10 Feb Time for German financial firms to seize the opportunities created by regulation
By Ralf Menegatti, Product Owner Asset Management, EMEA, AxiomSL
In the years since the financial crisis, the European Union has taken major steps to create a new, harmonized regulatory framework for member states. For financial firms, the changes introduced have often appeared overwhelming. However, rather than fighting against the tide, it is becoming clear that market participants can obtain a competitive advantage by making a virtue of necessity and taking a proactive approach to compliance.
The introduction of Basel III in 2009 marked a major change for the financial industry in Europe. For the first time, significant responsibility for regulation was given to European authorities, such as the European Central Bank (ECB) and the European Banking Authority (EBA), rather than to domestic supervisory bodies. The list of measures the European authorities have created covers everything from new ways of reporting on capital, financial information and risk (Common Reporting, Financial Reporting and AnaCredit) to new requirements regarding the calculation and reporting of liquidity (the Liquidity Coverage Ratio, Net Stable Funding Ratio and Additional Liquidity Monitoring Metrics).
The response in Germany to this wave of regulatory change has been similar to that in other countries, with trade organizations and lobby groups arguing that the requirements will be too costly for market participants to implement and that the deadlines are unrealistic. There has also been concern that some of the regulations are weaker than those already in force in Germany.
The concerns expressed by Bundesverband Öffentlicher Banken Deutschlands (VÖB, the Federal Association of Public Banks in Germany) are typical. At the end of last year, the association claimed the standard that is currently required for reporting under the Handelsgesetzbuch (HGB, German Commercial Law) is of higher quality than the IFRS standard which will replace it. The association also argued that regulatory changes are being introduced too quickly and will have a serious impact on smaller institutions in particular.
The truth is that no amount of lobbying will reverse regulations that have been agreed at a European level and, despite the ongoing concern, market participants in Germany are in a better position than most to adapt to the new requirements, because the regulatory bar has always been set high in Germany.
Now is the time for financial institutions in Germany to take full advantage of their strong starting position by embracing regulatory change. In addition to keeping the regulators happy, there are compelling commercial reasons for making compliance a strategic goal. This can be seen by considering the ECB’s stress tests. The banks that demonstrate to the ECB that they are the most highly capitalized enjoy the greatest investor confidence and can therefore lower their financing costs.
Overall, the regulatory changes that are being implemented in Europe are making the region attractive for investors, who paid the price for investing in high-risk, less-regulated instruments during the financial crisis. These investors are now looking for financial institutions that have a proactive approach to regulatory compliance.
So what should financial institutions do to keep on top of regulatory change and ensure they can exploit the opportunities that come with it? The answer is to focus on their data.
Data is the common thread that runs through all of the new regulatory requirements. Regulators agree that, in order to avoid a repeat of the global financial crisis of 2007-2008, they need financial firms to send them more information about their activities than ever before, at more frequent intervals.
Unfortunately, many financial firms have failed to address longstanding data issues. As a result, the data the regulators now want to see is usually spread across multiple business lines, IT systems and spreadsheets. There are often significant variations in the quality of the data and the way it is represented. All of this makes it extremely difficult for market participants to complete the reports that regulators now require.
To overcome these challenges, firms need technology that can connect all of their IT systems, integrate data from these different sources and eliminate the data quality issues associated with manual processes. By using the right data management technology, firms will be able to pull all of their data together in one place and establish ‘a single version of the truth’ which they can use to complete all of their regulatory reports. The same data will also benefit firms by enabling them to make quicker, more accurate decisions about issues such as risk management.
As European authorities continue to introduce new requirements, it is time for regulatory compliance to be viewed as a strategic goal and for the importance of sound data management in achieving this goal to be recognized.
This article was originally published in Börsen-Zeitung under the headline ‘Banks need to focus on data quality’.
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