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The new reporting rules are still in the making, but banks should already move into the starting blocks.
Three questions to ask
- What are the new rules for regulatory reporting?
- What do the supervisors hope to achieve with the new framework?
- Who stands to benefit from the transition and how can institutions best prepare?
Regulatory reporting for banks has entered a new phase. The regulations of national, European and international supervisors are constantly being changed and expanded: additional information is needed, requirements change, and reporting structures have to be modified.
The next round is about to begin, but this time the situation is different. The Banks’ Integrated Reporting Dictionary (BIRD) and the Integrated Reporting Framework (IReF) are two parallel initiatives of the European System of Central Banks (ESCB) with the common objective of standardizing regulatory data and reducing the reporting workload for banks. However, reporting efficiency improvements will not be achieved at the flick of a switch. In order to actually benefit from the future simplifications, it is crucial that credit institutions get a head start and gear up for the new system.
The new BIRD and IReF rules aim to reduce the reporting burden on banks
The two new initiatives are built on entirely different systems; however, they are interrelated in many ways. BIRD is a voluntary standard developed in collaboration with major European banks, a type of data dictionary for harmonizing regulatory data throughout Europe. It provides an efficient new data model including transformation rules that banks can apply to properly structure their data for regulatory reporting. The IReF will be mandatory and will define future regulatory reporting requirements by merging almost all the current reporting templates (such as AnaCredit, BSI, MIR or SHS) into a single consistent and consolidated framework. It will apply the principle of proportionality, especially with respect to granularity and the data reporting cycle.
Today’s requirements for reporting to various supervisory authorities – from national oversight bodies, the European Central Bank and the Bank for International Settlements (BIS) to the European Banking Authority (EBA) and the Single Resolution Mechanism (SRM) – will be pooled in a single, integrated framework.
Adoption of BIRD remains voluntary, but will likely be worth the effort
Although BIRD will be optional, it will help to harmonize regulatory reporting by standardizing input data. Thus, implementing both BIRD and IReF together will make sense for most institutions, especially those with international operations. Neglecting BIRD and acting only on the IReF reporting requirements via software providers – with their proprietary data models – will primarily be an option for small institutions.
There are many questions still unanswered regarding the finer points of both systems, and the rules are still being worked out. However, the basis for change has been established, making preparations for the upcoming transition a sensible choice for institutions even today. A survey of banks which is the basis for a cost-benefit analysis of the IReF was concluded in April 2021. It will be evaluated in the next few months and the system will be refined. The final version is expected in the course of 2023.
Modified source data will have multiple uses
BIRD will comprise multiple layers in which the source data from the bank’s proprietary systems is converted according to defined transformation rules. This data can then be used to generate regulatory reports. The data hub can also feed into the bank’s internal systems, for example, the customer management and risk management or the management information system.
The rationale behind the IReF is to replace the multitude of reports which need to be submitted in a single day with a single EU reporting standard, thereby reducing the pressure on reporting staff and costs. Supervisory authorities often request the same data, but at different times, for different periods and in some cases, in a different syntax. The data pool is intended to cater to the requirements of all supervisory authorities. However, the data will not be made available to each regulatory body in the same granularity but rather on a need-to-know basis.
Implementation costs vs. long-term savings potential
For many institutions, the biggest challenge of the transition will be the cost. On top of one-time implementation costs, the process will also take time. It may entail submitting parallel reports in the transition period, which could be one of the largest cost drivers, depending on how long the transition periods are.
However, these drawbacks will be offset by numerous advantages in the medium term. The common data language introduced with BIRD will simplify communication and improve transparency – even across national borders. At the same time, the IReF will mean a lower reporting workload, thanks to the pooling and integration of regulatory reports, uniform reporting cycles and simplified processes. It will also be much easier to implement future regulatory amendments within the system. All the more so considering the EU intends to provide new regulations in a fully machine-readable format in the medium term as part of its digitalization drive.
Lastly, there is a significant potential for cost savings. On one hand, the new system promises to lower costs as most of the separate obligations to submit regular and ad-hoc reports will be lifted and communication with the supervisory authorities will be facilitated. On the other hand, the standardized data definitions for input data will make it easier to change software providers and fully outsource regulatory reporting as well as the use of modern cloud technologies.
Tight schedule for BIRD and IReF implementation
Even if the finer points of the rules are yet to be decided, banks will need to move fast to get ready. The first draft of the IReF regulation is expected to be available in the first half of 2022. The current plan is to have the regulation adopted by the end of 2023, along with the incorporation of BIRD in the standards. The new IReF rules will be gradually implemented from 2024 to 2027, according to a preliminary implementation schedule.
Under this timetable, the adjustments to regulatory reporting, a comprehensive IT plan and implementation project planning must be completed 12 to 18 months after the end of 2023.
In view of the brevity of the rollout phase, good preparation will be vital. Based on information already available, it is possible to identify the gaps between the BIRD approach and a bank’s current internal data model. Many of these differences can be aligned with BIRD and included in existing and planned change initiatives. Depending on the preferences of the institutions, different implementation options ranging up to outsourcing of the regulatory reporting function should be explored – to achieve an ever-bigger reduction in costs and workload.
Special thanks to EY’s Thorsten Schwan, Partner, Markets & Business Development, Ernst & Young LLP for contributing to this article.
Summary
The European Central Bank is preparing two initiatives aimed at easing the reporting burden on banks. The current reporting requirements will be harmonized and supplemented by an optional integrated data model. Although details are yet to be announced, in light of the ambitious time frame, banks are well advised to lose no time in preparing for the upcoming changes.