RegTech leaders were recently invited to join a panel hosted by EACB, EAPB, EBF, and ESBG to discuss: 'Access to better technology for (supervisory) reporting'.
The panel discussion addressed many points around technology, its impact on supervisory reporting and the EBA report on the cost of compliance. During this dynamic conversation, the six panelists stressed the fact that collecting, aggregating, and submitting data for regulatory reporting is difficult, complex, and financial institutions (FIs) struggle with managing data transparency. 'How can we shield banks from the complexity of these evolving requirements?' was put forward as a question. Murat Abur, CTO & Co-Founder at Suade, said “complexity does not mean difficulty”.
As an analogy, Murat referred to filing tax returns – as we enter various expenses and income streams such as “dividends”, “revenues”, etc. – we do not need to fully understand the complexity of the tax law system. We rely on different software applications to navigate through the tax forms, and at the end of the process, it gives us the final amount to pay or possibly get a refund. It might sound simplistic but in essence, RegTech is about reducing and ultimately eliminating the complexity out of those multiple processes for the end users.
Another example Murat expressed to which many FIs can relate is the lack of transparency of the XBRL submission process. You start from an intense manual process that relies on Excel, is error prone and ends up being a black box approach to submit the results into XBRL, another black box. Today, we have the technology between an intelligent data-driven platform that if combined with standardization, process automation, transparency, advanced analytics, and the cloud, can achieve greater insights into regulatory practices, automate complex reporting with full auditability and traceability, streamline submission processes, and conduct meaningful analysis of critical compliance areas while mitigating risks and reducing operational cost.
Speaking of cost, it was another point discussed among the panelists. The panel agreed that collecting/ ingesting/ aggregating source data and auditing end-to-end reporting processes is a huge cost and having an automation system in place is a necessity for banks. As Murat stated, indeed automation is critical but automation without standardization and proper infrastructure (i.e., governance, controls, cloud, etc.) will not substantially curtail cost. Establishing a standard is key and history has demonstrated its positive impact in reducing costs across all industries (e.g., internet, telecommunications, cars, etc.).
To this end, using an open-source data standard such as FIRE (Financial Regulatory Data Standard) which has been in existence for over 7 years and has gathered input from financial firms across the world, has significantly increased regulatory reporting efficiency and savings by as much as 70%. Succinctly, let’s see why FIRE offers such amazing benefits to FIs. As an example, we will use the EBA’s COREP/FINREP reporting which represents approximately 350,000 data cells. Needless to say, this is a huge amount of data to gather, ingest and aggregate. These regulatory requirements are built on the EBA’s data point model which contains 150,000 data points. Following the EBA’s suggestion that firms use 150,000 data points to produce data covering 350,000 data cells, this represents about a 2 to 1 data efficiency ratio. This is by no means an optimal approach, as regulations constantly change, and regulators keep demanding more granular data under tighter timeframes.
To best meet these evolving regulatory mandates, FIRE was built on the premise of: “define your data once and re-use it”. As a result, FIRE was created with only 400 different attributes and can produce those 350,000 data cells needed to meet the EBA’s COREP/ FINREP requirements which, if we follow the previous thought process, leveraging FIRE represents a 1000 to 1 data efficiency ratio. Huge savings!
For a good analogy to better understand how technology can often solve complex problems, think back to Yahoo when they started indexing websites using categories such as sports, finance, health, etc. New websites were created at an exponential rate, and Yahoo could not keep up in assigning websites with the proper methodology to allocate them into the appropriate category. Google addressed the “index issue” from the opposite spectrum. They used technology as the answer. As a result, they eliminated the “index” approach and created the “search” approach where there was no need to index based on affiliations, industry, etc. The “search” enabled people to access information across all segments and content in a totally seamless manner.
To conclude, some words of wisdom which, in the spirit of open-source, Murat calls “Wisdom of the Community™”. FIRE is the only open-source data standard published for the entire financial institutions and regulator communities. Recognized by the World Economic Forum, FIRE is a mechanism that harmonizes data, at any level of granularity, across multiple reporting jurisdictions globally. Suade has also built a formal data governance structure to ensure the evolution of FIRE data standard is conducted in a responsible and sustainable manner, while keeping the tenets of atomic and data granularity in schema and attribute definitions.
Going back to our previous example of Yahoo versus Google; if we were to apply it to regulatory mandates, building on the theme of granularity and legal definitions, a financial institution may have hundreds of types of counterparties, but across the global regulatory landscape there are only 45 types of counterparties that are recognized. The power of FIRE is to simplify, harmonize and provide a single framework that standardizes data for risk and regulatory reporting.
Suade’s ecosystem is transforming the industry’s approach to regulatory compliance. It addresses the issue of “complexity” by implementing the right technology elements throughout the risk and regulatory reporting process. The combination of these elements delivers the most efficient outcomes for our client community and enables efficiency ratio objectives, while insulating FIs from regulatory change.
For additional information about Suade’s technology, please reach out to: [email protected]