2 June 2021
Regulatory developments could push banks to double their efforts
Important challenges facing the financial sector have been addressed at the Reporting and Regulation, Challenges for Financial Institutions Observatory, organised by the elEconomista with the sponsorship of Cecabank. The meeting, which was held virtually, brought together María Carrasco, CaixaBank's Director of Regulatory Reporting; Sonia Sánchez, Kutxabank's Director of Oversight; and Massimo Salerno, Cecabank's Director of Treasury Management, Risk Services and Reporting, and was moderated by Isabel Blanco, Market Coordinator at elEconomista.
Regulation has become essential for ensuring transparency, yet it is also a living element that undergoes continuous changes and particularly affects a sector such as banking, which has its own regulations. In fact, we could say that regulatory requirements have become the major medium- and long-term risks for the industry, which is increasingly being subjected to greater demands.
Regulatory changes
With regard to the new requirements facing the banking sector, María Carrasco explained that the growing demand for information represents an effort 'in terms of technological investment and the development of professional profiles capable of complying with the requirements'. To the recurring regulation it is necessary to add 'all the supervisory activities and inspection procedures, with barely any room for planning'. All of this, explained CaixaBank's Director of Regulatory Reporting, poses a major challenge for the industry, 'which requires us to be fast and agile, while at the same time rigorous'.
In the immediate future, the sector is facing the modification of several circulars that increase the volume of information to be reported in the coming months, and at the European level we have several projects on the horizon that will have a significant impact. Projects such as IReF (Integrated Reporting Framework) or BIRD (Banks' Integrated Reporting Dictionary of the ECB), 'which seek, with good sense, to standardise reporting and simplify disclosure'.
The new regulatory requirements, which force entities to be flexible, reflect 'a trend towards detail and complexity' that is constantly increasing, Carrasco added. 'They are not only based on the data point model, mostly anchored to the financial accounting information that we all know, but rather, they are increasingly relying on information derived from operations, from the entities' transactional information', which requires entities to have much more complex data exploitation tools and structures for this purpose. The new competitors, most of which seek to avoid the regulatory requirements of traditional banks and, therefore, have a greater comparative advantage, as well as the speed with which they must respond to these requirements, are other challenges pointed out by the CaixaBank Director.
'The ECB and the EBA should define a single strategy to make the efforts more efficient', explains María Carrasco, CaixaBank's Director of Regulatory Reporting.
Sonia Sánchez, Kutxabank's Director of Oversight, agreed with Carrasco on the variety of statements that have to be sent to different supervisors with different frequencies, deadlines and levels of aggregation, 'which sometimes generate duplicities and complicate consistency between statements, and which also involve complex processes for entities, and a very large investment in technological and human resources', she stated.
Specialised areas
The approach taken by Kutxabank to respond to these needs, explained Sánchez, is to organise the process of preparing the statements 'through specialised areas that are responsible for preparing statements according to three large blocks; on the one hand, those related to financial reporting; on the other hand, those related to solvency and resolution; and finally, those related to market risks and insolvency'.
'All these processes involve a very large investment in resources', explained Sonia Sánchez, Kutxabank's Director of Oversight.
Massimo Salerno pointed to 2 issues that Cecabank is working on within the Pyramid ecosystem: in the short term, it is focusing on changes related to the EBA (the European Banking Authority). 'We are currently working on what is called EBA 3.0, which enters into force now; 3.1, which enters into force in September, and 3.2, which enters into force at the beginning of next year. It's an entire series of changes that affect different areas, and as suppliers we have to assist our partners through the economies of scale that we are bringing to these processes. In the medium term, he added, the above-mentioned European-level initiatives, such as IReF, 'which we are currently analysing', or BIRD, are very important.
Consolidating information
The objective of IReF is to unify the statistical information sent to national and European supervisors, and consists of a series of reports with greater granularity, which would replace the current reporting system, explained Kutxabank's Director of Oversight. The implementation date is not expected to be before 2024-2027. The risk that the expert points out is that until all reporting is integrated into this framework, it is very likely that the current system (based on statements prepared by the entities) will have to be maintained, in addition to this new, more granular model. For Kutxabank, the idea is to 'continue to rely on the market tool that we currently use to compile statistics', which is being employed as a single repository model for all the information on contracts with all their data, and which would be 'a good starting point for sending this information with greater granularity', according to Sonia Sánchez.
'Reporting accounts for up to 6% of banks' operating expenses', noted Massimo Salerno, Cecabank's Director of Treasury Management, Risk Services and Reporting.
'We support European projects with initiatives that aim to improve data coherence, information efficiency and increase data quality... BIRD aims to create common definitions for prudential information, and IReF aims to provide an integrated information system', emphasised María Carrasco. Nevertheless, in the case of the BIRD initiative promoted by the ECB, 'something very similar already exists with the DPM (Data Point Model) led by the EBA, which is the one we have adopted at CaixaBank to structure financial reporting. The best solution would be for both institutions, the ECB and the EBA, to define a single strategy to make reporting efforts more efficient', he added. However, 'the current stance of regulators could compromise this philosophy and, as a consequence, generate duplicities'.
In the opinion of Cecabank's Director of Treasury Management, Risk Services and Reporting, 'these are important initiatives, although it is true that they are not very developed, we are working with drafts. But as service providers we are examining how we can help our user entities'. And he stressed the same idea as Carrasco: 'It is clear that moving towards standardisation is a win-win situation, but we also need to avoid duplicities'. And if to get there 'we have to continue to maintain two data models, that is not the goal; we cannot duplicate efforts', he stressed.
It is important to note that these duplicities are solvable, according to the experts participating in the Observatory. The key issue is that 'if we are all compiling statements at the same time with the same information in different forms, the cost is much higher than if we make the disaggregated information available to the supervisor and the latter handles it according to its needs', Sonia Sánchez pointed out.
Standardising definitions
There is also a need, added María Carrasco, to 'standardise certain definitions. For example, the Bank of Spain's definition of doubtful is similar but not the same as the European definition, which is Non performing. Something similar occurs with the no-significant risk in its European version, the low credit risk. These similarities lead to duplications in our processes and reduce efficiency, and it is a commonality that the entire sector suffers'.
A large part of the costs are technological. As a service provider, 'at Cecabank we have developed a reporting service that is used by more than 30 entities in Spain and Portugal', explained Salerno. This 'enables comparisons of the reported data, and gives more value to the said data, which allows for further analytical use of the information'. Salerno noted that, according to estimates, 'reporting can account for up to 6% of banks' operating expenses. We are talking about a relevant figure'.
'The creation of a single certified data repository' is essential 'to transparently collect and exploit any information beyond prudential reporting', increasing the reusability of data, added Carrasco, CaixaBank's Director.
One of the areas in which work needs to be undertaken is in maximising the use of this data. According to Carrasco, 'a holistic view of data management is required. The quality of our reporting is an assessment of our reputation as a brand' and can act 'to the benefit of a better value proposition and understanding of our customers'. According to Sonia Sánchez, 'This reporting information, which is public, is sometimes used to make comparisons and to see your relative position with respect to other entities, and it is used not only internally but also by analysts and other market players to draw certain conclusions'.
Data on sustainability
Non-financial information has gained prominence in recent years. To what extent is it complicated for a financial institution to collect all this data?
CaixaBank's Director of Regulatory Reporting explained that we are experiencing 'a paradigm shift in the valuation of entities; profitability is no longer the only thing that counts, but also the means used to achieve it. All progress in this direction is being accompanied by undeniable regulatory pressure. Entities are dedicating a lot of effort and resources to the implementation of the sustainable finance reporting directive. If we draw an analogy with traditional reporting, sustainability reporting is still at the starting line'. Carrasco also referred to the bank's leadership in the green bond market in Spain and the international recognition for its commitment to sustainability in the bank's strategy.
The absence of standards for non-financial data implies difficulties. 'Kutxabank and its banking foundations have been publishing their sustainability reports for over 15 years under GRI standards, so we are accustomed to collecting non-financial information and making it public'. Nevertheless, the new regulation poses challenges, 'as it requires us to provide information related to the investment activity and environmental impacts of our customers. The most complicated aspect, and the challenge derived from the new regulations, is to reduce this information from the global level to specific data, and in particular, greater difficulties are foreseen with regard to the financing of SMEs, since they generally have less information on this issue, as they are not obliged to report this data'.
