More than 80% of major banks are trying to cope with inconsistent data sources, formats and structures as they seek to comply with new rules on risk data.
A survey by research group Lepus, sponsored by SAS, probed 27 global and domestic systemically-important banks (G-SIBs and D-SIBs) around the world to see how they were managing their efforts to comply with the Basel Committee for Banking Supervision’s BCBS 239, Principles for effective risk data aggregation and risk reporting (PERDARR).
In a paper entitled Aggravation or Aggregation: Risk Data and Compliance, Lepus also found that more than half of respondents were faced with the challenge of having separate systems for each risk type, while more than a third had inflexible source systems.
“It is evident that data modelling and data management challenges are rife across the industry,” the report said. “Clearly, finding appropriate solutions to overcome data consistency issues still seems to be a significant hurdle for banks.”
Another issued that surfaced was “the lack of skills and expertise in data management that seems to plague the financial sector”.
Stressful tress tests
While banks should be able to carry out stress tests ideally on a daily basis, the research found that 41% of respondents took 1-5 days to execute such tests, with most others taking longer than that – even up to 30 days. Only a tiny handful were able to do stress tests within hours or overnight.
“This is a troubling statistic given the increasing frequency of regulatory stress testing and the need for rapid scenario modelling in times of economic stress,” says the report.
Banks are required to use a wide range of stress test scenarios to ensure that they are capable of withstanding future shocks. That, however, is difficult to do if banks are facing such challenges in turning around stress tests quickly. More than half the respondents said that this was a challenge in developing new stress test scenarios. Data quality issues were a more frequent problem, however, with almost 60% of respondents citing this as a challenge.
Frequency of reporting
More than half of respondent banks are producing risk data for compliance purposes and risk management purposes on a daily basis. Only a few manage to do so intraday, while some only produce such data on a weekly or even monthly basis.
“Data produced for market risk dominates the intra-day activity compared to credit and liquidity risks,” says the report. “This trend highlights an important point that, given that the volume and complexity involved in producing data for credit and liquidity risks is significantly higher than for market risk, banks have further to go to develop this capability in the credit and liquidity risk space.”
Few sais that their data aggregation was “entirely automated” – most said it was “largely automated” but a small number said it was “largely manual”.
Progress on market risk projects is more advanced than for credit risk or liquidity risk, but between a third and a half of respondents said that their risk data aggregation and reporting initiatives were “partially complete”. About a quarter said they were almost complete. Two r three said they had not started yet.
Between a fifth and a third said they were satisfied with the trajectory of their initiatives, but most said there was “room for improvement”.
For a copy of the Lepus research, click here (registration may be required).
The Basel Committee's Principles for effective risk data aggregation and risk reporting (PERDARR - BCBS 239) can be found by clicking here.
See also: Basel Committee report on progress in meeting 2016 deadline by clicking here.
For other Forum for Regulatory Change articles relating to PERDARR/
BCBS 239 please click here.