New Compliance Asks: Is Your Risk Data Management Sound?
Blog: Enterprise Decision Management Blog
Have you got a handle on IFRS 9, CECL and BCBS 239? If not, and it all just sounds like regulatory alphabet soup, it’s time to familiarize yourself with these critical acronyms. All three requirements highlight the need for financial institutions to ensure the quality of their risk data. Aggregation and effective use of this data are becoming key to meeting new compliance challenges, not to mention an opportunity to derive additional business value.
So what specifically are all these acronyms? Here’s a quick overview:
- IFRS 9 – IFRS 9 is a new international accounting standard that was adopted by the International Accounting Standards Board (IASB). In the aftermath of the financial crisis, the IASB believed that the accounting standards in use (specifically IAS 39) failed to highlight the losses that firms would face because they were based on past events. With the adoption of IFRS 9 beginning in 2018, financial institutions will have to model future events and calculate provisions based on expected, rather than current, incurred loss events. My colleague recently wrote a blog post on IFRS 9, if you are interested in more details.
- CECL – While IFRS 9 began as a joint project with the Financial Accounting Standards Board (FASB), which promulgates accounting standards in the US, the two organizations ultimately developed separate standards. FASB’s Current Expected Credit Loss (CECL) standard adopts a similar approach to IFRS 9. It requires lenders to forecast all potential losses for the expected life of a loan at origination and, based on that, set aside reserves upfront for those losses. However, CECL differs from IFRS 9 in that it requires provisions based on lifetime loss for all impacted assets, not just those that are under-performing or non-performing. The final CECL standard was issued on June 17, 2016. It will be effective in 2020 for Securities and Exchange Commission registrants, and in 2021 for all others.
- BCBS 239 – Rounding out the alphabet soup is BCBS 239. Another lesson learned from the financial crisis was that bank’s IT and data architecture were inadequate to support the management of broad financial risks. The Basel Committee of Banking Supervision (BCBS) developed BCBS 239 as a set of overarching principles that impact efforts related to the new accounting standards, as well as activities such as stress testing. The primary goal was to ensure that global systematically important banks (G-SIBS) strengthen their risk data aggregation capabilities and internal risk reporting practices. In doing so, these institutions would enhance their risk management and decision-making processes. The regulation required impacted banks to align to a set of principles of effective risk management and governance by January 2016.
These new standards, coupled with other compliance requirements such as stress testing, reporting and monitoring, all place an emphasis on effectively collecting and managing risk data from disparate sources in order to meet growing regulatory scrutiny. The resulting challenges were discussed at length during several regulatory compliance sessions in late April at FICO World 2016, our premier client conference.
As a senior leader at a large multinational financial institution asserted in his presentation, compliance should not be the only goal in developing a strong risk data aggregation and reporting system. Significant business value can also be derived in the form of: better data quality, reduced costs in data management, enhanced operational agility as model complexity is reduced and better-architected applications for analytics.
Of course, FICO subject matter experts were quick to assure FICO World attendees that we have comprehensive solutions that will enable them to address these challenges, whether it is loss forecasting models, impairment calculation tools, stress testing capabilities, or risk data aggregation and reporting.
The big takeaway, however, remains that compliance is becoming more and more dependent on financial institutions’ ability to coalesce and optimize its risk data. If done successfully, this can lead to more than just a compliance win but also a lift to your overall business.
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