19 Jul CoRep and FinRep: a "Frankenstein's monster" of reporting
Date: June 1, 2012
Location: New York
Banks are being asked to report thousands of extra risk and capital data-points at the end of the first quarter next year – a huge increase in volume and complexity, with an aggressive deadline. And the list of items they need to report is still subject to change.
For translators and other students of language, false friends are pairs of words from different languages that closely resemble each other in form but not in meaning: in Italian, stravagante means eccentric, but looks like it should mean extravagant; bellen is the act of barking in German, but phoning someone in Dutch; in Portugal, raro means rare, but in Spain it means strange. Other examples abound, providing lots of room for confusion between speakers of the 23 official languages of the European Union (EU).
The EU’s banks have long suffered from the same problem – they report similar information to their regulators, but do so in slightly varying ways, making comparisons difficult. It’s the job of the European Banking Authority (EBA) to get them all speaking the same language.
The fourth Capital Requirements Directive (CRD IV) calls on the EBA to draw up a set of implementing technical standards (ITSs) and create templates that all EU banks will use when reporting to their national regulators. But while everyone agrees reporting needs to be harmonised across the European Union, the EBA’s proposals for Common Reporting (CoRep) and Financial Reporting (FinRep) are causing headaches for banks and regulators – the timeline chief among them.
The EBA published a consultation paper in December last year – CP50 – laying out the templates banks would need to use and proposing the new reporting regime should come into force on January 1, 2013, with the first reporting period at the end of March and the submission date May 13. It aims to finalise the technical standards by June 30 this year. But that raises some practical challenges, in part because CRD IV itself is still being finalised – Denmark currently holds the EU’s rotating presidency and is hoping to have the rules finished by June, although that looks a tall order (Risk April 2012, page 8).
“The CRD IV text is not yet final and the CoRep and FinRep ITSs are unlikely to be finalised before the end of July 2012, so current templates are subject to potentially significant amendment,” says Matthew Pettican, vice-president for UK regulatory reporting projects at Credit Suisse.
The industry has a host of other complaints – instructions published with the EBA’s draft templates are not necessarily clear or complete, banks say, and the proposals request significant volumes of data, some of which is not currently available to some institutions. In total, industry experts estimate the number of individual items of information to be reported under the new regime will increase ninefold (see box).
“The main challenges of CoRep for a firm like ours are the aggressive timelines for implementation without clarity on the regulation, and the additional effort for detailed analysis on multiple data dimensions that will be required,” says the London-based head of UK reporting for a medium-sized US investment bank. These dimensions include more detailed breakdown of information on trades, counterparties or issuers, he says: “We need to analyse all these additional dimensions required, then we need to work with upstream providers of data to source the information, and then make sure we populate the returns at that level.”
Even national regulators agree – they are in the same boat as the banks on many of the issues, particularly the timetable – with one going so far as to describe CoRep as “a Frankenstein’s monster”.
Like Frankenstein’s creation, CoRep and FinRep are not wholly new – they were originally issued by the EBA’s predecessor, the Committee of European Banking Supervisors, in 2006 and 2005 respectively. CoRep covered consolidated, sub-consolidated and solo reporting of capital requirements and own funds based on the original CRD. FinRep covered financial reporting for credit institutions that use International Financial Reporting Standards (IFRS) for their published financial statements. The CoRep and FinRep guidelines were subsequently updated to incorporate later CRD and IFRS amendments.
The problem is that European member states had the option to adopt CoRep and FinRep fully or partially, or continue with their own domestic reporting requirements. Countries have taken a range of approaches, from Belgium, which has more or less fully adopted both CoRep and FinRep, to Germany, which has adopted most of CoRep but not FinRep, to the UK, which has only partially adopted CoRep but not FinRep.
The greater uncertainty around FinRep is a dilemma for both banks and regulators. Credit Suisse’s Pettican claims institutions have less than half the time they would normally need for an implementation programme of this kind: “Twenty-four months is a realistic timeline for banks to do the work necessary to implement CoRep and FinRep but they will have to try to do it in six to nine months,” he says, raising questions about how much effort the industry should dedicate to FinRep. And some regulators suggest they could sideline it if they have some flexibility: “If FinRep is not mandatory we won’t impose it on January 1, 2013. That is not to say we never will, but right now we and the banks have got our hands full,” says one.
The FSA has also said that if the EBA does not make FinRep mandatory for January 1, 2013, it will choose a later implementation date, with the caveat it is allowed to continue with its existing FSA001 and FSA002 financial reporting requirements. The EBA is not totally unaware of what it is asking of banks and national regulators – CP50 includes a proposal to delay implementation by six months and allow national regulators to apply interim solutions. That idea has few fans.
BOX: The systems burden
One of the benefits the European Banking Authority (EBA) claims for the new regime is that it will make reporting more efficient. However, with such tight deadlines, banks are being forced to make tactical changes to current systems rather than taking a strategic approach that will take advantage of harmonised rules across the EU’s different jurisdictions, says David Attenborough, business development manager for Europe, Middle East and Africa with New York-based reporting, compliance and risk management systems supplier AxiomSL. Common Reporting (CoRep) and Financial Reporting (FinRep) will also vastly increase the volume of data institutions must report and manage.
“Reporting is one area where there is little competitive advantage to be gained from in-house system development, and even the biggest banks opt for third-party systems from vendors”.
Industry experts estimate the number of required data points will increase by a factor of around nine. Matthew Pettican, vice-president for UK regulatory reporting projects at Credit Suisse, says CoRep replaces nine existing returns to the UK’s Financial Services Authority with 34 reporting templates. These templates require 14,191 data points per country, and could total up to 40,000 data points for Credit Suisse’s group reporting, he says. And because the required data is more granular, it is more likely to be subject to regulatory change, increasing the burden on institutions in terms of keeping their reporting databases and systems current, says Axiom’s Attenborough.
But reporting is one area where there is little competitive advantage to be gained from in-house system development, and even the biggest banks, such as Morgan Stanley and JP Morgan, opt for third-party systems from vendors. “For CoRep and FinRep compliance, a vendor system can help with early definition of reporting templates, analysis of additional data elements as specified by regulators and provision of a version of the software that supports the CoRep and FinRep submission interfaces,” says the London-based head of UK reporting for a medium-sized US investment bank.
– By Clive Davidson
© Incisive Media Investments Limited 2012, Published by Incisive Financial Publishing Limited