Decoding the key regulatory reporting themes for financial services GCCs in India

Along the end-to-end COREP reporting process, banks potentially encounter various challenges in their credit risk reporting (C.07 and C.08), as highlighted below, that might lead to incorrect reporting:

Inaccurate bifurcation and reporting of exposure classes: In the COREP reporting, sectoral classification of exposures plays a major role in RWA calculations. Customers are bifurcated based on exposure classes and credit ratings for the purpose of regulatory reporting.  To ensure high quality and accurate reporting outputs., it is important to conduct periodic (say yearly) validation checks (through useful tools and enablers) of the detailed reference data tables across regions and legal entities.

Inappropriate allocation and access of credit limits: One of the major challenges faced by banks is the lack of adequate controls to capture credit limits accurately across group entities for a particular customer. To combat this situation, it is required to set up an operating model that facilitates consistent data lineage across regions to capture the overall credit limit of a customer at the group level. The group can achieve the same through a coordinated attestation process from all the regions to validate and confirm the credit limit for a customer.

Use of the same collateral against multiple exposures: Often, lack of a synchronous coordination between different business units leads to the origination of multiple exposures against the same collateral, leading to operational redundancies and duplication of efforts from a reporting standpoint. Therefore, it is required that the banks’ operating model involve collaboration within business units (BU) where different teams have the visibility of respective business activities of the customer through a centralized collateral management system. The same will help avoid redundancies, which could lead to incurring additional risk for the bank.

EBA validations: Extensible Business Reporting Language (XBRL) is a specific filing requirement for submission of the EU COREP returns to the regulators. Presence of a control and governance framework that involves robust controls such as four-eye checks, creation of EUCs, a centralized adjustment matrix with visibility of adjustments posted for various business functions and maintaining strict access controls will influence robust reporting.

Partial Permanent Use and Sequential Implementation: Firms that are eligible to avail the PPU exemption must have exposures only in non-significant business units and the types of exposures must be immaterial in terms of size and risk profile.  Lack of adequate skilled resources in drafting requisite policies for regulatory approvals could pose a challenge for firms. Therefore, maintaining granular data dashboards on exposures subject to standardized and IRB approaches could be beneficial for firms to monitor any movement of its exposures from one approach to another.

Parallelly, firms should take a transformative approach to manage data and implement formal regulatory assurance programs across regulatory reports. They should also take into consideration the following key themes when working toward addressing the COREP reporting covering both end-to-end production and the required change management initiatives to remediate issues arising from such reporting:

Data and infrastructure— the yardstick for an effective regulatory reporting framework: One of the major hurdles for global financial services firms is understanding the golden source of data, data lineages from various business lines and regions, and enrichment of data before it enters the report preparation phase. Firms could consider an infrastructure where data is stored in a centralized repository like on its dedicated cloud where data could be seamlessly sourced from each region and business lines for a robust COREP reporting.

Establishing an integrated operating approach: Regulatory reporting is an enterprise-wide activity with accountability by senior management functions within finance, risk, compliance and operations. Firms with global presence need to move away from a traditional approach where data was managed in siloes toward a more integrated approach that involves a well laid out data lineage and framework to manage such complex regulatory reporting like COREP.

Robust process and data quality: Banks continue to face challenges in maintaining adequate levels of data quality in their regulatory reporting framework. Sophisticated systems and comprehensive architectures throughout the data supply chain are the steppingstones to an efficient reporting process with high-quality data.

Upskilling of resources: One of the common challenges across such global financial services firms, with large, shared services centers in India, revolves around the lack of adequate technical knowledge and awareness of both policy requirements and regulatory expectations. Ensuring regular technical up-skilling of resources both in regulatory policy and assurance readiness, i.e., operation of controls and managing key person dependency risks along with adequate segregation of duties has become a necessity in such ever evolving regulatory landscape.

It is imperative to address these challenges in a timely and efficient manner to ensure completeness and accuracy of the regulatory submissions. A robust governance framework is what these GCCs need to put in place to overcome these challenges and ensure the highest quality of reporting to the regulators.