The European Banking Authority (EBA) has finally published its final draft Implementing Technical Standards (ITS) (here) on supervisory reporting for CRD IV. Long awaited, the technical standards set out the near-final reporting requirements, as part of COREP, for own funds, financial information, losses stemming from lending collateralised by immovable property, large exposures, leverage ratio and liquidity ratios.
This is great news for bank’s CRD IV implementation teams who have been awaiting clarity on the risk rules since February last year (here). Not only is the clarity good news, but the EBA has listened to the very public concern on the complexity and cost of a number of requirements. To reduce the burden for institutions the EBA has simplified the reporting templates and dropped the request for the reporting at group level of the country, sector, and NACE code of the counterparty. Additionally, the reporting frequency for a number of templates was changed to semi-annual.
Usefully, the EBA has formalised is requirement for firms to use an LEI in their counterparty reporting information, but it is still unclear (not the EBA’s fault), when the LEI will be available, or whether interim identifiers can be used in its stead.
Not only are the requirements less complex to implement, but firms will also have more time to implement them. As the CRR was only finalised (and thus the scope of financial reporting confirmed) only in April 2013, the application date has been further postponed to 1 July 2014 to allow adequate time to implement the requirements
It is not all good news however.
While the ITS specify uniform formats, frequencies, dates of reporting, definitions and IT solutions to be applied by firms in Europe, the EBA has decided that the use of its XBRL taxonomies should not be mandatory for institutions. Ostensibly, the reason for this is because the ITS cover only a small part of the whole reporting package of an individual institution as part of its national reporting requirements, and that it is considered to be more beneficial to leave the decision to use XBRL in national authorities’ hands. This lack of mandatory requirement is a major blow to the ability of regulators to centrally aggregate, and make sense of, the data that they are collecting.
Additional reference data issues remain in the requirements. Many respondents to the EBA’s consultation papers (CP50 and CP51) asked for the removal of the Counterparty Sector fields, arguing that NACE codes cover that information. However, as the EBA notes, general governments, international organisations and households do not have NACE codes, and for that reason, it is necessary for it to remain. Its seems a little odd that when the aim is to harmonise reporting requirements, the EBA should forge ahead with a classification code that is obviously not fit for purpose (and thus require two).
These reporting reference data issues will be compounded by the BCBS Principles for Risk Aggregation (here). These recommendations include requirements for single authoritative data sources per risk type, procedures to manage down numbers of manual adjustments and internal review by qualified staff. Combined with the cross-over with the requirements in EMIR (here) firms’ reference data systems will have to know much more about how counterparties are trading or risk holding too much capital or, worse, being noncompliant.
Accounting standards will also have a large impact. Given that there is as yet no harmonisation of the underlying accounting frameworks applied in the various EU Member States, the EBA admits that the ITS are not intended (or able to) to harmonise the underlying valuation measures which will give uniform risk measurement results.
JWG’s research has shown that (here) there are huge costs associated with poorly optimised regulation that can run into the billions. While regulatory harmonisation has been an EU policy goal for some time, it is not always effective. Uneven distribution of requirements, different adoption rates for standards and little alignment in implementation timelines for similar requirements mean that compliance costs are considerably higher than they could be and firms are left vulnerable to regulatory changes or delay.
With adequate regulatory alignment of policy goals, sufficient implementation timelines and common standards these costs can be considerably mitigated and, as a result, the cost to the industry would be considerably reduced. It’s good to see that the EBA is aware of these issues, but many problems still remain.