Regulations are changing the way banks function. For example, the ICB report in the UK recommends that a bank's investment banking business be ring-fenced from retail and other businesses. The Dodd-Frank Act recommends standardization of OTC products and trading via central exchange counterparties. Post the fi¬nancial crisis, regulators have also pointed out that data received by various regulators from a bank do not reconcile. The Basel III requirement for stress testing, economic capital and liquidity risk management will mandate further integration of data across functions.
Needless to say, banks are seeking integration across functions to draw synergies in their control, analysis, planning and reporting. Hence, banks will have to focus on three aspects: standardization, rationalization and transparency.
Standardization: Across functions, the need for standardization is evident and the drivers are both external and internal. In the finance function, the IFRS has replaced IAS 39 by IFRS 9 which covers the requirements for financial assets and liabilities, impairment and hedge accounting. IFRS 9 highlights the focus of the International Accounting Standards Board (IASB) on standards aimed at financial stability. In the risk function, regulators have introduced stricter regulatory capital requirements, leverage ratios, two new liquidity ratios and modified rules for counterparty risk. To handle the changes, banks will require internal data standardization of reference, product, accounting and risk data.
Rationalization: In their heyday, banks created a myriad of products, expanded operations across geographies, created several legal entities, internal LOBs and operating units. IT systems supporting business were often designed to meet the requirements in silos. Rationalization will aim to retire the silo systems by implementing centralized solutions. At the very least, it will ensure that the solution across silos is standardized. The idea is that if all the reports are generated from the same source, the chances of reconciliation differences are reduced. Additionally, difference resolution is easier.
Transparency: The quality, reliability of data and the maturity of governance to manage and remediate data quality will determine the degree of transparency in the banks' financial and risk reporting. Transparency will be driven by consolidation and standardization of the infrastructure with the aim to source, transform, analyze and report data.
Banks must work towards ensuring that the LOBs and functional domains leverage the capabilities of a centralized operating environment and technology infrastructure to reduce the cost of managing the regulatory and compliance reporting overhead arising from changing regulations.