. Regulators have also started advocating data standardization through creation of Office of Financial Research (OFR) and using standards such as the Legal Entity Identifier (LEI) when tracking counter parties in swap.
Post the financial meltdown, organizations are responding to regulatory pressures and making a bigger effort to manage their risk. Currently though this response is reactive and has resulted in point solutions that are often tactical fixes and require manual reconciliation. Sometimes these fixes are done at the reporting end and do not tie back to the source data. In many cases, current reporting practices across Finance, Risk and Compliance simply collect “finished/processed” data for their reporting, management and regulatory needs from countries or businesses. These point solutions do not address the key elements of data quality and data ownership which are essential to provide transparency to regulators and key stakeholders.
1 — Tarullo, Daniel K. (2010). “Equipping Financial Regulators with the Tools Necessary to Monitor Systemic Risk,” statement before the Subcommittee on Security and International Trade and Finance, Committee on Banking, Housing and Urban Affairs, U.S. Senate, February 12.
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