Responding to the 2008 financial crisis highlighted how siloed data can hinder agile and effective response, with many financial institutions scrambling to understand their market and counterparty exposures, and as a result unsure on how to react.
This time around in response to the pandemic crisis, banks are caught in the same data trap, compounded by the fast-moving and uncertain environment. Without more sustainable solutions, banks may continue to face a trade-off between reporting and responding.
Reporting challenges in a fast-moving environment
The current crisis heightens the interplay between different risk types and the need for visibility across credit, market, liquidity and non-financial risks. This is crucial for both understanding the bank’s risk profile and for fulfilling regulatory reporting duties.
Among the other priorities facing regulators and senior management, they should understand—in detail and on a daily basis—four interconnected areas:
Cashflows and liquidity: Financial institutions should understand the credit facilities (that are likely to be drawn down at short notice), overdrafts and where there is any surplus liquidity. Additionally, they should prepare and pre-empt for industry and consumer developments during and in the aftermath of the pandemic.
Wholesale and market exposure: Firms should understand which sectors, corporates, bank and government counterparties should be under close watch in terms of anticipating credit exposure. This includes the latest lending appetite, exposures and near-term forecast, alongside what impacts are expected on limits utilization and what interventions are required to meet these.
Retail, wealth and personal banking: With regulatory focus on consumer protection, it is key to understand where the exposure is for customers. This involves supporting vulnerable customers through unprecedented times and who require similar, albeit nuanced, views into credit exposure, overdrafts and card utilization. An additional concern is around increased fraud risk (e.g., due to the lack of physical customer signatures). Advanced network analytics can help mitigate this through assessing whether the customer is likely to commit fraud based on the history of their social circle.
Non-financial risk: Taking a holistic view of the operational risk landscape is key. People risk, such as physical and mental health issues in the workforce, has risen during the pandemic, and firms may face greater risks in relation to the treatment of employees. Critical non-financial risks also include both physical assets such as customer contact centres, offshore centres and the impact of branch closures alongside the virtual assets and capabilities such as whether IT and virtual private network (VPN) capacity can handle the volumes from remote working.
The data trap continues
The current crisis lays bare the gap between banks’ ability to fulfill BCBS 239 principles, which call on banks to produce “aggregated risk data rapidly during times of stress/crisis for all critical risks” and their underlying data architecture. This, despite efforts over the past decade to respond and to comply.
Instead, banks continue to draw on business as usual (BAU) risk control and reporting teams or mobilizing task forces to manually source, collate and decipher information coming in from dozens of source systems. Doing so takes line people and management away from their day jobs.
This leaves regulators rightly concerned about the lack of granular and timely data firms are able to produce in this crisis on the one hand, and senior management facing the trade-off between effort to gain insight versus acting on the imperfect information on the other.
The key issue is that decisions should be made in an integrated manner, but the data still reside in siloed locations. This puts constraints on already stretched management and traps resources in fighting the data silos, rather than addressing the current crisis. Further, the disjointed data undermine the possibility of high-quality management information (MI)—sowing the seeds for troubles further down the line, whether it’s on banks’ financial health or regulatory compliance.
Where next for financial institutions?
Despite the current uncertainty, the long-term solution seems clear. Financial institutions should treat this as the catalyst to build a data architecture that supports fully flexible, digital reporting and insights, built on an integrated, cloud-based logical architecture for risk data and models.
A vision focused on providing fast, accurate and granular data linked to common hierarchies, dimensions and consistent semantic-based definitions across customers, exposures, sub-industries and risk types is encouraged.
Modern solutions such as interactive data visualization, cloud-native analytics libraries, automatic data quality detection and correction using machine learning should facilitate this vision without loss of integrity or granularity. Banks should take this opportunity to make sure their overall business, technology and data roadmaps are driving towards this outcome, and delivering the critical capabilities early in this journey.
Without more sustainable solutions, banks may continue to face a trade-off between reporting and responding.
The immediate actions are equally important, not least since management and regulatory confidence to navigate the coming months is expected to rely on an accurate compass to guide them.
A good balance of near-term pragmatism while strategically preparing for future shocks is needed from the successful players emerging from this crisis as well as withstanding future disruption on this scale.
Financial institutions shouldn’t let another crisis go to waste in future-proofing data architecture to build dexterity into their data response.
As institutions look to keep their employees safe and support their customers during this crisis, Accenture created a hub of our latest thinking on the pandemic. You can visit our COVID-19 hub here.