By David Attenborough, Business Development Manager EMEA, AxiomSL
The European Central Bank (ECB) is increasing its focus on credit risk. As part of the Analytical Credit Dataset (AnaCredit) project, it plans to create a centralised register of granular data about the credit granted by financial institutions in Europe to the non-financial sector. The regulator is currently thrashing out the details, but it is already clear that the implementation of AnaCredit in 2017 will have serious implications for the way firms manage their reference data.
As part of AnaCredit, firms in the eurozone and other European Union countries that choose to participate, such as Sweden and Denmark, will need to report granular data about their credit exposures at borrower level, including loans, derivatives and off-balance-sheet exposures. The final report templates are expected to include more than 140 data attributes. The data fields mentioned in discussion papers about AnaCredit include the borrower identifier, country of residence, institutional sector, sector of economic activity, size, loan identifier, currency, type of loan, collateral type and many others.
The requirement to report on individual borrowers is significant. Until now, regulators have typically requested aggregated credit risk data. This gives them little insight into the accuracy of the data that financial firms hold about individual entities. The move to entity-level reporting required by AnaCredit will make this visible. Under AnaCredit, it will be clear to the ECB when data reported by different firms on the same entities does not align. For example, it will be apparent if two banks attach different levels of risk to the same entity or if they classify an entity differently. Inconsistencies like these are likely to result in awkward questions from the regulator.
Firms will also need to ensure the granular data they submit for AnaCredit is in line with the data they report to the ECB and European Banking Authority as part of their compliance with other requirements, such as Common Reporting and Financial Reporting. This is particularly important as regulators are likely to compare the different types of reports they receive from market participants in order to assess whether they are complying with the Basel Committee on Banking Supervision 239 requirements for accurate and complete risk data.
To avoid falling foul of the regulators, financial firms will need to up their game in relation to reference data. AnaCredit provides yet another reason for firms to break down the data silos that are common in most organisations and replace them with a single, enterprise-wide view of the entities to which they have a credit exposure. Firms will need good data governance procedures to ensure their reference data is refreshed regularly, so they can be confident the data they are reporting is up to date and accurate.
Data reconciliation and data lineage functionality will also be important for AnaCredit compliance projects. Before submitting AnaCredit reports, firms will want to reconcile them with related regulatory returns in order to identify any possible inconsistencies. Strong data lineage functionality will enable firms to respond quickly to queries from the regulator and justify any apparent discrepancies.
The challenges presented by AnaCredit are multiplied by the sheer volume of reports that firms will need to submit and the frequency of reporting. The ECB has indicated that it intends to mandate a threshold of €25,000 for reportable credit instruments. This is much lower than the current norm. The ECB has also indicated it will require firms to report non-prudential data on a monthly basis and prudential data on a quarterly basis. In effect, this means that under AnaCredit firms will have less time to produce far more detailed reports on a much larger number of credit exposures.
Firms should consider whether their current systems and processes will scale to accommodate AnaCredit. They should also think about how they will be able to sign off on the large number of reports they will be required to submit. They will need a platform that not only automates the reporting process, but also provides business dashboards and management information functionality. This will make it possible for users to check and sign off on their reports before they are submitted, giving firms confidence that they have accurately executed all of their reporting.
The ECB plans to roll out AnaCredit reporting in stages from the end of 2017. To ensure they are ready in time, firms must start getting to grips with some significant reference data and regulatory reporting challenges today.
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