Middle East Bank Regulatory Reporting challenges 2014

February 11th, 2014 by Stephen Jones Leave a reply »

Last week we had a hectic round of meeting with banks in Dubai, Oman and Kuwait all faced with increased challenges of delivering timely, accurate, regulatory reports as reporting formats change and new regulations come into force.

There was great interest in BRSAnalytics end to end solution framework which delivers the specific, local format reports and removes the risk, manual effort, and error.

Banking regulation has advanced noticeably since the 2008 financial crisis, with considerable progress achieved in 2013. However, many regulatory details remain unresolved and the banks’ success in adapting to these regulatory changes varies greatly by institution and jurisdiction. 2013 was a pivotal
year for regulatory reform. . The ‘CRD4’ package was finalised, for phased implementation from 1 January 2014. The Basel Committee published a key paper on risk data aggregation and reporting, and the Financial Stability Board published a series of papers on risk governance and continued to focus on systemic institutions and on progress in implementing regulatory reforms.

Central Bank of Kuwait (CBK) Governor Dr. Mohammad Al-Hashel said here on Saturday 2 February 2014 that the CBK board of directors has approved the application of the Basel III capital adequacy standards to Kuwaiti banks.

Basel 3 reporting requirements still lacks considerable detail creating further implementation challenges for banks. Basel 3 was to be implemented in the EU from January 2014, through the ‘CRD 4 package’ – the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). The CRR largely copies out the core elements of Basel 3 – tighter definitions of capital, greater emphasis on higher quality capital (in particular CET1 capital: equity and retained earnings), higher minimum capital ratios, higher risk weightings on counterparty exposures, the counter-cyclical capital buffer, the leverage ratio, the Liquidity Coverage
Ratio and the Net Stable Funding Ratio.

In addition, the CRD 4 package provides for:
• The imposition of capital surcharges on global and domestic systemically important banks. The Basel Committee announced prospective capital surcharges for 29 G-SIBs, to be phased in from 2016, and attention is now turning to the designation of banks of national systemic importance (D-SIBs);
• An additional systemic risk buffer that member states can apply to all, or a subset, of banks to cover medium-term structural or systemic risks. The UK for example is expected to apply a systemic risk buffer of 3 percent on at least the major UK banks, bringing the minimum CET1 capital ratio up to 10 percent;
• The introduction by European member states or the Commission of more stringent large exposure limits, sector-specific risk weightings, liquidity and disclosure requirements on all, or a subset of, banks.

Uncertainties remain including liquidity, the leverage ratio, and risk-weighted assets.

Bank regulation will drive significant structural change, impacting product and service availability for customers. Regulators’ will require banks to better meet customer needs and to reinvent cultures, and that will impact costs, client pricing and choice.

As banks prepare for extensive risk data reporting rules, many are not yet compliant with Basel Committee principles on reporting and data aggregation. Many Banks have upgraded risk management practices but still lack risk systems or approaches to set risk appetite frameworks, assess risk culture or add business value. Banks are generally moving from the evaluation of regulatory initiatives to implementation, albeit at different
speeds and from different starting points.

Ongoing debates on the leverage ratio, internal models, stress tests, and simplicity versus complexity have made both bankers and regulators very uncertain about where the regulatory reform agenda will come to
rest. This makes it difficult for banks to plan effectively. Banks also want to tell their own story to their
investors, customers and other stakeholders about what risks they take and how they manage those risks.

Another source of great uncertainty, at least for this year is Comprehensive Assessment to be undertaken
by the European Central Bank before it takes on direct supervisory responsibility in November 2014 for the 120 or so major banks in the European banking union and how this will impact on the current regulatory reporting requirements.

Data demands are growing and to ensure that data is fit for purpose is also more difficult with the fragmented systems and processes through which the data flows. Good data provides the basis
for product design, customer service, risk management and business decisions, but many banks remain seriously constrained by their legacy IT and data systems. Meanwhile, bank supervisors are frustrated by the
implications of this for the effectiveness of banks’ risk management. Supervisory intensity in this area is can safely be predicted to get even more intense. This requires bank to rethink their reporting systems and data validation and aggregation and conversion processes.

Banks face major challenges around data management. They need to capture, hold and to use the right data to get much closer to their customers. They have to meet the wide-ranging and exponential increases in
demands from regulators and others for reporting and disclosures. They need to respond to supervisory concerns that banks do not have the right data, systems and IT architecture to enable them to understand,
aggregate and disaggregate, and to effectively manage their risks.

There are new and unforeseeable risks and legislative requirements in data privacy and cybercrime, conflicting national laws and the impact of retrospective investigations in an environment where vast amounts of data
are indefinitely available.

As a recent KPMG report stated ” The emerging regulatory requirements – including structural reform, conduct, governance and the possible emergence of ‘Basel 4’ – are game changing. The banking industry’s existing business models will in large part have to be discarded. There are likely to be losers. The winners
are likely to have been relentless in how they have faced up to and implemented the change required.”

There is a high probability that Basel lll will quickly evolve into a tougher Basel 1V and an agile and robust reporting framework is essential.Key to these challenges are increasing. The consequences are that:
- banks need a higher maturity of data analytics capabilities;
a clear understanding of the ownership, roles and responsibilities for data management (including retention and rationalization and historical audit and version control);
- a clear plan to attack core data quality issues;
- the implementation of more flexible technology solutions with greater sharing/re-use and better handling of unstructured data.
- this will need radically different, powerful, automated and agile management information systems

The Basel Committee published in December 2013 a self-assessment by 30 G-SIBs of their progress in meeting the risk data aggregation and risk reporting principles.
The Basel Committee concluded that banks need in particular to:
• Upgrade significantly their risk IT systems and governance arrangements, with an emphasis on formal and
documented risk data aggregation frameworks, comprehensive data dictionaries that are used consistently
by all group entities, comprehensive policy governing data quality controls, and controls at each stage of the life cycle of data;
• Improve the accuracy, completeness, timeliness and adaptability of their risk data, with less reliance on manual processes, and quality checks on risk data that are as robust as those supporting accounting data; and
• Generate relevant data on a timely basis to meet evolving internal and external risk reporting requirements.

These self-assessment findings are reinforced by the conclusions of the Senior Supervisors Group, published in January 2014, which examined the quality of banks’ large exposures data. The Group found that banks’ progress towards the consistent, timely and accurate reporting of large exposures failed to meet both
supervisory expectations and industry best practice
. Nearly half of the banks reported material non-compliance and many reported that they are facing difficulties in establishing strong data aggregation processes, and are therefore having to resort to extensive manual workarounds.

The Deloitte Centre for Regulatory Strategy has identified the top 10 regulatory changes that will affect banks, insurers and investment managers next year. The themes are included in the Centre’s latest report – ‘Our Outlook for financial markets regulation and supervision’ David Strachan, co-head of the Deloitte Centre for Regulatory Strategy, said:

Six years have passed since the start of the financial crisis. Banks, insurers and other financial services companies are having to deal with a fundamental overhaul of regulation and supervisory approaches – but the sobering fact is that the job is by no means done.
“2014 will be a busy year. Banks will need to implement the new capital and liquidity framework, and the ECB will be intent on establishing a new European supervisory regime. Closer to home, conduct risk in both the wholesale and retail sector will remain at the top of the agenda. Over-arching this, a multitude of new regulations will require banks to re-engineer their legal entity structure and change the way they operate across borders.”

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