Stressing Data Infrastructures

Banks are being inundated with regulatory demands from every direction: financial, operational, legal, data, conduct, etc. With the sheer volume of these strains on resources and the ever shortening timelines to respond it is understandable why banks instinctively shift into fire-fighting mode. These stresses on data infrastructures are addressed through manual submissions or building dedicated repositories and processes for regulatory needs. Though banks may feel these data demands are overwhelming now, the reality is that there is much more to come.

With the future holding COREP/FINREP¹ for Europe, FDSF² or possible FPC³ requirements in the UK, or CLAR⁴ from the Fed, the focus and demands on data from global supervisors is not temporary it's permanent. As 'The Permanence of Supervisory Data Needs'⁵ describes, supervisors, in general, have lost their patience with the inability of banks to manage their own risks and provide quality data to enable regulators to do their job.

The dilemmas banks will face are that manual submissions and ad hoc processes are not sustainable solutions and segregated regulatory repositories are not scalable solutions. Supervisors want to look deeper into bank data, view the same types of reports and analysis bank senior management use and even understand and validate data aggregation and reporting capabilities. The sustainable and scalable answer is to leverage regulatory demands and, as much as possible, turn them into business requirements.

Despite what some may think, the Basel committee data aggregation principles⁶ are not another regulatory 'tick box' exercise and certainly not a superficial exercise. They stem from a long running concern from supervisors about the infrastructure underlying banks and their ability to respond to data requests. They are an indication of what regulators see as a fundamental need for banks to operate in an information-based industry. Supervisors also feel they are needed to get full transparency on banks' infrastructure and gain another perspective on a bank's own ability to assess its risks.

However, the banking model is transitioning, by necessity, from the biased focus on top-line growth, growth through mergers and acquisitions or high margin structured capital market products designed to warehouse and shift risk. The model is moving towards one of traditional customer-centric industries requiring a focus on organic growth of more stable, long-term businesses demanding an effective deployment of resources.

The top banks in this shift will determine how best to use some regulatory demands to drive internal improvements for their own businesses and not follow the usual scramble to scrape together responses. These banks will build a competitive advantage by leveraging these required efforts for their own betterment and improved, long-term management of risks, costs and stable return on capital. One of these areas is the huge demand on data.

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¹ Common Reporting (COREP) and Financial Reporting (FINREP) requirements by the European Banking Authority and collected by national supervisors as part of Capital Requirements Directive IV. See the Bank of England's note on CRD IV.

² Firm Data Submission Framework (FDSF). The framework for UK VHIFs (Very High Impact Firms) to submit data for capital stress testing.

³ Financial Policy Committee established by the Bank of England and delegated with setting Counter-cyclical Capital Buffers and Sectoral Capital Buffers.

⁴ Common Liquidity Analysis and Review

⁵ 'The Permanence of Supervisory Data Needs', http://blog.jcchapman.com/2013/04/the-permanence-of-supervisory-data-needs.html , May 2013.

⁶ 'Principles for Effective Risk Data Aggregation and Risk Reporting', Bank for International Settlements, http://www.bis.org/publ/bcbs239.pdf, January 2013.