‘Regulatory reporting’ is the submission of raw or summary data needed by regulators to evaluate a bank’s operations and its overall health, thereby determining the status of compliance with applicable regulatory provisions. Governments across the world give prime importance to keep their banking systems updated. This has proved to be an important task, more so after the financial crisis of 2008-09 or what we have come to know as the “Great Recession”.
After the said financial crisis, several governing bodies especially in the United States started evolving a regulatory environment of sorts. Many new reforms were introduced most notably the Dodd–Frank Wall Street Reform and Consumer Protection Act by the United States Congress and Basel I, II and III namely by the Basel Committee on Banking Supervision (BCBS). It proposed to make changes in the American financial regulatory environment that affected all federal financial regulatory agencies and almost every part of the nation’s financial services industry. Nowadays, banks and financial institutions are required to develop dynamic systems so as to keep themselves regulated according to these reforms. This can be owed to the increased requirement of information reporting, audits, calculations etc. A solution that automates and streamlines the process to generate reports in a timely fashion is the need of the hour.
But this is easier said than done. Regulatory requirements differ across the globe. Some governments follow an approach where the whole banking spectrum is under their control, thus limiting the entry of new players in the market. On the other hand, some governments do not directly control banks but put such restrictions in place which compel them to disclose accurate information at a timely interval in order to keep a check on them. Whatever the case, regulatory reporting is a vital cog in the banking business and is here to stay. So what makes it all so important? Basically, regulators want all the smoke screens removed between them and their entities when it comes to matters like liquidity management, asset liability management, foreign exchange exposure, risk management and the entity’s financial health. Once data is collected this way, there’s a much lower chance of the reporting bank going bankrupt as there still is time to ensure that corrective measures are in place and the bank’s profitability is not threatened. It can be compared to a type of early warning system specially crafted for banking organizations.
After the “Great Recession”, regulators across the world have tightened their clout over financial markets and various new regulations have been introduced to ensure the following:
- Avoid large bailouts as they put immense political, social and economic pressure on countries.
- Increase consumer protection by spreading awareness in the upside and the downside of their investment decisions.
- Improve transparency and accountability of financial instruments like derivatives, options and embedded derivatives, associated cash flows from the finance and risk perspective.
So why do financial institutions find it tough to meet regulatory reporting?
Nowadays, banks need to collate data for various reports like Financial Reporting (FINREP), Foreign Account Tax Compliance Act (FATCA), Common Reporting Standards (CRS) and BASEL. With so much of load on the current legacy banking systems, they are working to their limit and cannot handle all the extra information generated with ease. Some of the key challenges faced by banks in such a scenario are:
- Multiple sources of information: Banks do not have a single source of information. Depending on the depth of information required, banks need to collate data from different sources to comprehensively meet reporting requirements. At times, this requires development of IT applications which have an impact on the time and cost aspects of the reporting exercise.
- Multiple report formats: Depending on the nature of business, banking systems need to file reports in different formats as specified by the governing regulator. Organizational systems and processes in most cases are not flexible enough to create new, or modify existing, data models to meet changing requirements.
- Lack of skilled resources: Changing reporting requirements mean that banks not only need finance experts, but also require professionals skilled in mapping business requirements to existing IT systems, developing new applications if and where needed, and so on.
- Inaccuracy of data: Banks exchange information through financial statements, risk reports, submissions for capital adequacy, and regulatory reports. All these reports are generated from different systems, and banks need effective reconciliation processes to cross-check the accuracy of data across systems.
- Stringency of timelines: Regulators expect financial institutions to quickly alter their internal processes to meet the modified reporting requirements within scheduled time frames. Though prior information on these implementation dates is shared with banks, more often than not, the time is not sufficient to action the required changes.
Eventually, the question arises as how to cope up with evolving regulations?
In this regard, it is very important to understand the role that technology plays in the ever changing regulatory setup to meet the reporting requirements. Today, in the market there are many tools and software present but the demand for newer technology increases with every new regulation introduced. These regulatory reporting tools help banks avoid inherent problems like legacy system issues, lack of granular data, excessive system feed and complexity in data mapping, compatibility for data feeds.
Hexanika: Regulatory Reporting Made Easy
Hexanika is a FinTech Big Data software company, which has developed an end to end solution for financial institutions to address data sourcing and reporting challenges for regulatory compliance.
Hexanika helps establish a compliance platform that streamlines the process of data integration, analytics and reporting. Our software platform can develop and clean data to be sourced for reporting and automation, simplifying the processes of data governance and generating timely and accurate reports to be submitted to regulators in the correct formats. Our solutions also significantly reduce the time and resources required for everyday-regulatory processes, and are robust enough to be implemented on existing systems without requiring any specific architectural changes.
To know more about our products and solutions, read: https://hexanika.com/company-profile/
Contributor: Akash Marathe
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