Raising the bar

Aligning and enhancing regulatory reporting for greater strategic advantage

Focus on regulatory reporting intensifies

Headlines continue to raise questions about the quality of data that financial institutions use in the reports they file with the regulatory authorities. These reports are leveraged in the analysis regulators perform on individual institutions, as well as the industry as a whole. They are also used to form the basis of many public disclosures. Yet, these questions are not new. They serve to highlight long-standing challenges. Recent news reports offer glimpses into the challenges financial institutions continue to face around producing core regulatory reports and highlight specific issues that still remain across the banking industry. These challenges include (1) large numbers of manual processes and reconciliations; (2) data integrity issues; (3) systems limitations; (4) analytical challenges; (5) resource and time constraints; and (6) governance weaknesses, including those pertaining to the second and third lines of defense.1

In addition to unflattering news reports, regulators have also publicly released feedback revealing their continued concerns regarding long-standing regulatory reporting findings. For instance, the joint announcement and feedback letters issued by the Federal Reserve Board and the Federal Deposit Insurance Corporation (collectively, the Agencies) on April 13, 2016, regarding deficiencies and shortcomings in the 2015 resolution plans of eight systemically important, domestic banking institutions, identified specific data- and reporting-related concerns as Figure 1 illustrates.2 Based on this feedback, covered institutions will need to significantly improve their management information system (MIS) capabilities in order to ensure these systems can credibly capture key legal entity and business line data at multiple levels of granularity. 

The Agencies are also continuing to express concerns that certain trading activities of the major broker-dealer firms could pose particular challenges to their orderly resolution. To remediate this, regulators will likely continue encouraging institutions to streamline their derivatives booking models, including reducing the number of internal transactions that transfer risk between legal entities, and opting into global coordination efforts such as the annual International Swaps and Derivatives Association Universal Resolution Stay Protocol. In addition, institutions with resolution strategies that include wind downs of their derivatives portfolios will need to develop detailed portfolio information by product type and material entity as well as document the specifics of their wind-down pathways.

Figure 1:
Domestic institutions are in varying stages of progress towards addressing key regulatory elements of resolvability

The deficiencies and shortcomings raised by the Agencies raise significant data and reporting issues that institutions should consider in their resolution planning processes. In developing future resolution plans, institutions will need to carefully consider their strategies for incorporating Agency feedback, as regulators are signalling they are growing weary of lingering open issues and concerns that remain unaddressed.

A growing number of regulatory criticisms are directed at well-established reports, such as the FR Y-9C (Consolidated Financial Statements for Bank Holding Companies), FR Y11/2314 (Financial Statements of U.S. Nonbank Subsidiaries of U.S. Holding Companies/ Financial statements of Foreign Subsidiaries of U.S. Banking Organizations), and FR Y-10 (Report of Changes in Organization Structure). However, additional reporting requirements, such as the enhanced FR Y-14 (Capital Assessments and Stress Testing) and FR Y-15 (Banking Organization Systemic Risk Report), have compounded the issue, particularly given the increased complexity of this series.

Intermediate holding companies (IHCs) of foreign banking organizations formed under Regulation YY (Enhanced Prudential Standards) are also expected to have similar reporting requirements as bank holding companies (BHCs), but will have the added pressure of incorporating their other legal entities, such as broker-dealers, that were not previously subject to the BHC reporting requirements, into their aggregate submissions. Additionally, with more firms now under Federal Reserve oversight, nonbank financial institutions will need to continue developing the requisite processes, systems, governance, and data in order to file accurate and timely regulatory reports such as the proposed FR 2085 (Consolidated Financial Statements for Insurance Nonbank Financial Companies) and its supporting schedules.

Although the continued focus on financial reporting is receiving the most public attention, a regulatory focus is also developing with respect to nonfinancial regulatory reporting requirements. This is developing into a very broad spectrum of reports, such as the Home Mortgage Disclosure Act (HMDA), as both depository institutions and nondepository institutions are required to report HMDA data if they meet the regulatory criteria for coverage. Going forward, regulators will likely consider further refinements to the HMDA reporting requirements and expand their analytics to use these reporting data as tools to assess more accurately how effectively institutions have addressed community housing needs in their service areas. As regulators continue to place pressure on all financial institutions to improve their financial and nonfinancial reporting capabilities, strategic solutions will be needed that take into consideration the end-to-end process for filing all regulatory reports. 

These strategic considerations should also be tied into broader standards, including the Basel Committee on Banking Supervision's (BCBS) principles for effective risk data aggregation (RDA) and risk reporting.3 Regulators continue to express concern about the inadequacy of financial and risk data systems and processes plaguing the industry, impeding the ability of banks and other financial intermediaries to manage risk, investors to confidently assess the accuracy and integrity of banks' financial reporting, and regulators to mandate adequate capital and liquidity provisions in order to limit systemic risk. The challenge to get this right continues and remains pressing, even as regulatory authorities appear to be growing impatient with the industry's lack of progress. Many financial institutions are simply failing to address the magnitude of the problems they face around RDA. We believe it is likely that the underlying cultural issue of who owns the data generally and who is accountable for its quality and integrity are key root causes for the industry's struggle to date. 

The financial industry must work towards a holistic approach to data governance - not a siloed approach targeted at specific datasets associated with individual directives. Data management cannot be solely about meeting regulatory requirements. Instead, it needs to address more important cultural changes that are necessary if the industry is to view data management as the foundation for comprehensive, accurate, and timely reporting. Adopting an integrated and dynamic approach would enable financial firms to harness the full potential of their data and assist their boards of directors and executives in making informed decisions based on reliable and actionable intelligence. 

1The "three lines of defense" model provides a construct for management control, risk control and compliance oversight, and independent assurance by defining clear roles and responsibilities within an organization's wider governance framework. The "first line" includes operational management, the "second line" includes the risk management and compliance functions, and the "third line" includes internal audit. The Institute of Internal Auditors, /IA Position Paper: The Three Lines of Defense in Effective Risk Management and Control, January 2013.
2See Agencies Announce Determinations and Provide Feedback on Resolution Plans of Eight Systemically Important, Domestic Banking Institutions.