Richard Bennett – CEO, Razor Risk
It’s often said that in every crisis there is an opportunity. And in the case of the financial crisis, the
regulators, mandated by the G20, seized the moment. The crisis prompted a comprehensive
overhaul of banking regulation. This was not just at a UK or European level but, through the G20
and the Basel Committee on Banking Supervision, these reforms became a global project.
The primary aim was to address specific issues that had been laid bare by the crisis. This was the first
step. But regulators knew, of course, that the latest crisis is never a blueprint for the next one. The
next crisis might come in a completely different form. So the second step was to enhance the
general resilience of banks, to make them strong enough to withstand any type of storm. This idea
underpins the three main building blocks of the reforms: capital, liquidity and governance.
Much has been done on these three fronts. Regulations have been put in place that mean banks not
only have to hold more capital than they did before the crisis; but their capital also needs to be of
higher quality. Banks can therefore suffer more losses before they actually fail. At the same time,
banks have to fulfil much stricter liquidity standards than before, providing them with a cushion in
case trust evaporates and funding dries up. This allows banks to survive in a crisis for longer than
they could in the past.
Reforms to improve governance and risk management have also come about, but these have
received less attention. For too long, governance and risk management have taken a backseat in
public or academic debates. But they are just as important as capital and liquidity – if not more
important. After all, good governance and sound risk management help to prevent a bank from
getting into trouble in the first place. Capital and liquidity are merely backstops for bad management
– or bad luck.
The new rules help and encourage banks to set up appropriate processes and integrate them into
their organisational structures. In this context, one of the standards developed by the Basel
Committee is somewhat underappreciated. Specifically, the BCBS 239 Principles for Effective Risk
Data Aggregation and Risk Reporting plays a significant role in adequately managing the risks of a
bank. In order to make sound decisions, top management needs sound data.
The BCBS 239 Principles set out a standard for the larger, more complex financial institutions to
work towards and in recent times larger domestic banks and other financial institutions such as
larger brokers are also being asked to invest in this governance standard. Banks have made significant
investments in the data capabilities needed to meet rising regulatory demands—yet they are still
struggling to keep pace. According to banks’ own quantified self-assessments, overall compliance
levels have actually declined since 2015.
At the top of the list of governance-related challenges are the increasing scrutiny that banks expect
in the near future and the rising levels of investment needed in data and technology capabilities.
These challenges can be met, however, if banks are able to create value from data as they tackle the
governance agenda. In other words, the data vision and strategy that banks deploy to meet
governance needs and contribute to overall safety and soundness also support business goals. While
banks remain primarily focused on risk data compliance, a few have begun to also use the data
strategically to support business growth through advanced analytics and digitisation.
The goals of governance and business value can be pursued simultaneously. Compliance efforts are
leading to enterprise-wide data-quality controls and governance established on the same data has
also been used that to yield business value. Through machine learning and other advanced analytics
methods, high-quality, well-governed data will provide the basis for the insights which are needed to
realise business value in a range of situations.
Supervisors have been meeting with banks’ boards of directors and senior management to obtain an
update of the banks’ progress in their implementation of the BCBS 239 Principles and BCBS plans to
conduct the next implementation monitoring exercises this year. In light of the current national and
geopolitical stresses combined with an economic slowdown influencing the world markets, it will be
interesting to see what progress they will report.
Latest posts by Richard Bennett (see all)
- Challenges to Financial Stability in the Eurozone - December 4, 2019
- Banking Reforms and Governance in an increasingly anxious world - August 8, 2019