The finance, risk and compliance departments of any financial services firm all need fast and comprehensive access to business data in order to measure performance, manage risk and report to regulators and clients. But each department needs a specific view, whether strategic, operational or a combination of the two.

Risk data aggregation in particular has garnered considerable attention since the Basel Committee on Banking Supervision (BCBS) published Principles for effective risk data aggregation and risk reporting, often called BCBS 239, in 2013. Banks are required to be fully compliant with all eleven principles of BCBS 239 by January 1, 2016—and many will require considerable resources and expertise to get there.  

In the past, risk managers have often had to decide for themselves what data they needed. But regulators are now specifying more about what a risk management analytical framework needs to look like. The goal is to help financial services institutions individually and collectively to avoid counterparty risk and systemic risk, to help prevent a repeat of the 2008 financial crisis.

One of the key lessons learned in the aftermath of the 2008 crisis was that financial services organizations’ IT systems and data architectures were insufficient to enable the management of financial risks, especially around aggregating risk exposures and identifying concentrations of unacceptable risk quickly and accurately at the group level and across lines of business.

Data aggregation frameworks can offer a complete view of the risk inherent in each exposure, counterparty, customer, product and so on—in minutes rather than days. Having the right information at hand to make an optimal decision quickly can make an enormous difference. The delay in understanding what a bank’s total exposure to Lehman Brothers was at the peak of the crisis is a cautionary indication of the value of such a system.

But despite the clear mandate and clear benefits of developing compliant risk data aggregation and risk reporting, the Basel Committee’s December 2013 preparedness survey of thirty “systemically important banks” showed that these banks self-rated their compliance at 2.8 overall on a scale from 1 (noncompliant) to 4 (fully compliant). Principles 2, 3 and 6 (data architecture/IT governance, accuracy/integrity and “adaptability,” respectively) scored the lowest at around 2.5/2.6. Half the respondents indicated that they were far from being compliant in these areas. Since the principles are all interdependent, presumably some weak spots would make overall compliance a significant challenge.

To comply with BCBS 239 in time, financial services companies will need to:

  • Automate manual processes to accelerate data management and analytics
  • Consolidate today’s disparate views of risk
  • Bolster the reliability of risk systems and risk data quality assurance
  • Improve risk data governance, data ownership and procedural documentation

According to experts at Oracle, speeding up data management and analytics practices is key to avoiding the kind of risk that rocked the world in 2008. Firms that embrace near real-time/on-demand analytics and similar data management technologies will be able to aggregate data much faster across different classes, different lines of business and different data structures—including unstructured data. This will enable them to better pinpoint and evaluate risk to predict problems before they become catastrophic.

Of course, data quality is also vital. How can a firm calculate or predict risk exposure if its data is unreliable or incomplete?

Due to the complexity and diversity of many financial services firms’ data management systems, an objective, third-party assessment of where you are and where you need to go can be the best way to move “with all deliberate speed” towards compliance with BCBS 239.

Buda Consulting has over fifteen years’ experience with building and assessing these kinds of complex, mission-critical database applications. Get in touch to discuss how we can help you evaluate and address your risk data aggregation and reporting challenges.