Over the past decade, banks have made significant investments in both people and technology in response to the flow of increasingly complex regulations. Today, financial institutions are realizing that they have an opportunity to leverage those investments to enhance the profitability of their core businesses of banking and investment.
Banks no longer want merely to comply; they want to compete and win. Due to the post-crisis reporting obligations mandated by regulators globally, financial institutions have spent the past decade investing in improvements to their regulatory data management and reporting processes. Banks are discovering that this data represents a kind of raw material that can be used to add value to their core banking activities, and that now is the time to leverage it. The granularity of data required by regulators means that often they have perhaps 80% to 90% of what they need to support analytics that can allow them to assess and improve the profitability of their customers, products and services.
From discussions with our clients, we're seeing that for many data represents a new source of business intelligence that can be mined for insights into critical risks, potential ways to enhance profitability or strengthen internal controls and management. BBVA Compass, the U.S. subsidiary of the major Spanish bank, is one of a number of customers that recognize that when given the right tools, regulatory reporting can generate value.
However, many banks often don't regard managing and organizing data as core business activities. This can limit the extent to which they are able to utilize customer transactions data, for example, so they can cross/up-sell more relevant products based on these customers' needs.
The same applies to regulatory calculations and reporting. Despite recent advances, according to a Wolters Kluwer survey conducted with a leading industry publication, 58.4% of respondents said they were not very confident in the quality of their firm's data. Indeed, only 6% said they had a completely integrated regulatory data workflow, and 54% cited issues with data validation and reconciliation of regulatory data with risk and/or underlying financial data. As a result, many firms are looking at what tools they can use to help them, particularly when it comes to profitability analytics and improved financial reporting, for example under CECL, IFRS 9 and other regulations.
Banks can unlock the potential of this wealth of regulatory data if they can structure it properly so that it can be used to support value-added functions like analytics. The data may vary between reports, but it's sourced from the same transactions and organized by line of business, making it highly valuable.
Faced with this opportunity, banks we talk to are taking proactive measures to get their data houses in order and turn the raw materials they've been mining for the past decade into valuable insight that helps their bottom-line across the board.
The critical first step, these banks are finding, is establishing a single source of truth to underpin the bank's regulatory and financial reporting processes. This allows the bank to start mining a standardized, consistent and up-to-date data set for new sources of business intelligence.
Banks can combine the data and results held in this single data repository with other external data sources to address a wide set of business needs, while meeting the regulatory imperative of using this data in decision-making and helping the bank to operate in a more agile, responsive and forward-looking way.
Business benefits of this approach range from operational to strategic. They include the ability to track unexpected or large changes in exposure concentrations, capital requirements and portfolio rating migration; risk appetite monitoring, analysis and alerts; what-if analysis around the effects on future regulatory capital requirements; liquidity survival horizon stress testing, and others.
From this foundation, banks can move to automate their financial reporting and from there automate their regulatory reporting, thereby establishing their regulatory response as a "business as usual" (BAU) activity. This increases the bank's confidence in its numbers and results in more informed decision-making and more accurate reports.
The final cherry on the cake, though, is the ability to maintain regulatory reporting's "BAU" designation in the face of changing requirements. According to the Wolters Kluwer survey, 54% of respondents said they struggled to remain compliant with changing regulations and adhering to respective regulatory deadlines.
But this can be addressed by keeping on top of regulatory updates, thus ensuring automation continues even as required data fields change. This allows banks to manage regulatory uncertainty, in essence by future-proofing their regulatory reporting approach.
By automating business logic updates, data requirements and documentation in the regulatory reporting process, banks can reduce the time spent on analysis and development of changes by the bank. This limits the bank"s obligations to sourcing the required additional data elements, further simplifying the implementation. It also keeps the solution synchronized across all areas of finance, risk and reporting, resulting in reduced risk and lower operating costs.
This kind of comprehensive approach allows banks to offload the heavy-lifting of keeping up to date with regulatory change and deliver on reporting obligations, while giving clients the tools required to get back to banking business and use analytics to identify and deliver on new opportunities.
Having adopted an integrated platform capable of evolving to address changing regulatory requirements, bank staff at BBVA Compass have been freed up to focus on what matters. Furthermore, the bank was able to re-cast regulatory change as a ‘business as usual’ function by embracing automation, with the result that resources can be redeployed to support higher-value activities, such as advanced analytics or preparing for the next big transformation.
What's more, the repository of granular, risk- assessed data gives BBVA Compass a new source of business intelligence that can be mined for insights into critical risks and opportunities to enhance profitability, or strengthen internal controls and management.
BBVA Compass’s experience shows that – given the right tools – regulatory reporting can become a driver of business value.by Will Newcomer, VP Business Development and Strategy, Wolters Kluwer