Challenge: The Basel Committee on Banking Supervision’s (BCBS) Principles for Effective Risk Data Aggregation and Risk Reporting document outlines what large financial institutions need to do in order to meet the risk data aggregation (RDA) objectives at a “bank-wide” level to help the financial entity avoid overexposure risks that could destabilize the bank and, ultimately, the global financial system. The deadline for RDA, which is based off of BCBS 239 document, is January 2016, which is just over a year away at this point.
Wall Street & Technology's Capital Markets Outlook 2015
Here are 10 topics that will be a focus for financial institutions in 2015 and beyond:
- Technology Innovation Returns to Financial Services
- Global Banks Need to Demonstrate RDA Progress in 2015
- Where Should You Spend Your IT Budget in 2015?
- Financial Firms to Struggle With Growing Social Infrastructure in 2015
- As Market Matures, Fintech Startup Winners Will Emerge in 2015
- Universities Increasing Programs for Data Scientists
- Next Year, Aim for Communication & Clarity of Cloud Apps
- E-Trading Disruptors Seek Untapped Liquidity in Corporate Bonds
- Swap Markets Debate Anonymous Trading in SEFs
- The Clock For Market Structure Change Is Ticking
- Increasing Cyberthreats Pose Massive Challenge for Financial Firms
Why it’s important: With the deadline only a year away, large banks -- known as global systemically important banks (G-SIBs) -- need to continue to enhance capabilities that will improve risk reporting across the enterprise. Regulators across the globe want to prevent another financial crisis where G-SIBs, and also smaller banks, need to be bailed out of financial trouble. Meeting the requirements of BCBS 239 requires data integration and risk metrics that span the bank. However, assessing risk across bank divisions and for different products and asset classes, not to mention for data that is stored in various formats, is extremely difficult.
John Bottega, Data Management Advisory Services
Where the industry is now: Most G-SIBs have been working over the past few years to improve RDA capabilities and are moving toward BCBS 239 compliance. "Clearly, the larger G-SIBs are investing a lot of time and money in getting the things up to speed,” says John Bottega, founder of Data Management Advisory Services and former chief data officer at Bank of America. "We are hopeful that the banks can demonstrate significant progress, using best-practices… and not just rush compliance and get things in place simply to meet a deadline.”
In other words, meeting all of the guidelines for RDA by the January 2016 deadline is almost impossible. "It will take a long time. If banks can demonstrate they are making progress” they should be in good shape, Bottega says. "It isn’t reasonable to think that banks will get this all done by 2016. They need to implement and do it the right way."
Focus in 2015: RDA essentially tells banks they need to clean up their technology architectures and their data management and risk management practices. In fact, the first line of BCBS 239 makes it crystal clear: "One of the most significant lessons learned from the global financial crisis that began in 2007 was that banks’ information technology (IT) and data architectures were inadequate to support the broad management of financial risks.”
[For more on the importance of data management, read No More Muddling Through Data Governance.]
Bottega says most banks are somewhere along the road to complying with RDA. "They all know what needs to be done,” he says. "There are many banks built through mergers, and they have systems that are built on top of each other. Those are complex things that need to be worked through. It’s not easy to unwind years of legacy environments.”
In the coming months, banks need to make sure they have a firm plan to meet RDA requirements, even though they may not reach full compliance by January 2016. “If there are 10 things to do, it should be mapped out. We have been advocating a drive toward best-practice. If you map to a best-practice, that’s what you need to do” and that is what regulators are looking for. "If you are in step four or five of a seven-step plan, that is a good thing.”
When it comes to best-practices, Bottega says most banks are looking to apply a taxonomy to data, something he notes has never been done before. “Defining the meaning of data through a taxonomy is important” because part of RDA is that a company must have “a clear unequivocal meaning of data. That is tough.”
The discipline of defining data, however, is largely new to banks. Banks "are really good at moving data, but are not good at the discipline of defining the data,” Bottega notes. In order to be successful with RDA, banks need "to look at it from a content and technology perspective, not just a technology perspective,” which many firms have traditionally done when it comes to data management initiatives.
Regulatory outlook: For the most part, regulators in different regions are moving in the same direction when it comes to RDA, which is a relief to G-SIBs. "The sense is that most of the global regulators are in the same place. They are operating slightly differently, but from a principles standpoint, they are all moving in the same direction."
Price tag: Putting a price tag on RDA compliance is no easy task. It involves investment in new risk management models, new data management techniques, and information technology infrastructure to support the initiatives. Furthermore, if done correctly, getting a bank’s data house in order should provide much more value than RDA compliance. With comprehensive data on an institution’s financial holdings and risks, banks should be able to make better decisions about new products, investment opportunities, and more.
"If I can understand my clients holistically within my firm, and I can understand their behaviors across all my business lines, now I have opportunities that are on the offensive side, such as improving my customer service, increasing my revenue, and building new products,” says Bottega.Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio