There’s nothing better than a good analogy and this week’s JWG organised panel discussion on the topic of funds transfer pricing (FTP) saw one of the banking industry panellists (Chatham House rules prevent me from naming names) come up with a particularly good (if well used) description of the risk data challenge as one in which firms are striving to build a “Tower of Babel”. The panellist spoke about his own firm’s attempts to develop such a structure (bespoke, in-house rather than vendor bought) in order to be able to aggregate data relevant to risk management from across its siloed legacy systems architectures.
The Tower of Babel analogy has been used in a number of different data management contexts of late, not least of which has been by the European Central Bank’s (ECB) statistics division director general Francis Gross to describe a reference data utility, and it seems that firms are keenly aware of the value of an over-arching structure via which to pool vital data components. Enterprise risk management is predicated on the ability to gather these data sets together in a timely fashion and put them through their paces, after all. That was certainly the message repeated by panellists at our own A-Team Insight Exchange events last month.
However, such an endeavour is no mean feat. The panellist at the JWG event indicated his firm has been working on the project for 18 months already and progress has been slow and arduous. This could be partially explained perhaps by the fact the firm has decided to tackle data relating to the hardest instruments first: the derivatives book.
Another panellist at the JWG event added that his team has been focusing its work on the liquidity risk management space since early 2007 and has yet to find a “magic formula”, other than chipping away at the problem. The increased time pressure from regulators for the production of reports has also meant the “machine has had to be streamlined” by considering a simplification of certain data flows, he said.
A vendor panellist noted the need for risk teams to be able to provide their boards, in light of the new governance requirements coming down the pipe from the Basel Committee (see more below), with the “right information” rather than drowning them in raw data. The UK Financial Services Authority’s Prudential Risk Division director Colin Lawrence also discussed the need for aggregated but sufficiently granular data in order for the right level of transparency to be achieved.
In fact, the Basel Committee’s most recent paper on “Principles for enhancing corporate governance” refers directly to this data aggregation challenge for risk management teams in compiling reports for their boards. “In ensuring that the board and senior management are sufficiently informed, management and those responsible for the control functions should strike a balance between communicating information that is accurate and “unfiltered” (ie that does not hide potentially bad news) and not communicating so much extraneous information that the sheer volume of information becomes counterproductive,” states the paper.
As noted by one of the panellists, in order to achieve this, standards for accuracy and completeness of data (otherwise known as a data quality framework) are needed, and fast. That will mean the difference between a Towel of Babble and a Tower of Babel.