Banks risk fines over new credit risk rule
Banks and financial institutions face serious disruption and fines if their IT departments delay preparations for the 2006 Basel Capital Accord on credit risk, according to experts.
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Under the accord, IT departments within banks, insurance companies and pension companies may be required to revamp their existing reporting systems, potentially involving extensive enhancements to enable integration of disparate data systems and applications.
Arthur Parker, president of business intelligence specialist Sagent Technology, said the impact of the changes will be similar to that of the year 2000 bug, so finance companies must act now to avoid trouble.
Directors should ensure that they have the support of senior managers and should conduct a thorough analysis of their IT systems, reporting capabilities, policies and procedures ahead of the changes, said Parker.
Action will be needed to ensure compliance with new reporting regulations concerning the capital requirements for financial institutions to ensure solvency. ‘The scale and complexity of data requirements are enormous and banks will need to plan for systems and process changes to ensure that data collection requirements are met well before the date of the accord implementation,’ commented Parker.
‘Unless this work commences in the very near future the demands made on the limited number of financial IT specialists could lead to potential delays, fines and disruption of the European banking system.’
The Financial Services Authority has called for firms to begin implementation work as soon as possible, because they will need to deal with between two to five years of historical data.
‘Some firms’ planning is already proceeding while others are waiting for a clearer indication of the outcome of the negotiations in the Basel Committee and Europe,’ said the FSA. ‘Given that [the Basel Accord measures] are challenging, companies that wish to adopt any of them in 2006 should consider now how they will set about demonstrating that they meet the requirements.’
Enterprise-level data collection, standardisation and consolidation are critical to achieving compliance, but the data management issues involved are vast. Data from all operational systems across the enterprise may need to be collected and stored in a data warehouse to determine group-wide capital reserves, according to Sagent.
The accord requires consistent standards for all risk management data. Unavoidably, data collection from multiple operational systems will cause data duplication and raise issues concerning data quality, but cleansed data will be required for accurate risk analysis. The entire process of rating, mapping and back-testing for third party validation must be transparent, and this will be more easily achieved if processes are fully documented, said the company.