TRILLIUM SOFTWARE INSIGHTS

Regulatory Data Management – The Gift that Keeps on Giving

By Michael Hutnyan, EVP Sales & Solution Strategy, Harte-Hanks Trillium Software

After reflecting on the recent holiday season, now that many of us have recovered from some extensive gift-giving (and are now paying the resulting bills), it occurs to me that my financial services clients are receiving a more troubling gift – one that only promises on-going costs and a possible deviation from growth and service - - new and ever-changing regulatory requirements.

I’m referring primarily to those government-sponsored, mandated regulatory demands that involve a significant data management component. Newly defined regulations such as FATCA and the yet-to–be-unveiled LEI (legal entity identifier), will require an extensive and proactive data management strategy by banks. They’ll need to clearly demonstrate knowledge and control over data and its quality in order to achieve compliance.

Like other data-intensive regulations before them, such as the FSA’s Financial Services Compensation Scheme and the Basel Accords, these new regulations necessitate a detailed readiness assessment and a remediation plan for relevant data defects in order to satisfy regulators’ demands.

Moreover, our clients confirm these regulations are not simply one time events that come and go. It’s widely understood that these regulations will morph and change over time, requiring an on-going understanding of the regulations and a flexible data quality management platform.

Our clients are loathe to invest in the same regulatory compliance effort more than once, and establishing a flexible data management environment that can change as rules change is critical for banks to keep cycles free for the real business of banking. Unfortunately, financial services firms today often find themselves with limited budgets, and only those items that “must be done” (such as complying with regulations) are receiving funding. 

A recent article in Bank Systems and Technology supports this trend. In this feature, Michael Versace of IDC comments that growth in IT spending for risk management (including regulatory compliance) will outpace the growth of overall IT spending and will top 15 percent of total IT spending in financial services in 2012.

So, it appears that our financial services clients will continue to have to do more with less, and deal with receiving the “gift” of a constantly changing regulatory world. My mom always said it is better to give than to receive. I think she was correct in this particular case, but, a data quality management solution that is flexible enough to work within your current financial data systems and calculation models to ensure regulatory compliance – now, that could be the very best “gift” for any bank this year.

How is your financial services organization handling regulatory compliance around data?

 

The Impact of Basel III Readiness & Data Challenges on your Bank

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

Banking firms expect that the Basel III framework will be published and implemented in the United States by the end of first quarter 2012. Basel III imposes additional capital surcharges, and mandates liquidity standards, both of which trigger data elements that deserve your attention. Although some US banks have expressed opposition to Basel III capital requirements, the banks are in fact overcapitalized and are trying to prepare for the new capital thresholds demonstrated by the positions on their call reports. 

But, the unspoken question remains…”are banks really ready for Basel III?”

Some banks have already begun internal preparation for implementation of Basel III by participating in qualitative impact studies (QIS) that analyze and measure the affect the new framework may have on a bank’s business model, balance sheet, and product mix. Project setup and working groups will assist with the technical realization and data preparation/data quality management of the new framework relevant to the liquidity ratios. Yet, banks are facing many challenges including the treatment of missing data, comprehensive data consistency, extensive data warehouses, and numerous data sources. 

In particular, the liquidity coverage ratio (LCR) will require banks to have sufficient high-quality liquid assets to withstand a 30-day stressed funding scenario that is specified by regulators. The net stable funding ratio is a longer-term structural ratio designed to address liquidity mismatches. It covers the entire balance sheet and provides incentives for banks to use reliable sources of funding. This liquidity framework mandates consistency in data based on manual or automated calculation of the ratios or different evaluations (book value vs. market value) of assets.

The liquidity framework may introduce a significant challenge to financial services firms because banks will have to integrate their existing liquidity risk systems into their Basel frameworks, which is likely not yet done as U.S. banks, for example, are still anticipating implementation of Basel II

In addition, adoption of a new framework will require a substantial budget for banks to transition and remain in compliance. So, banks may believe they are addressing their financial data issues in advance of Basel III, but they may not be working out the right problems to ensure compliance. A deeper and more specific data assessment may be needed to find the data inaccuracies you may not know about yet. The consequences of mistakes will be costly. 

Is your data ready for Basel III?

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.

Capitalism or Favoritism?

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.

Is “Too Big to Fail” still a common reality? Absolutely! Why else would the government allow the country’s second largest national bank (by assets) to transfer its risky security instruments to its retail bank?

This type of conduct is predictable for a troubled bank…that’s why regulations exist to prevent it, due to the risk this type of transfer poses to the deposit insurance fund (DIF). Sections 23A and 23B of the Federal Reserve Act represent an effort to reconcile the objectives of banks’ interactions with their affiliates.  The goal of the act is to protect the bank’s deposits and maintain economic separation between the bank and its affiliate subsidiaries. This is critical to encourage better risk management practices between financially affiliated organizations and to discourage non-bank subsidiaries from benefiting from the government guaranty provided to banks.

But, in the earlier case, shifting risky security instruments to a retail bank indirectly helps to insure the risk generated from investment banking operations, because most deposits in retail banks are insured by the FDIC.  Many would argue that this practice is not fair.  I take the position that (a) it may not be permissible under the law, (b) it may be construed as an act of favoritism for the subject institution, and (c) too big to fail is still a reality in this economic climate.

In light of all this, it becomes easier to justify why these transfers drive the need for the type of LEI solution that Trillium provides its financial services clients, due to the numerous counterparties involved and the risk exposure of different legal entities. In the rare event of a failure of this bank, the LEI solution can help regulators quickly ascertain counterparty identities involved in the transfer and the correct legal entities for an immediate wind down and liquidation of assets.

What do you think?  Is it favoritism or capitalism?

 

Are Increased Capital Levels a Result of Regulatory Uncertainty?

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.

Despite the recent financial crisis and mounting litigation against banks due to mortgage-backed securities, global banks are somehow overcapitalized and less leveraged. The burning questions are “how and why?” 

I think I might be able to answer these questions in one word…REGULATIONS!

Yes, I said regulations. Even though most of the domestic regulations from Dodd-Frank are still in-the-making, and Basel III has yet to be promulgated, banks already understand the expected regulatory capital thresholds for domestic and global standards, but absolutely no idea as to how they will be applied. I opine that banks are holding extra capital because they are truly uncertain of what the future may bring, relevant to regulations.

In particular, banks are dreading the designation of systemically important financial institution (SIFI) by regulators. If designated as a SIFI, a bank will face even more capital requirements (such as capital buffers) due to the risk it poses to other financial institutions and the overall economy. 

So, can regulatory uncertainty actually be a good thing? If regulatory uncertainty causes banks to tighten their purse straps and reduce lending, it’s probably not a good thing due to the impact it has on the economy and consumer spending. But, if it forces banks to better prepare for crisis by maintaining additional capital beyond the current regulated requirement, and make them more risk-averse when pursuing opportunities, then it is an EXCELLENT thing…for regulators…but not so much for the banks, as the money could be utilized for other purposes.

Need I say a double-edged sword?

 

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.

5 Observations from FIMA 2011 (Part 5 of 5)

By Jon Asprey, Director, Strategic Consulting EMEA, Harte-Hanks Trillium Software

Continued from my previous post, Part 4, I talked to many of the attendees from FIMA 2011 made 5 core observations:

Observation #5. Carefully consider outsourcing & the resource mix
I heard some discussion about the pros and cons concerning outsourcing data quality operations.  It is clear to me that beyond relatively simple data cleansing activities, outsourcing or ‘offshoring’ can introduce added complexity, although solving the immediate resource problems. It is also important to leverage the right resources for each particular task to ensure your data management efforts are effective. For example root cause analysis requires specialist product and process knowledge.  This usually necessitates dialogue with many individuals to establish the origin of a data defect, whereas, some data cleansing activities can be outsourced in a “clearing house” type model. Carefully consider whether you need this added management effort and how you will coordinate you outsourced resources.

The Opportunity
These observations present a huge opportunity (and a huge challenge) for those responsible for a company’s data governance and compliance initiatives. It will require and enormous educational push and cultural change to ensure information is captured accurately and treated appropriately as it is used in down-stream processes.

Efforts to improve communication and share knowledge will only benefit the company by increasing efficiencies and streamlining processes. My view is that a centre of excellence model does work as it allows a centralised team to build the skills and knowledge that will serve the wider business as a whole. And regardless of whether it’s the regulators or the executive arm driving the changes, I would argue that they will help you run a better business.

 

5 Observations from FIMA 2011 (Part 4 of 5)

By Jon Asprey, Director, Strategic Consulting EMEA, Harte-Hanks Trillium Software

Another core observation, continued from Part 3, based on my conversations at FIMA 2011: 

Observation #4. Siloed efforts
While a number of firms at FIMA are well on the way to establishing an experienced data quality team with expertise in risk and pricing functions, there is still a disconnect between the many data “consumers” and those in the front office responsible for “producing” or “sourcing” data. Many companies I spoke with still struggle with governing how data originates and then subsequently used within a business as a trusted source.

Do data consumers and data ‘producers’ at your company communicate on a regular basis? What has worked? What hasn’t?

 

5 Observations from FIMA 2011 (Part 3 of 5)

By Jon Asprey, Director, Strategic Consulting EMEA, Harte-Hanks Trillium Software

Continued from part two, I talked to many of the attendees from FIMA 2011 made 5 core observations:

Observation #3. Profile the process
Many companies focus on business process and efficiency—and rightly so. However they have not fully considered how data profiling can support their efforts. Profiling helps to identify the “evidence” of process failure, which eventually results in more effectively targeting resources and remediation efforts.

Have you profiled your data? What did you uncover? If you haven’t, what’s stopping you?

5 Observations from FIMA 2011 (Part 2 of 5)

By Jon Asprey, Director, Strategic Consulting EMEA, Harte-Hanks Trillium Software

Continued from my previous post, I talked to many of the attendees from FIMA 2011 and made 5 core observations:

Observation #2. Regulators are still driving change
While the business still has data quality needs that aren’t being met, change is primarily being driven by the regulations and a firms’ ability (or lack thereof) to meet minimum requirements. Building a case for data quality initiatives based on ROI is a difficult task for many firms. One of the presenters even suggested that such ROI calculations would always be negative! (I will cover this in a future blog).

We’d love to hear what is driving change in your organization.

Observations from FIMA 2011 (Part 1 of 5)

By Jon Asprey, Director, Strategic Consulting EMEA, Harte-Hanks Trillium Software

I had the pleasure of attending the recent Financial Information Management Association (FIMA) 2011 conference in New York, where I participated in a panel discussion titled “Exploring the Current State of Data Management” and moderated a round table in the Data Quality and Risk Workshop.

Like the NY Knicks’ performance in basketball games that week, the results for data quality within financial firms is mixed to say the least. I did make a few observations that all point to big opportunities for those responsible for their company’s data management & governance initiatives. I’ll present these observations over the course of the next 5 blog posts and would love to hear your comments and opinions.

Observation #1. There is a need for executive level education & expectation setting
Senior executives are becoming increasingly aware of the need for robust data governance and information management. However, after talking to many attendees at FIMA, it is still clear that many do not realize the implications and resource requirements in proactively tackling data quality and governance “head-on.”

What does this look like at your organization? Do executives have a good picture of what it will take? If not, what are you doing to help them understand what needs to be done?