24 Aug OSFI Large Exposure Reporting – How Is It Really Going?
With COVID-19 upping the ante on risk, now is a prime time for Canadian banks to assess their approach to OSFI large exposure monitoring and reporting
By Anh Chu, Head of Canada Product Management, AxiomSL
OSFI large exposure counterparty reporting is under way. By the end of the first half of 2020, most Canadian D-SIBs (domestic systemically important banks) will have filed two quarters of OSFI 930 returns under the Office of the Superintendent of Financial Institutions’ (OSFI’s) large exposure framework that establishes limits for a bank’s exposure to a single counterparty, measured as a percentage of capital. An exposure is considered to be large when the sum of all exposures to a single counterparty or group of connected counterparties equals or exceeds 10% of the institution’s Tier 1 capital.
Aligned with Basel III, the framework is designed to limit the maximum loss a financial institution could incur as a result of the sudden failure of an individual counterparty or a group of connected counterparties such that the institution’s survival as a going concern is not compromised. The framework also contributes to the stability of the financial system by mitigating the risk of contagion among systemically important banks.
With the first several large exposure reporting filings under their belts, financial institutions should take a moment to reflect on their experience thus far asking, How is it really going for us?
Counterparty relationship data – a wild and wooly world!
D-SIBs knew going in that accurately reporting large exposures meant delving deeper into the thorny realm of counterparty data and aggregation. On the best of days, most organizations struggle to mitigate the impacts of incomplete or disconnected counterparty datasets, dealing with:
Internal entity hierarchy data that must be complete to correctly identify full interbank relationships
External entity hierarchy data that must be complete to correctly identify full client relationships
Siloed trading and position systems – each with its own different legal entity dataset – that must be reconcilable
Dominating these challenges is OSFI’s high expectation that banks will correctly identify connected counterparties for aggregation and regulatory reporting. The section on this topic in the OSFI Large Exposure Limits guideline contains 11 sub-items devoted to defining connected counterparties. The complexity lies in identifying connections between counterparties when financial relationships are undisclosed or unknown. Significant detective work is required to properly determine if one counterparty’s financial well-being is dependent on another’s. This can be especially difficult when counterparties are private companies that are not required to disclose all their financial details.
Plenty of room for error
Not only can banks miss a single counterparty breach, but they can quite easily misidentify connected counterparty relationships. Mistakes can attract costly regulatory scrutiny due to erroneous reporting. But the potential risk around large exposure reporting is not limited to reporting errors.
The integration imperative – Basel-related calculations, reporting, and stress testing
Now, with regulatory change and scrutiny at an all-time high due to economic disruptions from the COVID-19 crisis, D-SIBs should consider how large exposure reporting relates to their overall approach to Basel capital. Many are currently handling their OSFI large exposure calculation and reporting on different systems from those they use for other Basel-related requirements, and some of those systems are not integrated. If banks do not connect the dots, they may fail to establish data consistency across interconnected Basel-related calculations and may lack the ability to reconcile across related reports.
But even more importantly, if they do not integrate, banks will continue to lack a complete, accurate view of crucial counterparty relationship data that enables correct exposure calculation and integration into stress testing.
Identifying new areas of resilience
Financial institutions can indeed respond to the integration imperative and strengthen their approach to Basel-driven mandates. With a fully integrated transaction and counterparty system that incorporates client relationship data into a single Basel calculation and reporting framework, firms can more easily and transparently leverage exposure data to conduct stress testing. In a holistic, integrated environment, financial firms can more easily discover how the distribution of large exposures changes under COVID-19 conditions, and how such changes might affect the way they look at these exposures. Indeed, banks can become more focused on identifying new areas of risk – through connected counterparty groups, for example.
And from that intelligence, banks can begin to identify new areas of resilience, asking and discerning what products are more resilient under certain conditions. A transparent view of exposures can empower banks to enter into new investing opportunities, in real time. For example, financial institutions can explore how relationships between suppliers and businesses affect capital. If a supplier should encounter difficulties or experience a downgrade, how would that change impact the rest of the connected business counterparties and capital?
Solving the integration imperative – AxiomSL’s holistic Canadian Basel Capital Solution
Canadian D-SIBs reporting OSFI 930 now have a pandemic-given opportunity to future-proof their Basel reporting program and start identifying new areas of resilience. By ingesting their transaction and counterparty relationship data into AxiomSL’s Canadian Basel Capital solution running on the ControllerView® data integrity and control platform, depicted here, banks gain assurance that their data and reports are consistent across OSFI’s requirements.
The solution’s flexible architecture enables banks to stage Basel capital reporting in alignment with their needs. Banks that are executing Basel Capital Adequacy Reporting (BCAR) with AxiomSL, for example, can easily fold in large exposures as well as other consolidation and reporting capabilities on a single platform.
Taking a holistic approach to Basel capital requirements enables data consistency, efficient reuse of critical data elements, automated report reconciliation, and successful audit defense. In addition, with AxiomSL’s holistic, single-platform Canadian Basel Capital solution, banks can perform analysis on their exposures in real time. Having more flexibility and transparency – especially in times of crisis – enables financial institutions to navigate changing conditions and identify new areas of resilience.