By Frederic Bernard, Manager EMEA Capital & Credit, AxiomSL.
In response to the credit crisis, the European Central Bank (ECB) launched the Analytical Credit Dataset (AnaCredit) project in 2011 to create a harmonized database and framework of rules regarding the credit exposure of credit institutions and other loan-providing financial firms. Yet since the inception of AnaCredit reporting in 2018, financial institutions (FIs) have faced numerous challenges: including the dynamics of constantly evolving data validations, a lack of technologically advanced processes that accommodate regulation changes and are adept at managing data quality issues and error rectification, the disparate application of regulatory rules by National Central Banks (NCBs) across the Eurozone, and the application of so-called reduced reporting requirements.
A Simple Tune, Or A Complex Symphony?
On the surface, AnaCredit seems to be a harmonized database and framework of rules within which an FI must file counterparty exposures at a certain threshold on a periodic basis. But upon examination, it becomes clear that both current and upcoming requirements create complex challenges regarding report automation and scalability, and data quality management. Add to this the headache of managing filings across multiple Eurozone countries — meeting both common ECB and specific NCB requirements — and suddenly things don’t seem to be quite so harmonious.
Data quality issues
The ECB intended for AnaCredit reporting to be a seamless monthly reporting requirement. But for many FIs it has been quite the opposite. In fact, many find they must re-submit reports — often several months’ worth — because of poor data quality. The re-submissions could be driven by an NCB or the ECB noting report errors but could also be initiated by the FIs themselves as they reconcile errors post submission. Errors can arise in many ways. With AnaCredit, loans are reported on a granular level, not as an aggregated grouping, as they were previously. This necessitates having a reliable database at the loan level. Non-automated processes and an FI’s individual interpretation/application of AnaCredit rules could be out of date and not aligned to the current ECB framework requirements, thus causing incorrect submissions.
In addition, FIs are often bogged down by rigid internal data management systems and a lack of transparency regarding errors and their rectification. This means that an FI cannot easily identify the cause of a reporting error when doing checks before submission. And, once an error is identified by the regulator, a lack of drilldown capability inhibits rectifying it efficiently. FIs also struggle to incorporate consistency checks on static attributes into their processes. These checks are important because they ensure that a current dataset is aligned with previous submissions.
Disparate application of ECB and NCB requirements
In many cases across the Eurozone, NCBs have implemented the ECB reporting framework based on their own local regulations, with no uniform implementation mandated or overseen by the ECB. For example, timelines for adoption of ECB rules by NCBs could vary drastically, leading to complexities and lack of consistency when reporting in multiple jurisdictions. Requirements can also change based on counterparty roles, loan characteristics and their NCB applications. If rule implementations are different, an FI suffers the consequences. They cannot manage their data uniformly and efficiently and can find themselves operating in multiple “time zones” at once, even though AnaCredit was supposed to be harmonized!
ECB and NCB regulation changes diverge
Requirements between the ECB and NCBs diverge widely and therefore data management — including collection and aggregation for reporting — is not streamlined at all. A piecemeal process with disparate application of rule changes creates massive overhead and maintenance costs for FIs as they manage data from multiple sources and submit reports according to varying requirements. An ad hoc approach leads to high maintenance costs and a huge amount of effort for FIs operating in multiple jurisdictions. Insufficient coordination strains resources and slows down the reporting process, in addition to augmenting the possibility of errors. This presents FIs with a logistical nightmare: “How can we be sure we are simultaneously in line with the frameworks of multiple jurisdictions and can we monitor ongoing changes in each one?”
And the Band Plays On
So what is in store for FIs in terms of their AnaCredit reporting in the future?
With the maturation of AnaCredit requirements the ECB will expand their reporting population. In the future, NCBs will need to include information on the loans of private individuals and not just those of legal entities. This new information must be collected and aggregated. Not only do FIs lack existing processes for collecting this data, but its inclusion adds a layer of security sensitivity to data management as General Data Protection Regulation (GDPR) and Personally Identifiable Information (PII) become a concern.
Going forward, derivatives, loan guarantees and commitments will be subject to AnaCredit reporting. The inclusion of these instruments will bring a new wave of sourcing issues, additional validations, and reporting challenges. The ECB had previously intended that both reporting and instrument scope expansion be included in the near term. These expansions are now anticipated in the medium term, although the ECB has not yet committed to firm timelines. If FIs implement tactical measures simply as a reaction to evolving new requirements, they will perpetually be playing catch up to the same tune.
Reconciliation and plausibility checks
NCBs have started creating reconciliation reports between AnaCredit and statistical reports — both nationally specific ones as well as those with a broader reach, such as FINREP/ COREP. FIs must have excellent data accuracy in order to reconcile granular AnaCredit data to the aggregated statistical data points, which are a feature of financial and statistical supervisory reporting. FIs must now scrutinize individual categories of all aggregated loans — they should equal the total of the loans included in an FI’s complete AnaCredit report in order to be compliant. Plausibility checks are also now part of the current data quality agenda and will be expanded upon in the future. These checks have been put in place by regulators as a means for improving data quality, but it is yet unknown how far back the checks will be applied and whether the retroactive re-submission of reports will be enforced.
Knowing the Score Takes Practice, Practice, Practice
The anticipated AnaCredit reporting and instrument scope expansion, and the new plausibility checks now magnify the data quality and disparate requirement issues with which FIs were contending before. FIs must get a better handle on their data quality and the evolving aspects of AnaCredit if they want to avoid non-compliance and the consequences therefrom. FIs are asking themselves if they are prepared for the maturing requirements in addition to the ones already in place. Some important questions to consider include: how can you accurately map data to different NCB frameworks? Can you streamline processes to optimise resources? Will your current systems accommodate new requirements now and in the future? Do you have full transparency for defensible submissions? What are your drilldown capabilities for error rectification? Can you access historical submissions and create correct and traceable versions for re-submisson when necessary?
FIs must maintain a series of best practice approaches to AnaCredit reporting in order to efficiently manage data quality, privacy requirements, and the expanding demands of the ECB. A strategic approach to ongoing changes to AnaCredit means implementing an adaptable and scalable process for seamless data management and reporting — with a predictable cost structure.