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Is it Time for Banks to Automate their Prudential Regulatory Reporting?

by Connor Blake on October 29, 2020

Topics: Regulatory Reporting

As regulations evolve globally, data has become both an essential currency and a pain point for financial institutions.

Prudential Regulatory (i.e. central bank reporting) report submissions involve more frequent, complex, and granular data requests, and require calculations that draw on multiple business functions across finance, operations, and treasury. In most Banks, achieving data requirements is a significant compliance challenge.

Despite these trends, many banks continue to pursue largely manual regulatory reporting approaches that seem designed for a different era, and that each year look more likely to result in problems and lost opportunities. Very few Banks have the right systems and procedures in place to support regulatory compliance efforts. In a recent survey by BankBI of Banking CFOs, 75% stated they were under pressure from inside their business, as well as from the regulators, to automate their current reporting processes. 72% of respondents said they were planning to implement suitably robust systems and procedures in light of regulatory challenges in 2020.

This transformation will be necessary for banks because manual strategies are resource intensive, susceptible to human error, and struggle to generate the required audit trails and transparency. With regulators shifting their focus from the largest tier 1 banks to smaller and regional institutions, mid-sized banks can expect increased regulatory scrutiny – including the risk of having to refile reports, creating additional overheads – and reputational damage.

How can automation give you the advantage?

Regulators are placing greater emphasis on the qualitative aspect of report automation. It is no longer sufficient to just have the right answer; banks must also explain how the answer was derived. Banks need to demonstrate quality of data and are discouraged from using manual processes in regulatory reporting and other important business functions.

By automating the various stages of regulatory reporting, from source data to aggregation, regulatory calculations and classifications, banks can enhance the accuracy of reports and create a clear audit trail in which the entire data flow leading up to final reported numbers is visible.

Regulatory reporting has been identified as one of the areas ripest for digital disruption, and one of the top emerging trends in financial technology. Banks can also leverage this valuable information for financial performance management and product analytics for better strategic decision-making across their portfolio. We discussed this topic in our webinar; Automate Regulatory Reporting and Deliver 3 Unique Value Propositions.

Does size matter?

Banks may be aware of the need for automation, yet for various reasons remain hesitant to take the plunge. Mid-sized banks tend to face particular challenges. They are required to report more than smaller institutions yet may lack the resources and formalised processes that can make it easier for large banks to automate. Saccos and Microfinance Institutions will be very familiar with this pain too.

Having generally smaller teams, they are more susceptible to key person risk, in that reporting responsibilities may rest with just a handful of people who have built up manual processes over time with which only they are familiar.

Incremental automation as best practice

The good news is that automation doesn’t necessarily involve a massive, expensive or disruptive implementation. Adopting a “data-first” approach, starting with the general ledger, then moving on to the product portfolio managed in the core banking systems can deliver immediate results. Each stage of automation frees up more resources, creates greater transparency, and contributes to sounder decision-making across the enterprise.

Arguably a data first cloud enabled approach is now best practice on the technology side, but it’s important this is supported by the right personnel strategies. It’s essential for the CFO and Finance Leaders to cultivate a degree of buy-in; the owners of manual processes should be convinced that automation doesn’t represent a threat, but a chance to refocus their energies on higher-value contributions to the business.

In essence, even though they may face more challenges initially, mid-sized financial institutions should not hesitate to grasp the automation opportunity. The pace of new regulatory requirements, complexity, time to compliance and regulatory scrutiny is set to continue.

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