Published by the Basel Committee on Banking Supervision in January 2013, BCBS 239 is the first set of recommendations that is clearly driven by technology issues. Read the analysis of Samy Slim, Consulting Manager at Micropole.
Published by the Basel Committee on Banking Supervision in January 2013, BCBS 239 is the first set of recommendations that is clearly driven by technology issues. BCBS 239 sets out 14 principles to strengthen banks' ability to aggregate their risk data and improve reporting. The regulator's objective: to limit the probability of another major financial crisis (similar to the one in 2008) and to strengthen the resilience of banks. As the European Central Bank (ECB) warns about the increasing and entangled risks weighing on the financial system of the euro zone in the first half of 2016, it seems essential, beyond compliance, to modernize its information system and adapt its organization and processes to make the most of the new strategic challenges.
Regulatory pressure and compliance sites
Twenty-eight years after the advent of Basel I and the Cooke ratio, the regulatory pressure on banks continues to grow over the years. In order to limit the probability of another major financial crisis and to strengthen the resilience of banks, the regulator and the legislator now require them to strengthen their risk assessment models (credit, market, operational, liquidity), and to industrialize their data aggregation and reporting capabilities.
The 29 global systemically important banks (EBIS-G) had until January 1, 2016 to comply with this new regulation, while the nationally important banks (EBIS-N) had three more years once they were identified (2018/9). In reality, the implementation projects have been delayed. But, pragmatically, the Banks have prioritized and committed to the regulator to address compliance gaps with the highest priority, to avoid heavy penalties, increased capital requirements, the impact of a breach on their reputation, as well as the likely loss of a competitive advantage.
The resulting increased reporting needs require multi-domain joint contributions (finance, credit, risk, ALM, tax, etc.) requiring significant convergence and reconciliation efforts. What's new: the regulator now requires complete, reliable and above all very granular information (at the customer, contract, etc. level) in order to run its own models, on a monthly or intraday basis in the event of a crisis; the data must be identified and controlled in its genealogy(data lineage), traced and shared throughout its life cycle and up to its formal certification(sign-off).
Investing in information systems
To achieve this, the only way to build a solid foundation is through the rigorous planning and management of dedicated programs across the entire company, jointly driven by the business and IT departments and aimed at satisfying the principles of BCBS239. The objective is to gain efficiency and improve profitability by: (1) more efficient production and provision of information, (2) thanks to more robust IT infrastructures for the rapid generation of key reporting; (3) a mature decision-making process strengthened by improved risk management (4) thus a lower probability of losses related to weaknesses in risk management models, and finally (5) the implementation of true data governance, the foundation of trust essential to the sustainability of the edifice (see diagram above).
In May 2016, the European Central Bank (ECB) warned of increasing and entangled risks to the eurozone financial system in the first half of the year. The main causes, according to the ECB, are (1) financial market turmoil (increased volatility in a less predictable and unstable international environment), (2) weak earnings in the financial sector (erosion of revenues related to monetary policy, (2) low profits in the financial sector (erosion of revenues due to monetary policy, increased regulation of their activities, disintermediation and higher volatility of their customers), (3) excessive debt levels (credit risk, case of Greece) and (4) the development of a parallel banking system (emergence of new players and competitors with shadow banking.
To secure their margins and their investment capacities, which are thus severely tested, banks must reduce their costs and optimize their processes. As for risks, it is an entire internal culture that needs to be transformed. Because the advent of digital and FinTech start-ups, added to the weight of regulatory compliance, is also forcing them to review their organizational models, and to make significant investments to strengthen the security and agility of their information systems in order to ensure that they have the adequate capacities necessary for their stability and survival.
Data is the black gold of the 21st century
To prepare for the future, they can rely on the paradigm shift offered by digitalization and more broadly on disruptive innovation around data(data lakes, data labs, cloud computing, decoupling layers, data intelligence, blockchain, etc.) in order to :
- Transform unnecessary costs into profitable growth opportunities
- Accelerate the transparency and decompartmentalization of an organization that is still too often in silos
- Introduce pay-per-use consumption modes for scalable/gradual infrastructures
- Turning regulatory compliance into a competitive advantage
- industrializing a single channel for making key data available (data sink)
- establishing unified data governance, defining new roles and responsibilities
- facilitating rapid decision-making informed by timely and reliable data
- Make agility and disruptive innovation profitable growth vectors
- Accelerate time-to-market, encourage agility, prototyping and short-cycle work
- Bring digital technology and customer knowledge to the heart of the Bank and anticipate changes
- Work brick by brick, learn as you go from a 360° vision(think big, start small).
Beyond the challenge of compliance, it now seems essential for banks to modernize their information systems and adapt their organization and processes to make the most of these new strategic challenges. The disintermediation of the banking sector, which has been undergone until now and encouraged by the regulatory environment, could finally lead financial institutions to review their business models in order to accelerate their digital transformation into a service platform, like Goldman Sachs, which recently declared, through the voice of its CEO Lloyd Blankfein, that it aims to become a "technology company", a sort of Google or Amazon of finance. This is why it is time to go on the attack and change the rules of the game.
- Shadow banking: the term "shadow banking" refers to all the (off-balance sheet) activities and players contributing to the non-bank financing of the economy. Following the 2008 financial crisis, these actors (investment banks, private equity firms, hedge funds, rating agencies, commodity speculators, clearing houses and off-balance sheet companies, etc.) were criticized for the high level of risk and opacity of their off-balance sheet operations, which were not visible to regulators.
- EBIS: Systemically important banking institutions (whether global or national). A risk of failure would contribute to the likely collapse of other banks and the wider financial system (domino effect).