In light of the increase in cross border activity and foreign financial institution entry into European domestic markets over recent years, Anna Maria Tarantola, deputy director general of the Bank of Italy, has been talking up the need for common information sharing methodologies and central databases across Europe. Last year, Tarantola discussed these issues with a banking delegation in Milan and stressed the need for increased cooperation between regulatory bodies in terms of data elements and organisation.
Tarantola explained the increased supervision of foreign bank subsidiaries, particularly around liquidity risk, within Italy as a result of the financial crisis. She elaborated on the steps that have thus far been taken to achieve “timely and in depth analysis” of firms’ risk management and control systems, including revisions to Basel II. However, she explained that a lack of common data sharing practices across Europe has become a sticking point in some instances with regards to cross border cooperation.
The issue of data standardisation in the OTC derivatives space is also a challenge, according to Tarantola: “One aspect that can condition supervisory activity is the availability of full information on the activity of foreign branches, and to some extent also of the subsidiaries present in Italy, when their role is merely to distribute products developed abroad, often in London. In these cases it becomes difficult to obtain, even during on site examinations, the documentation needed to reconstruct the operations of the foreign intermediary in Italy; in some cases the transactions in question are complex, exposing banks to high operational, legal and reputational risks that are difficult to quantify. In accordance with the division of responsibilities under Community legislation, there is a need for greater cooperation between foreign intermediaries and the authorities of the countries in which they offer their services.”
Improvements in transparency can be achieved by an enhanced level of data sharing between countries’ regulators and a more formalised approach, she contended. This will therefore allow for an improved appraisal of risk management systems within financial institutions, which is a common goal of regulators in the post-crisis environment. Tarantola suggests that this task should be the remit of the colleges of supervisors, which are in the process of being bolstered and extended to all cross border groups. The Financial Stability Board (FSB), which was revamped last year to take on a more proactive role with regards to European regulatory coordination, is also keen on this idea.
“To make action more effective, a clear legislative framework and a precise definition of the powers and duties of colleges are necessary. For the most part, they have worked well as the place for information exchange but have not developed a real capability for the joint assessment of the risks of groups and their components or for the effective coordination of supervisory action,” recommended Tarantola.
She also believes these colleges should act as a forum for integrated risk assessment of cross border financial institutions, in order to ensure none of the related entity data falls through the regulatory cracks. Such an endeavour would be challenging, given the disparate approaches that have been adopted thus far by national regulators and the requirement to build a database from scratch.
However, given the desire of the regulatory community, in line with the G20 goals identified last year, such an endeavour is likely on the cards this year. Data standardisation and a common data store within the regulatory community was certainly a frequent discussion topic over the course of last year and 2010 may see some action taken.