Imagine this scenario: You pay your mortgage in the repayment portal of your bank or credit union. Unless you update screenshots in a couple of other portals within the bank itself, your bank will say your payment is past due. This is precisely what is happening to the banks at the regulator end.
In the banks’ case, the same loan detail needs to be in multiple regulatory reports, either in an aggregated or a detailed manner. For example in the U.S., a home mortgage loan will have to be reported as an aggregated number in consolidated fashion in the FR Y-9C, and as an aggregated number in call reports (FFIEC-031 or FFIEC-041) for the individual bank entity where the loan was sanctioned.
The loan in its detailed form will have to be reported again in FR Y-14M every month. And this is just for the Federal Reserve. The same loan may have to be reported based on the type of loan counterparty on TIC reports submitted to the Department of Treasury, and in BE reports to the Bureau of Economic Analysis.
If it is a traded loan which has been securitized, it might end up in one of the Financial Industry Regulatory Authority (FINRA) reports as well. All of this is just for the United States. For an international bank operating in multiple jurisdictions, each jurisdiction has its own set of regulations where the loan might end up being reported a couple of times more.
The regulator, in order to reconcile all the data items where a loan is reported, keeps checks on each report to reconcile with the other called edit checks. If the edit checks don’t match up, the individual banks are subject to audit on their eporting practices.
Simply put, the entire process is inefficient. All of these add costs in the form of an interest rate spread to your loan, or a smaller interest for your deposit.
Venkat Chandrasekar Subramaniam
What if the regulator demands all the details of the loan in just one form or a file, and the data is recycled within the regulator to produce the required views for analysis? This is where the concept of interoperability comes in.
Interoperability in regulatory reporting can be defined as a regulator needing to have a piece of information reported only once in the correct form. The regulator can then use the information in its management Information systems (MIS) for construction of multiple views of all the information submitted by the banks for multiple purposes.
This construct ensures that the burden of regulation is lighter on the banks, while also reducing the room for error. Instead of making reporting a means to audit banks for data quality, regulators can focus their energies on supervision. And banks can dedicate their staff to more customer-facing functions rather than tying up data between the various regulatory reports.
As a first step towards interoperability, the European Banking Authority has the Common Reporting Framework (COREP) and Financial Reporting Framework (FINREP) taxonomies. The individual regulators can then take parts of the information required to construct their reports. For example the Bank of England has templates like PRA 101 and PRA 102 which align to the latest EBA COREP and FINREP taxonomies in XBRL format.
Other regulators like BaFin directly use data from the taxonomy for supervision. An example is given for a CRR3 (Capital Requirements Regulation) template mapping from a XBRL file.
Each data point in a template is mapped to a XBRL element via data point mapping (DPM). These taxonomies have the additional benefit of data point standardization, where definitions of data points (say, total sssets) are standardized.
Divergences between the reports are handled by extensions to the taxonomy under which the report is produced like addition of new XBRL tags.
The case in Europe has been made easier with the currency union, but such synergies can be explored in other regions as well.
This way the burden of catering to the regulatory reporting burden is partially shared by the regulator. Banks also can have their reporting simplified.
Banks generate enormous amounts of data and then spend lots of effort in harmonizing the data to the individual regulator needs in each jurisdiction. This process creates a disconnect between individual banks and the regulators in various jurisdictions in which they operate in and must submit reports.
Interoperability between reports submitted to regulators both within and between regulatory jurisdictions will help alleviate the pain and help both regulators and banks concentrate on their core duties. The result is that some of the unnecessary slack that has been built into the process can be eliminated.
Venkat Chandrasekar Subramaniam is a senior business analyst at Deutsche Bank with around a decade of experience in Basel and Regulatory reporting. A certified FRM, he has worked a total of 18 years in the banking and risk IT space. He can be reached via LinkedIn at https://www.linkedin.com/in/venkatcsubr. Views expressed in this article are his own and do not represent the views of his organization.