In the US, new and complex regulatory requirements are shaking up the financial regulatory landscape. EY's 2015 Federal Reserve regulatory reporting survey, Regulation now: the new standard and how firms are adapting, reports on the current regulatory reporting practices at 25 of the leading financial institutions.
Firms must consider current and planned initiatives to develop scalable and sustainable solutions that address regulatory changes, including Basel III, Comprehensive Capital Analysis and Review (CCAR) and evolving Federal Reserve Bank financial reporting requirements for banks — including enhanced prudential standards (EPS) for foreign banks operating in the US.
Survey results reveal that institutions subject to Federal Reserve Bank financial reporting requirements are expanding the role of regulatory reporting departments (RRDs) and relying on active involvement from other functions across the organization.
"Despite significant challenges that bank holding companies (BHCs) and foreign banking organizations (FBOs) are facing, firms are adapting to the pace of regulatory change by expanding RRDs, establishing regulatory reporting committees, and seeking ways to automate through vendor solutions. Additionally, in response to increased reporting requirements and other legacy limitations on systems and data, an area of focus for many firms in 2015 is establishing data standards and a central data warehouse — often times through a Chief Data Office," says Anita Bafna, Partner, Ernst & Young LLP.
Based on results of the survey, the primary regulatory reporting challenge faced by institutions continues to include adapting to the pace of regulatory change and more specific challenges related to a number of key organizational and functional areas:
The evolving regulatory landscape continues to stress the need for institutions to report increasingly granular data with greater frequency, challenging organizations to meet this demand while providing high-quality data. This pressure has forced institutions to rethink their organizational structures and operating models in order to facilitate cross-functional cooperation to enable RRDs to keep pace with regulatory reporting needs.
RRDs have expanded to adapt to new reporting requirements and heightened regulatory expectations, but survey respondents reported that hiring resources with sufficient regulatory reporting experience was among their biggest challenges.
Preparing regulatory reports is a cross-functional activity that requires numerous inputs of varying complexity. Survey results reveal that the preparation process currently requires significant time, resources and manual intervention in order to meet regulatory requirements.
As firms attempt a move toward processes that allow more time for high-value activities, such as analytics and review, many are finding that progress is hindered by the pace of regulatory change, system and data integrity issues, staffing/expertise limitations, and the need for continued manual adjustments.
Forty percent of firms surveyed in 2015 indicated that the RRD performs in excess of 500 manual adjustments to regulatory reports. Since 2012, firms have continued to spend greater than 50% of their time preparing regulatory reports versus performing analysis and review.
Data and technology
In the context of rapidly changing Federal Reserve requirements, key data and technology challenges include managing both data infrastructure that incorporates multiple independent sources and systems that support the production of high-quality reconciled data at sufficient levels of granularity.
Although automation of the regulatory reporting process is a key industry initiative, many firms indicated continued reliance on manual processes.
Governance and controls
Regulators are setting increasingly high standards for regulatory reporting, as well as expecting a transparent, controlled and consistent reporting process with sufficient levels of governance and oversight. In addition to meeting quantitative reporting requirements, banks increasingly have been responding to heightened qualitative expectations, including independent verification.
To satisfy Federal Reserve conditions for more granular reporting, finance and risk departments will need to coordinate implementation of a strong governance framework. This will include fostering a culture of accountability and ensuring the effective operation of controls for the end-to-end regulatory reporting process.
Impact of Intermediate Holding Company (IHC) rule
On February 18, 2014, the Federal Reserve finalized rules for foreign banking organizations (FBOs) to implement requirements of Section 165 of the Dodd-Frank Act — namely EPS covering corporate governance, risk-based capital and leverage requirements, capital and liquidity planning. With the finalized rule, the Federal Reserve seeks to achieve enhanced supervision on FBOs’ US subsidiary banks and nonbank subsidiaries, including the required regulatory capital to maintain them.
These EPSs have broad potential implications that require FBOs to implement significant changes across the finance and risk operating models in order to meet new requirements. The rule is not explicit on the application of existing US bank holding company (BHC) regulatory reporting requirements for the IHC. However, the expectation remains that IHCs would be subject to a similar regulatory reporting regime as US BHCs.