TRILLIUM SOFTWARE INSIGHTS

What Works When Planning to “Operationalize” Data Governance

Michael Stiffler, Strategic Consultant, Data Governance, Harte-Hanks Trillium Software

In case you missed it, we presented our thoughts around “operationalizing” data governance in a recent Trillium Software-sponsored webinar. I wanted to stress a couple of key takeaways:

Data governance is an iterative program. You need to set the expectation that the program will evolve, especially as the company's business requirements evolve. For instance, you may have to adjust your framework to include other areas that are now important to the business. Or perhaps you understand the corporate culture a little better now and need to adjust your approach to increase your chances of being successful.

When Risk Becomes Reality – Even Weather Impacts Data Quality

By David Binkley, Senior Technical Account Manager, Harte-Hanks Trillium Software

As many of you may know, the weather here in the United States has been rather unique this summer.  It’s been extremely hot and dry in the South and Southwest and extremely rainy here in the Northeast.   Take those conditions into effect; add a random earthquake and a hurricane or two; and you’ve got a very challenging opportunity for many of our clients.

Well, I just happened to be at one of those clients recently, whose shipping operations were badly impacted by all of the above external conditions.  This particular customer happens to be a manufacturer of extremely expensive products that are required to be refrigerated from the point of manufacturing to the final point of use.

Taking into account the disruptions of power in the East from hurricanes like Irene, the client needed to be able to effectively synchronize product manufacturing and shipments to their customers in regions where the power grid was not impacted, or to hold the manufacturing of products for those areas where the power was likely to be out.   Because this client has excellent data quality control over their shipping information, the IT and shipping departments were able to quickly identify potentially impacted orders and have customer service representatives contact the customer to either reschedule the deliveries or confirm that delivery was still requested.

Now you might ask, how much of an impact did data quality really have on this situation?  Well, take the following into account:

To identify the orders that were impacted, the customer first needed to know what products required refrigeration, and that required accurate coding of the components of the order.  Second the order had to be evaluated as to the location of the actual shipping address, and that shipping address had to be evaluated as to its accurate location within the affected delivery areas.  Third, the customer had to be contacted via phone, e-mail etc. to verify that the order could still be sent. 

Finally, the shipper had to coordinate its impacted delivery areas with our customer’s shipments to make sure that the shipper’s distribution centers were also not impacted by the weather.  ALL OF THIS INFORMATION relies on the quality of data!!

Fortunately, for our customer and thousands of their customers, all of the above worked out.  Literally thousands of shipments were halted, re-routed or otherwise modified to make sure product would not be impacted by these events.  Production runs were modified to make up for halted orders and business resumed as normal after a week or so. 

In fact, the only problem I heard about was that some reports weren’t out at their usual time the day after manufacturing and shipping had set an all-time record for orders fulfilled in a single day as catch-up processing was in full bloom.  Well, I guess you just can’t win them all…
Think about it.  Would your data and its quality permit you to respond as well?

Two Capital Frameworks Cause Challenges for US Banks

By Shameka Simmons, Banking Attorney, Financial Solutions, Harte-HanksTrillium Software

Shameka Simmons is a Banking Attorney with Harte-Hanks Trillium Software.  She offers a wealth of knowledge about the inner workings and processes of financial institutions, retail/commercial lending, and complex loan transactions.  She gained this expertise through her experience at GMAC (now Ally Bank), the Legal Division of the FDIC Enforcement division, and her active role in the Illinois Attorney General subpoena/investigation of Countrywide at the height of the foreclosure crisis.

Increased capital demands have introduced a host of challenges for U.S. banks, especially now that they are operating under two regulatory capital frameworks. U.S. regulators issued a final rule June 2011 for core banks that have adopted the “advance approaches,” which utilize general risk-based capital rules to compute the bank’s risk-based capital floor.

This final rule maintains the relevancy of Basel I, but also burdens banks with many regulations that mandate increases in regulatory capital. Increases in regulatory capital reserves will have an unintended effect by tying up money that could be used for loans, investments, and growth. 

For example, Dodd Frank legislation imposes capital requirements on all depository institutions, and their subject holding companies, while Basel III includes two new capital buffers. So, this begs the question, how and when will regulators determine one appropriate capital regime to effectively protect against risk and absorb losses in this volatile economic climate?

This question will likely remain unanswered until banks overcome the following challenges as a result of the current dual capital regime:

•    The risk based capital floor (calculated under Basel I) does not adequately address “risk sensitivity” in banks’ credit portfolios. In addition, the new floor does not reflect financial innovations and risk management practices at large financial institutions. Thus, the bare minimum that banks are required to maintain in regulatory capital will not safeguard against the very risks that contributed to the recent financial crisis in the first place.

•    Financial institutions are facing a rigorous task in measuring capital under Basel I, II, and III (when implemented) with no transitional floors for Basel II, but a parallel run and phase-in period for Basel III…all while using Basel I to compute the floor. Yes, I know…extremely confusing!

•    Economic capital models and regulatory capital models are presumed to be aligned, but with differences in purposes and scope.  However, under current capital frameworks, economic capital will eventually erode as regulatory capital burdens a bank’s platform.

•    The tier 1 risk-based capital floor for U.S. banks will conflict with Basel III minimum tier 1 capital as a result of the capital conservation buffer.

As a result of all this, U.S. banks will continue to face competitive disadvantages as foreign banking organizations aren’t subject to the same floor requirement/dual utilization of Basel I and Basel II.

The subject frameworks will affect overall capital positions for banks. It is questionable whether the challenges will (a) impede growth ( b) induce further investment in compliance solutions (c) spark creativity amongst bank risk management personnel to meet regulatory demands…or all of the above! 

To prepare for the challenges that the dual frameworks introduce, banks should identify key problem areas that lead to erroneous capital calculations under both frameworks, such as data quality. Banks also should perform an in-depth analysis of the calculation changes associated with each framework because each framework requires quality data to get the best result.