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Some regulators, however, believe banks are moving too slowly.
“The Benefits of Innovative Information Technology in the Banking Industry” was conducted by the Frankfurt School of Finance & Management, New York University’s Stern School of Business and Management, the University of Applied Sciences and Arts North-Western Switzerland, the Business Transformation Academy (Basel, Switzerland) and SAP SE.
The study uncovered various trends in banking, most notably a large disconnect between regulators’ expectations and the ability of banks to meet compliance and reporting requirements. However, many financial institutions have plans to increase their budget for Information Technology (IT) to invest in the necessary banking solutions to meet these changing requirements.
Throughout the study, a clear consensus prevailed that regulatory requirements are the primary driver of business model changes.
Regulators agree that required levels of risk reporting in banks cannot be met given existing IT infrastructure. As one regulator noted, “IT budgets have to significantly increase to meet the current and future requirements.” Indeed, 61 percent of survey participants expect an increase in their IT budget of at least 25 percent in the next three years. Regulators ranked new provisions that are regarded as the main cost drivers for the future IT infrastructure for banks.
According to the study, the top cost driver is the Basel Committee’s guideline on principles for effective risk data aggregation and risk reporting (BCBS 239), followed by Basel III, Dodd-Frank, the recommendations set forth in the Liikanen Report, Markets in Financial Instruments Directive and Markets in Financial Investments Regulation, European Market Infrastructure Regulation and multi-curve valuations.
Regulators defined which features will characterise a state-of-the-art IT infrastructure from a regulatory standpoint. The ability to conduct automated ad hoc stress testing is key, as well as the ability to produce timely, complete, granular balance sheet data and counterparty data for the entire bank.
In order to achieve a sustainable infrastructure, regulatory authorities and auditors recommend banks make the following improvements: Implementation of a central data warehouse, Improvement of data and process governance, Introduction of more automated processes, and Flexible and customised modules for automatic analysis, stress scenario generation and ad hoc stress testing. Others are: Enhanced capabilities and data analytics for product valuation and bank enterprise risk management calculations, as well as enhanced capabilities for legal entity- and jurisdiction-specific analytics.
As banks adopt advanced technologies to decrease the time lag on reporting, regulators have laid out their expectations.
For reporting on regulatory and economic capital on a group level, institutions should aim for final results within 10 business days from the effective date. Interestingly, there is a common expectation that in the near future the time frame deemed acceptable for delivery of information will not exceed one day, granting near real-time visibility.
Banks are largely in agreement that their current systems need updating, according to the study. Respondents to the online survey expressed little confidence in the ability of their current systems and processes to simulate the potential effects of business decisions on various figures, including economic capital and regulatory capital, in real time.
Despite increased regulatory pressures for banks to update their Information Technology (IT) infrastructure, banks remain largely focused on short-term success. As one auditor voiced, “To date, many financial institution tend to implement work-around and small scale solutions, but this will create significant issues in meeting potential future requirements.”
“The Benefits of Innovative Information Technology in the Banking Industry” was conducted by the Frankfurt School of Finance & Management, New York University’s Stern School of Business and Management, the University of Applied Sciences and Arts North-Western Switzerland, the Business Transformation Academy (Basel, Switzerland) and SAP SE.
The study uncovered various trends in banking, most notably a large disconnect between regulators’ expectations and the ability of banks to meet compliance and reporting requirements. However, many financial institutions have plans to increase their budget for Information Technology (IT) to invest in the necessary banking solutions to meet these changing requirements.
Throughout the study, a clear consensus prevailed that regulatory requirements are the primary driver of business model changes.
Regulators agree that required levels of risk reporting in banks cannot be met given existing IT infrastructure. As one regulator noted, “IT budgets have to significantly increase to meet the current and future requirements.” Indeed, 61 percent of survey participants expect an increase in their IT budget of at least 25 percent in the next three years. Regulators ranked new provisions that are regarded as the main cost drivers for the future IT infrastructure for banks.
According to the study, the top cost driver is the Basel Committee’s guideline on principles for effective risk data aggregation and risk reporting (BCBS 239), followed by Basel III, Dodd-Frank, the recommendations set forth in the Liikanen Report, Markets in Financial Instruments Directive and Markets in Financial Investments Regulation, European Market Infrastructure Regulation and multi-curve valuations.
Regulators defined which features will characterise a state-of-the-art IT infrastructure from a regulatory standpoint. The ability to conduct automated ad hoc stress testing is key, as well as the ability to produce timely, complete, granular balance sheet data and counterparty data for the entire bank.
In order to achieve a sustainable infrastructure, regulatory authorities and auditors recommend banks make the following improvements: Implementation of a central data warehouse, Improvement of data and process governance, Introduction of more automated processes, and Flexible and customised modules for automatic analysis, stress scenario generation and ad hoc stress testing. Others are: Enhanced capabilities and data analytics for product valuation and bank enterprise risk management calculations, as well as enhanced capabilities for legal entity- and jurisdiction-specific analytics.
As banks adopt advanced technologies to decrease the time lag on reporting, regulators have laid out their expectations.
For reporting on regulatory and economic capital on a group level, institutions should aim for final results within 10 business days from the effective date. Interestingly, there is a common expectation that in the near future the time frame deemed acceptable for delivery of information will not exceed one day, granting near real-time visibility.
Banks are largely in agreement that their current systems need updating, according to the study. Respondents to the online survey expressed little confidence in the ability of their current systems and processes to simulate the potential effects of business decisions on various figures, including economic capital and regulatory capital, in real time.
Despite increased regulatory pressures for banks to update their Information Technology (IT) infrastructure, banks remain largely focused on short-term success. As one auditor voiced, “To date, many financial institution tend to implement work-around and small scale solutions, but this will create significant issues in meeting potential future requirements.”
