Over the past few years, global regulators have introduced new measures aimed at improving transparency. Most of their focus has been on getting a consistent, global view for the supervisors to monitor more granular risks, as evidenced by the BCBS’ Risk Data Aggregation and Reporting Principles and Basel III/CRD IV.
One thing everyone knows from this process is how difficult it is to get alignment on information standards. In October 2012, a new wrinkle appeared on the risk data landscape: the voice of the shareholder.
The Financial Stability Board’s (FSB) Enhanced Disclosure Task Force (EDTF) recommendations , as highlighted in a recent speech by soon to be Bank of England Governor, Mark Carney, is “one of the most important initiatives” to improve clarity in capital markets. It’s all about restoring trust.
The EDTF is unique amongst global regulatory initiatives, in that is industry-led and sanctioned by the FSB. With risk titans from Deutsche Bank, HSBC and PIMCO at the helm, including 25 senior officials and experts representing financial institutions, investors, analysts, credit ratings agencies, and auditors it is hard to accuse the initiative of being under resourced.
Transparency through a more complete, consistent, granular and public picture of risk management is the main theme of the work. The Task Force’s central goal is “to establish a benchmark for high-quality risk disclosures, with specific emphasis on enhancements that can be implemented in the short term, particularly in 2012 and 2013 annual reports.” So what does this mean? The short answer is potentially “a lot.” The recommendations are wide-ranging, from simple requests for informational consistency to describing risk management organisation, risk culture and how risk-weighted assets relate to business activities.
Perhaps one of the biggest challenges to making it happen is that the group did not fully consider implementation issues. For example, it’s not yet clear what producing the risk information requested to the level of detail and specification outlined by the EDTF will entail. What is clear, however, is that it will be a major step up for firm infrastructures requiring a serious investment to support this effort, which will be difficult due to the EDTF recommendation’s lack of operational detail. Perhaps this is the reason that only 5 of the 12 EDTF members have publically pledged to implement the recommendations in 2013.
Getting to the level of detail required won’t be easy, and firms certainly already have their work cut out for them. Without agreement on a unified regulatory framework for other initiatives, for example, such as the deltas between the International Financial Reporting Standards (IFRS), The SEC and UK Companies Act, it will be difficult, if not impossible to set similar standards for the EDTF.
Risk, operations and technology professionals will need to begin keeping a watchful eye on the global risk transparency regulation in 2013. Not only will firms be challenged to implement the EDTF recommendations without the detail required, but also to implement the final BCBS principles on Risk Data Aggregation and Risk Reporting.
The bottom line is that the esoteric topics being regulated have far too few qualified experts. As Andy Haldane highlighted in 2012, the EU is creating 70,000 full time jobs to comply with Basel III requirements. If we’re going to improve public disclosures AND the regulator’s understanding of our risk data we need to be developing synergies between these efforts now.
Perhaps this is the right place to start is forging a common definition of ‘what good risk information looks like’? A unified view of how the principles are applied to different types of businesses and risk types would be a start. Even better would be the key risk data element definitions, common data schema and standards. We could really make some progress if we were to catalogue the overlaps and under laps between the ‘known unknowns’ for risk data aggregation and their EDTF cousins.
For years the industry has known it could manage risk information better but there has never been the catalyst for change. Are we now at the tipping point? Perhaps. There are now many more interested parties with much bigger sticks than ever before.
As Spider-Man teaches, with great power comes great responsibility. It’s hard to argue that the duo of shareholder and regulator are not all powerful. This begs the question: if the shareholder and regulators can’t sort out these standards issues now – will we ever?