A regulatory ‘heat map’ shows that pressure on banks is slightly higher overall than a year ago, but is abating somewhat in a number of areas where implementation is under way. Regionally, the pressure has intensified in Europe, the Middle East and Africa (EMA), and is higher in Asia-Pacific (ASPAC) than it was (but from a lower base). Pressure has eased somewhat in the Americas.
The analysis by KPMG says that regulatory initiatives have put the pressure on in the following areas:
- Capital: ‘Basel 4’ may demand higher leverage ratios and a much tougher approach to the weighting of banks’ credit and market risk exposures;
- Systemic risk: The EU’s Liikanen proposals would result in the implementation of structural ‘ring fence’ separation;
- Supervision: Supervisors worldwide are taking an increasingly intensive approach. Within the European banking union, supervisory responsibility is shifting to the European Central Bank;
- Governance: Financial Stability Board and Basel Committee have initiatives on risk governance, and the wide-ranging new requirements on data reporting;
- Culture and conduct: Large banks in particular are under pressure to improve their culture and conduct.
- Liquidity: The Liquidity Coverage Ratio has been relaxed and banks have now made considerable adjustments to their balance sheets;
- Systemic risk: KPMG notes that progress has been made on recovery and resolution planning in the US and some other countries;
- Remuneration: Earlier “dire predictions” on banks’ responses to regulatory restrictions have proved largely unfounded; and
- Market infrastructure: Adjustment to the requirements on the clearing, trading and reporting of derivatives is under way.
The report examines in depth five critical regulatory areas with a wide number of ramifications, some of which touch on the data issues that banks are contending with:
- Financial stability landscape: Regulators are said to be concerned at the extent to which are reducing their capital requirements in part through doing nothing more than “cleaning up” their data. The ECB’s asset quality review (AQR) includes data integrity validation.
- Structure: structural separation of core deposit-taking and trading activities will be complicated and costly, requiring the creation of entities that are legally, economically and operationally separate. Banks are looking for greater efficiencies in processes and data management.
- Conduct, markets and culture: The European MiFID and EMIR regime remains at pods with US rules, even though the regulators have broadly similar aims. “Attention therefore remains focused on the July 2013 ‘Path Forward’ efforts by the European Commission and the US Commodity Futures Trading Commission to achieve greater convergence of approach across the US and the EU, although this has made relatively little concrete progress to date,” says KPMG.
- Data and reporting: The report notes that there is an “exponential increase” in the amount and granularity of data for external reporting requirements; regulatory pressure to be able to improve internal aggregation and reporting of risk data; as well as business pressures to improve data-handling efficiency and to make better use of data. This has resulted in “an increased focus on individual responsibility for reported data” as well as greater attention on internal audit and assurance and governance. What’s driving the regulators is “the ability of banks to aggregate risk data quickly, accurately, and across all risk types, activities and geographies and risk governance.”
Banks’ performance in complying with the Basel Committee Principles for effective risk data aggregation and risk reporting (PERDARR) show that the three most difficult principles were data architecture and IT infrastructure, the accuracy and integrity of data, and adaptability. Nearly half of the banks reported material non-compliance on these principles in the Basel Committee report published in December 2013. That report said that banks self-assessed their risk data reporting more highly than their governance – a result that Basel said was “odd” given that governance principles should be preconditions to ensure compliance with the other principles.
Moreover, some banks scored themselves ‘fully compliant’ on ‘comprehensiveness’ but ‘materially non-compliant’ on other data aggregation principles. “This raises a question as to how reliable and useful risk reports can be when the data within these reports and the processes to produce them have significant shortcomings,” says KPMG. A January 2014 report by the Senior Supervisors Group said that banks’ progress failed to meet supervisory expectations and industry best practice.
- Risk governance: The report makes the point that while new risk management and risk reporting procedures are being introduced, “roles and responsibilities have not always been fully determined, leading to both underlap and overlap... And most banks have not yet reached a stage where their risk management function is genuinely strategic and forward-looking.” Many of the governance issues are related to those discussed above.
The KPMG report, Evolving Banking Regulation: Is the End in Sight? (EMA edition) can be downloaded by clicking here