Should banks adopt rules as best practice?

Can rules prescribe best practices?

The Basel Committee’s risk data aggregation and reporting message originally came in 2013 in two parts: 1) the BCBS 239 final document; and 2) the companion survey results of G-SIB self-assessments of their current state of compliance with 11 principles and the associated 87 requirements. Two further investigative reports have since been published in 2014 and 2015. The committee noted in its December 2015 report that “banks still lack full compliance and further work needs to be done to meet the intentions of the principles.”

What is so special about the BCBS 239 paper, with its seemingly simple principles focused on data management, IT infrastructure, reporting and governance? Well, one of the critical implications of gaps in risk data that strike fear into the hearts of executives and boards of large and small companies is the inability to perform accurate stress tests.

The importance of accurate stress testing

Necessary stress tests are mostly annual drills (CCAR, DFAST, Bank of England, EBA), but the underlying stream of concern lives year-round. Regulatory stress testing is growing in momentum, complexity and frequency for domestic and foreign financial services companies of all sizes. And not having well-designed, well-managed quality data has major consequences. Failure of a stress test can have immediate and detrimental consequences for a company’s market valuation, cost of capital and reputation. And the disadvantages and consequences of failing regulatory stress tests do not only concern individual banks – they relate to the entire banking system. Furthermore, in the event of extreme events, banks need accurate data at the right level of detail to make the right decisions. Loss models and regulatory submissions will help to a degree, but they are only as good as the data contained in them; The BCBS 239 principles can be the key to ensuring a strong data base for stress testing and other risk analyzes.

What is the missing link?

How should financial service companies ensure that they have and can provide the right answers – at the company level and for each risk category (market, credit, liquidity)? It’s simple: Implement the BCBS 239 principles and treat them as best practices (e.g., accuracy and integrity, completeness, timeliness, adaptability and usefulness). To put it bluntly, if institutions do not already comply with the most important BCBS 239 principles as best practices, they risk not only failing regulatory requirements but also leaving them competitive.

Banks will know that they are on the field if they can run stress test calculations using a variety of scenarios, interactive, repetitive and on-demand, while being easily able to review the results to quickly answer regulatory and management questions. SAS addresses these specific needs with comprehensive risk management solutions covering data management, model development and implementation, results consolidation, reporting and management capabilities.

It is wise to use the main principles of BCBS 239 as a guide in developing sound technology control techniques, combined with risk collection engines that include interactive stress testing and data visualization with reporting technologies. This can improve the ability of any bank to meet many different regulatory requirements and the ever-changing landscape there, as well as provide the basis for better and more informed business decisions at all levels of the organization. Having the right programs combined with the right technology and the right data is a best practice that any organization should apply.

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