Improved data management could enable banks to release $27 billion (17 billion) of regulatory capital and improve profitability, according to a new whitepaper from Deloitte and SWIFT.
The whitepaper notes that regulations such as Basel III, MiFID and Dodd-Frank will prompt the requirement for a common identifier for all parties involved in a financial transaction. The requirement is expected to be endorsed at the G20 Summit in June.
To meet the demands of these regulatory changes and to remain competitive, banks will need to improve data management, urges the report. The whitepaper, which includes contributions from a number of senior industry participants, outlines the case for a strategic approach to reference data management and the key principles to be considered in getting there.
Stephen Ley, head of Deloittes enterprise risk services for banking and payments, said: Financial institutions have a significant opportunity to use the changes required by regulators to improve efficiency. Those that take a strategic approach to data management could reduce operating costs, improve risk management and compliance and release much-needed capital. Under Basel, for example, the misclassification of underlying assets caused by poor data management can lead banks to retain more capital on their balance sheets; capital that could be used to generate more profitable business.
A strategic approach to reference data management should be a globally integrated, enterprise wide implementation effort meaning cross-functional senior sponsorship, clear governance structures and budgeting across divisions, says the whitepaper.
Under Basel reporting guidelines the whitepaper finds the misclassification of underlying assets occurring as a result of poor reference data for example missing ratings, missing product types, incorrect counterparty details, etc. can result in cost of retaining potentially elevated buffers on the balance sheet, thereby withholding capital from more profitable activities. Eg, counterparty credit risk rules create a charge to the P&L dependent on the risk neutral probability of default for each given counterparty; inaccurate or inconsistent reference data could result in both incorrect reporting and an incorrect profit or loss calculation. The opportunity can be substantial with risk-weighted asset (RWA) efficiencies in the billions for larger institutions.
The whitepaper also finds that with failed trades due to poor securities and payment reference data – at an estimated cost of 20-40 per failed payment, for example as a result of missing IBAN or BIC identifiers, the accumulated expense of getting reference data wrong can quickly become significant even before considering any associated operational or reputational costs.
A copy of the whitepaper can be downloaded here.
(JDC)