One of the main requirements for conducting accurate and efficient macro-prudential oversight, as included in the remit of the incoming European Systemic Risk Board (ESRB), is to have a solid data foundation on which to base judgements with regards to systemic risk analysis (as noted by Reference Data Review last month). No surprise then, that the European Central Bank (ECB) has begun work on establishing these data foundations to be able to provide the ESRB with “adequate information” to conduct risk assessment analysis, according to Jean-Claude Trichet, president of the ECB, and José Manuel González-Páramo, a member of its executive board.
The ESRB’s main tasks will be: to identify and prioritise systemic risks; to issue early warnings when significant systemic risks emerge; and to issue policy recommendations for remedial action in response to the risks it identifies. “To achieve these tasks, the ESRB will draw on information from many sources, including strong analytical input from its members; intelligence gathered from financial system participants; and the data necessary to understand the nature of the intricate interlinkages that define the financial system,” explains Trichet, who is to be the chair of the ESRB.
For its part, the ECB has been charged with providing secretariat and analytical, statistical, administrative and logistical support to the ESRB, when it launches in January. Accordingly, the central bank has now begun work on defining what these duties will entail, including identifying the analytical tools and methodologies that will support the identification and surveillance of systemic risk. One of these duties will therefore to be to support the ESRB’s data gathering capabilities.
González-Páramo explains: “This will include information both at aggregate level and, when necessary, related to individual institutions. The latter will be gathered through the European Supervisory Authorities (ESAs). In particular, the ESRB may request information from the ESAs in summary or collective form, such that individual financial institutions cannot be identified. The ESRB may also address a reasoned request to such authorities to provide data that are not in summary or collective form when the latter are not sufficient.”
These are pretty heavy duty data requirements for the new pan-European supervisory bodies to adhere to and they, in turn, will likely compel a new set of data standards for the industry to make this job much easier. Thus far, there has been a dearth of detailed public discussion about what these data requirements and standards may be at a European level. According to another ECB insider, there have been many discussions behind closed doors, in particular about the potential of a reference data utility, but this has not yet been communicated to the market at large.
However, as well as the dilemma of which data formats and standards to use, there is also some degree of concern at a European level about privacy and the security related to the potential storage this data. Agreements are not likely to be reached easily or quickly on how the ESAs will collect this data, what form it will take and how it will be shared within Europe and globally.
Moreover, as noted recently by Trichet, the ESRB does not have binding powers per se and instead “must convince through the quality of its work”. Not easy when that work is based on the identification of trends across a patchwork of different data standards in the European region.
The need for reliable reference data on which to base judgements about whether a financial institution should be categorised as systemically important was also recently highlighted by John Lipsky, first deputy director of the International Monetary Fund (IMF). The three criteria for determining systemic importance, as identified by Lipsky in a recent speech at a Depository Trust & Clearing Corporation (DTCC) forum – size, substitutability and interconnectedness – are predicated on access to a firm’s entity data linkages to parents or subsidiaries and its exposure to counterparties (see his full speech here).
New data requirements may be on their way for Europe, but there is little, as yet, to indicate what form these will take. Hopefully, the ESRB will be more forthcoming on the subject once it is set up at the start of next year.