Granularity in regulatory reporting and importance of stress testing

All Banks go FinTech: The HKMA’s drive for adoption of digitalization by Banks in Hong Kong

Over the last few years, the Hong Kong Monetary Authority (HKMA) has been actively pursuing an agenda for digital transformation, having launched seven “Smart Banking” initiatives in 2017 building up to the recently announced FinTech 2025 strategy. As the HKMA works towards implementation of this strategy^[1] through the key elements of “All Banks Go FinTech” and “Creation of Next-Gen Data Infrastructure”, it strongly believes that Regulatory Technology (RegTech) will play a key role in enabling banks’ uptake of novel technologies and the digitalization of bank supervision.  

The HKMA has also been focusing on collected granular data from banks for a more in-depth and updated understanding of the banks business. To have a fuller and more up-to-date picture of the state of banks’ business, HKMA launched the Granular Data Repository (GDR) pilot to collect more granular data in the first quarter of 2019 wherein participating banks were required to comply with a broad reporting data grid, amounting to around 250 fields, for residential mortgage loans and corporate loans. As of end of 2021, the GDR catalogue has also expanded to cover interbank bank exposures and debt securities, and the 3^rd batch of pilot banks will begin submission around mid-2022.

Key challenges faced in complying with regulatory obligations:

Over the last decade, digital solutions underpinned by advanced data analytics have become the foundation for market supervision.  Banks are faced with an increase in frequency and granularity in reporting requirements and have to deal with challenges in collating detailed data for modeling stress tests. They also face challenges in tracking and extracting data from multiple sources and have a need to adapt the data to meet specific regulatory reporting requirements, many of which are updated often.

As mentioned by the HKMA in their recently published 4^th issue of the RegTech adoption guide on Regulatory Reporting and Stress Testing^[2],  many processes still have a dependency on manual intervention leading to increased risks of errors in data handling and in the possibility of errors not being detected in time. Moreover, this can lead to key-person risk and scalability issues. With compliance teams required to monitor risk daily, they are faced with the challenge of iterative nature of regulatory compliance which undergoes a lot of changes, both in terms of content and technology. Banks are also dealing with increased governance requirements for enhanced transparency during audit and control reviews.

With Hong Kong having many Banks with regional and global entities, they face issues with standardization of data reporting and stress test scenarios as per local jurisdictional requirements and must allocate additional resources and time to ensure compliance in each jurisdiction. This includes additional issues arising due to siloed data structures and difference in data quality and completeness. Regulators are placing emphasis on accountability of senior management and require stress testing and regulatory processes to have robust internal controls linked to key performance indicators and key risk indicators. Additionally, the HKMA expects the banks to not only perform stress tests for regulatory purposes reflecting all major types of risks such as credit, market, liquidity, operational and legal risks, but to also ensure that the quantitative and qualitative measures are tailored to the banks and are sensitive to business implications.

With the recent proliferation and increased maturity of RegTech solutions, banks can overcome many of the challenges faced in complying with regulatory reporting and stress testing. Through RegTech solutions, banks can leverage technologies that can process large volumes of data in a granular and timely manner. The higher granularity of data allows banks to better spot vulnerabilities and stress test break points across their value chains. However, with more granularities comes enormous datasets which require high computing power for processing. Most banks may not have the required processing power and the use of RegTech solutions can help overcome this challenge by significantly enhancing the banks’ data management abilities.

With transparency and lineage on how data is transformed to HKMA being essential, banks are advised to “do things right” at the first instance and pick the appropriate solution provider to address both legacy requirements as well as upcoming regulations. A more streamlined regulatory update service is required to control the total cost and to overcome the potentially expensive challenge of adding experienced manpower to support increase volume or new reports.

Banks can benefit from such the cutting-edge technological solutions for rapid implementation, accurate analysis, easy data integration coupled with high quality and consistency in data processing. Moreover, RegTech solutions can help banks overcome the challenge in maintaining of disparate databases in different jurisdictions and systems by providing an aggregated database. When it comes to stress testing, these solutions can assist the banks in scenario generation and to conduct standardized stress testing of workflow, while enabling comprehensive risk modelling and model management. These solutions can utilize the inputs from the stress tests and generate regulatory reports that showcase the impact of different scenarios on the banks business.

Key considerations when onboarding RegTech solutions:

It is vital for the banks to find the right RegTech partners to facilitate their regulatory obligations to ensure smooth and timely functioning of regulatory processes. Banks must assess the RegTechs for the following criteria before onboarding these solutions:

1. Previous track record of the RegTech in Reporting for HKMA requirements, including the ability to conduct workflow and automation and to provide solutions for automating HKMA required embedded complex calculation. Banks should also assess if the solution features a regulatory update service.
2. Robust management of quality data which includes easy data reconciliation, availability of one data source for all HKMA returns, enhanced data transparency, clear data lineage, seamless data workflow on a single platform and data change audit.
3. Capability of the RegTech to provide an integrated solution that has both the regulatory and risk data on a single platform, allowing for better management of the data. With increasing overlaps in regulatory and risk reporting, many of the data used for reporting are relevant in both cases. An integrated solution will help banks perform all required risk analysis and regulatory reporting on the single platform, ensuring data consistency across modules
4. Experience in addressing GDR requirements in various jurisdictions, including same platform and automation features for HKMA Regulatory Reporting. Additionally, the solution must have the ability to facilitate reconciliations between GDR and HKMA Returns per HKMA GDR requirements and should be easily scalable.
5. Assess how the RegTech can absorb the impact of alternative stress tests, scenarios, and simulations. Banks should also assess the solutions ability to perform simultaneous analysis of capital, leverage, liquidity and earnings, while reviewing their capabilities to define and combine “stress models” into a single analysis across numerous factors.

With regulators continuing to increase their use of technology and demanding more data from banks on a variety of fronts, banks will need to ensure they have the necessary tools to meet these regulatory demands. RegTech solutions can offer banks a way to not only ensure compliance with the demands, but to also ensure that they can have accurate, granular and consistent data to review their risk profiles and ensure their institutions are ready for any market shocks.

[1] https://www.hkma.gov.hk/media/eng/doc/key-information/speeches/s20210608e1.pdf
[2] https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2021/20211126e1a1.pdf