The ICAP Illustration
By: Daniela Valdez, Regulatory Subject Matter Expert México, AxiomSL LATAM
Financial institutions (FIs) striving to comply with regulatory requirements today are faced with the three ‘V’s of data challenges: velocity, volume and veracity. Regulators require information at ever-increasing frequencies. At the same time the size, quantity and diversity of structured and unstructured data sources has exploded.
If the FI is hampered with inadequate technology and disconnected processes or outdated systems, if its data is locked in silos, if outputs cannot be traced to the data source, if its systems are inflexible, then complex regulatory compliance becomes a source of intense concern and risk, sapping resources. FIs must deliver and attest to results of very complex aggregations, calculations and analysis. It is crucial that FIs and regulators alike can trust the veracity of reported data or of the underlying data that is used to generate reported information.
Justifiably, FIs are asking themselves: Does our technology stand up to these intense regulatory challenges?
The Bank of Mexico’s ICAP requirement is a good example of regulatory reporting complexity. To deliver this important measure requires an FI to dig deep into its data and tests its ability to consistently manage complex reporting that stands up to scrutiny every quarter.
The ICAP Illustration
It is a familiar regulatory framework. FIs in Mexico must report on their regulatory capital so that regulators can evaluate FIs’ capital adequacy and measure the health of the financial system overall. Improved capital adequacy took hold in Mexico with the institution of Tequila-crisis-driven reforms in 2004, well ahead of the Basel-driven reforms that followed the global credit crisis of 2008. FIs in Mexico continue to maintain healthy capital adequacy overall. However, regulatory capital compliance and reporting remains a significant challenge.
The Bank of Mexico requires annual submissions of regulatory capital (RC) and the capitalization index (ICAP), with additional quarterly reports for ICAP (Annex 1-O). Behind the scenes, FIs struggle to execute efficient reporting processes and comply with the regulator’s demands for very specific levels of granularity and data quality.
The ICAP requirement is a good illustration of these challenges. To determine ICAP, the FI must dig deep into its underlying data to assess risks and manage its capitalization appropriately. ICAP expresses the percent of its operations an FI must capitalize. To determine it, the FI must look at net capital relative to its credit, market and operational risks, as shown in the generalized formula below:
The FI must maintain its net capital at the regulatory required 8% minimum level, while considering the impact of each type of risk on its ability to continue to operate viably. Net capital itself consists of two parts:
- Basic net capital: Composed of fundamental capital and basic non-fundamental capital
- Complementary net capital: Composed of complementary capital instruments and permissible reserves
Furthermore, the FI must meet the regulator’s minimum requirements for the basic net capital components:
- Fundamental capital ratio: At least 4.5%
- Basic capital ratio: At least 6%
The FI must organize the operations that are part of net capital and perform various calculations to consolidate, validate and determine the cushion of capital conservation that it must maintain. This is a complex, data-intensive exercise.
As the ICAP challenge illustrates, FIs in Mexico struggle to comply not only with complex regulatory-capital related filings, but also with myriad requirements across the regulatory landscape. Working with institutions to implement regulatory solutions, AxiomSL has observed this struggle first hand. Challenges arise from both from regulators and from within the FI.
Obviously, the FI is directly challenged by the regulators’ issuance of new regulations. However, the frequency of changes or updates to regulations often creates the most pressing compliance challenges. Deadlines are aggressive, and timelines are short. Final rules and filing instructions are often delayed and/or issued shortly before a deadline. In addition, regulators increasingly demand:
- Deep detail about the FI’s operations across the entire enterprise
- More data and more granular data
- Greater specifications in movements or processes
- Implementation of complex risk methodologies
But, the FI’s most significant compliance challenges often arise from within their own organization. Such internal problems include:
- Inaccessible data that resides in disparate functional siloes and systems across the enterprise
- Preponderance of rustic or manual processes and tools or systems inadequate to the requirements’ complexities
- Inefficiencies in technical and business processes
- Lack of cybersecurity to protect sensitive information
- Error-prone systems and processes
- Lack of automation
The Role of Technology Innovation
An FI can address such problems with technology innovation. A high-performance integrated data integrity and control platform that easily ingests disparate source data, enables the FI to manage and process required data and handle complex calculations transparently, with no black-box obfuscation.
By utilizing an innovative data-driven platform equipped with dynamic data lineage and tracing capabilities to manage its regulatory data cleanly and automate its calculation and reporting processes, the FI vastly improves its data quality and gains valuable time for analysis and planning.
With accurate, transparent data and clean, efficient reporting processes, the FI is well prepared to withstand regulatory queries and audits, and able reuse its data for other regulatory needs. Thus, the FI can maintain its focus on business needs and leverage trustworthy data to generate alpha, driving competitive benefit, rather than struggling with regulatory reporting.
AxiomSL’s ‘Platform for Change’ is that game-changing technology platform. It empowers financial firms to stop viewing regulations as burdens and start seeing reporting results as opportunities to enhance information flow across business functions. By weaving regulatory-compliance investment into the fabric of their enterprise-level risk-enabled decision-making, firms are positioned to draw business intelligence from their regulatory compliance data-gathering and reporting activities and gain efficiencies.
The ICAP Illustration — Revisited
Implementing AxiomSL’s regulatory-capital reporting solution running on its innovative data integrity and control platform, empowers the FI to generate internal statistics and insights that enable it to undertake its own regulatory capital-adequacy analysis well in advance of the final regulatory submission deadlines.
When the FI can easily and transparently consolidate and validate its data, it can prepare the calculation of the net capital components, gain insight into the relationship of its net capital to its balance sheet, monitor and maintain its desired cushion of capital conservation, and report RC and ICAP efficiently, thus satisfying the regulatory requirements, withstanding scrutiny, and enhancing its risk control and insight.
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