CA Piyush Nalwaya
Banking regulators control and monitor the financial state of affair of the banks through reporting mechanism. With the formation of European Union, banks operating in European region are expected to report under multi regulatory environment, where such reporting becomes complex and dynamic, requiring banks to submit reports in a timely manner with more granularities, supported by intensive information. Identifying data synergies and taking leverage of that can help such banks in effective and correct compliance.
2. Diverse banking reporting environment in EU
Although each country in the European region has their central banks, regulatory culture is broadly driven by European Banking Authority (EBA) and European Central Bank (ECB). Central banks in each country are linked to the European Central Bank and their main charge is to implement policies of the European System of Central Banks (ESCB) which composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States.
European Banking Authority is a regulatory agency under European Union (EU) which monitors European bank. It conducts stress tests to increase transparency in the European financial system by identifying weaknesses in banks’ capital structures. The EBA has some quite broad competences, including preventing regulatory arbitrage, guaranteeing a level playing field, strengthening international supervisory coordination, promoting supervisory convergence and providing advice to the EU institutions in the areas of banking, payments and e-money regulation as well as on issues related to corporate governance, auditing and financial reporting.
European Central Bank is the central bank for Euro currency and it administers the monetary policy of the countries in the Euro zone. The other key tasks of ECB are to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the financial market infrastructure.
In some countries regulatory environment is also set by government departments such as the UK Treasury, or an independent government agency like FSA (Financial Services Authority), a combined regulatory authority over the banking, securities and insurance industries in UK. Hence, banks’ regulatory reporting is also subject to the guidelines prescribed by those authorities.
A bank in EU is expected to adhere with reporting requirement under various regulations, guidelines and reporting formats as prescribed by these regulators. An effort is being made in the following paragraphs to highlight the various guidelines for such reporting requirements .
Basel Committee (BCBS) accord and guidelines
To encourage convergence toward common approaches and standards, The Basel Committee of Banking Supervision (BCBS) formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision. The member countries implement those guidelines in their respective countries in the form of local regulatory guiding principles. BCBS does not issue binding regulation, rather it functions as an informal forum in which policy solutions and standards are developed. Basel committee has various sub-committees i.e. Standards Implementation Group (SIG), Policy Development Group (PDG), Accounting Task Force (ATF), Basel Consultative Group (BCG) each having specific task forces to work on specific implementation issues. Various guidelines issued by these groups, form the base for regulatory reporting requirement of central banks of member countries. For example, pillar 3 market disclosures of Basel accords aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution. In response to these, the member countries design their periodic return formats to capture information as required under pillar 3 market disclosures. The Basel Accord was implemented in the European Union via the Capital Requirements Directives (CRD).
Common Reporting (COREP)
Driven by increased cross-border activity in Europe and integration in financial markets and requirement of a common reporting framework to check the adequacy of solvency ratios in credit institutions & investment firms, EBA issued guidelines on prudential reporting with the aim of developing a supervisory reporting framework based on common formats. COREP includes credit risk, market risk, operational risk and capital and group solvency related disclosures. COREP reporting framework has widely been accepted by the countries in euro zone. COREP will become the prudential reporting framework for credit institutions and some investment firms according to the framework established by the Capital Requirements Directive IV (CRD IV) and Capital Requirements Regulation (CRR). From 31st December 2012, COREP is expected to become part of EBA’s implementing technical standards on reporting and will be mandated by the European Banking Authority from 1st January 2013. COREP will replace much of current FSA regulatory reporting. The introduction of COREP will significantly increase the granularity, volume, frequency and intensity of information provided to the FSA by banks in Europe. It will lead to potential 50% increase in the data items. In addition, the reporting period will be based on calendar quarter as opposed to accounting reference date under the current FSA regime.
Financial Reporting Standards (FINREP)
FINREP is a standardized EU-wide framework for reporting financial (accounting) data. It comprises templates for reporting the income statement and the balance sheet, as well as breakdowns of other data. This will standardize European reporting requirements and will reduce the impact on firms of multiple regulatory reporting requirements imposed by different European supervisors. FINREP is expected to apply to credit institutions (consolidated groups) and unlisted groups applying IFRS. The FINREP templates are split into the following groups:
Part 1: Primary Statements (Balance Sheet and Income Statement).
Part 2: Disclosure of financial assets and liabilities.
Part 3: Financial asset disclosures and off balance sheet activities.
Part 4: Primary Statements (Comprehensive Income and Equity).
Part 5: Financial asset disclosures and off balance sheet activities and non financial instrument disclosures.
FINREP will largely replace FSA001 and FSA002 for Capital Requirements Directive (CRD) consolidated groups and will require a greater level of detail than the present regime. FINREP is likely to be reported on a regulatory consolidated basis, not on a group accounting or solo basis. FINREP requirement are expected to be made mandatory by EBA in later 2013 or early 2014.
Wide adoption of IFRS across the globe stimulating banking regulators to adopt IFRS reporting formats. As discussed, FINREP reporting framework will be applied on those credit institutions which are reporting financial data under IFRS, not under the local GAAPs. Banking companies will need to collect data and prepare reports as per IFRS and looking to the complexity of data collection as per IFRS; regulators are modifying reporting formats which can reduce additional burden on banks. Disclosure requirement under IFRS 7 and in pillar 3 of Basel III accord carry lot of synergies with respect to credit risk, liquidity risk and market risk which can be leveraged by the banking organizations in different ways. The other way round, in upcoming IFRS 9, disclosure requirements are also getting modified according to the changes in pillar 3 of Basel III. Hence, although the reporting requirements in IFRS are limited to financial and risk related data, it has a significant impact on banks regulatory reporting.
Markets in Financial Instruments Directive (MiFID) issued by European Council aims to increase competition and consumer protection in investment services. It replaced the earlier Investment Services Directive (ISD). MiFID established a regulatory framework for the provision of investment services (such as brokerage, advice, dealing, portfolio management and underwriting) by banks and investment firms. MiFID II is one of the key regulatory changes which will form part of the Global and the European regulatory agenda. The European commission has proposed a 2013 target for the MiFID II directive. It will have a significant impact on operational models of banks wrt investment services. The reforms proposed in this directive with respect to market structures, transparency, business conduct and organizational requirements will require significant reporting transformation.
European Market Infrastructure Regulation (EMIR)
European Market Infrastructure Regulation (EMIR) is intended to increase the stability of the over-the-counter (OTC) derivative markets throughout the European Union. The clearing and reporting obligation under EMIR applies to banks and other financial counterparties such as insurers, asset managers etc. It will be implemented by the member states by the end of 2012 as proposed.
All the global factors generally do not affect the banks directly but only in the form of local regulations framed based on those norms. Local regulators are those to whom, banks are directly reporting and accountable to. So, of course regulators in the local region, may be direct banking regulators or others, drive the reporting framework for the banks. For example, in India, besides RBI, banking companies are also reporting to MCA, SEBI etc.
3. Challenges in Reporting
As the above discussion suggests the regulatory reporting requirements for banks in EU is very dynamic because of numerous regulators and unbroken reform prologues. All Banks function at diverse levels of technology maturity. A typical report generation process would involve data extraction from different source systems, integrating it and converting it into the requisite submission format and finally submitting the reports to the regulators. The key challenges faced by the report generation teams of banks include dealing with data extraction and integration issues, resolving data quality issues, handling manual interventions in generating the reports, ensuring accuracy and auditability of reports, and meeting the dynamic regulatory requirements. Another key challenge for banks is the ability to track back to the source systems to identify data lineage. From a regulator’s perspective, banks need to submit the reports on time, whilst maintaining high quality of data. A regulator also wants to ensure transparency in the reports generation process, access to the reports’ data elements, an ability to audit the reports as and when required, and to track the report data elements to the source systems.
Automation of data flow can address the issues highlighted as it facilitates a straight through processing between a bank’s source systems and the regulatory body’s centralized submission platform. Automated Data Flow for regulatory reports submission is being discussed by various regulatory bodies across the globe for addressing the MIS challenges. It is beneficial with respect to reports generation process, increasing flexibility, validating data, reconciling data and standardizing the regulatory reporting ecosystem etc.
However, automated data flow can be achieved where the number and format of reporting forms are fixed, but in case of regions like Europe where banking regulators are many and their reporting requirements are ever changing, automated data flow will not reduce the burden. In an environment where laws and regulations are frequently changing impacting the reporting data quality, alteration in IT system of the banks every time will be a costlier affair.
A robust regulatory reporting system for banking industry within an economy have no substitute and recent legal reforms in financial sector across the globe are required to avoid situations like 2008 crisis in future. Looking to the limitation in automated data flow system, banks can achieve efficiency in reporting by identifying data synergies between various regulatory provisions (Basel, IFRS, COREP, FINREP etc.) and leveraging them for reporting. Adopting a flexible reporting system, which can plug-in requirement of any new law and which can identify the synergies, and integrate it with the banks source systems will also help. XBRL can also be leveraged as efficient data tagging in XBRL format will help in identifying data overlaps.
On regulators part, the issue can be addressed by working on reducing reporting burden on banks by coordinating with other regulators and adopting a uniform system of reporting which can enable banks to concentrate on the core business of banking.
About the Author
Piyush Nalwaya is a Chartered Accountant & is part of Tata Consultancy Services Ltd’s Banking Industry Practice. Piyush specializes in Finance & Reporting & is an expert on IFRS/ US GAAP / FATCA / FTT / XBRL. He can be reached at [email protected]