APRA’s Economic and Financial Statistics Reform: A user’s guide to readiness | Wolters Kluwer
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  • APRA’s Economic and Financial Statistics Reform: A user’s guide to readiness

    by Douglas Cheung, Regulatory Product Manager, Wolters Kluwer

    Published March 14, 2018

    The decision by the Australian Prudential Regulation Authority (APRA) to delay planned reforms to the Economic and Financial Statistics (EFS) reported by banks has come as a relief to an industry concerned about the timeframe for the ambitious regulatory change program. The revision gave banks more time to prepare their initial reports under the new regime, and included eased historical data requirements and shorter parallel reporting periods.

    While a positive sign of APRA’s willingness to take industry concerns into account, these concessions shouldn’t encourage complacency. Change is still coming soon, and will still require some institutions to restructure their data collection and reporting approaches from the ground up.

    Many banks have yet to really prepare for the reforms, which even on a longer schedule will not be easy. The changes will require more granular data that in some cases resides outside traditional accounting systems, so they’re likely to strain banks’ current infrastructure and capabilities.

    Given the possible costs and complexities involved, some institutions may well be wondering where to begin. In this and a subsequent commentary we’ll outline effective approaches to tackling the APRA EFS transformation, and ways to extract strategic value from the process.

    Developing a timeline

    For most banks the first step to assess is when to start an EFS change program in earnest. While APRA has proposed clear timelines (commencing with March 2019 for phase 1), required preparation time will depend to some extent on an institution’s size and resources. Mid to large-sized banks should in general be looking to begin around a year ahead of the effective date and have all testing completed before phase 1 commences. Smaller institutions with a more limited scope of reports to adopt might consider starting later in 2018.

    Some banks may see having everything ready this year as premature, since phases 2 and 3 start later in 2019. However, leaving it any longer is likely to extend the period where testing and parallel reporting must be conducted simultaneously. Institutions should seek to avoid clashes between actual parallel reporting periods and user acceptance testing for subsequent phases.

    Other factors that should be considered include:

    • Priorities, as most banks have several internal or external projects taking place simultaneously across any given period. Where regulatory projects look impossible because of competing priorities, a bank may want to consider consulting APRA to seek flexibility on timelines.
    • Current infrastructure complexity. Some banks have more scalable infrastructure than others, though in general banking system infrastructure is complex and not particularly scalable.
    • Project leadership strength and culture. Some banks place a highpriority on infrastructure/project roadmaps, and have a culture of pushing ahead with changes to meet regulatory requirements and reduce running costs. These institutions tend to recognize the need to act earlier rather than later, and may not have to devote as much time to building momentum internally.

    From ideas to implementation

    After a rough timeline has been established, the first major milestone will be acceptance of the proposed project -- i.e. management backing for overall plans and the likely resource investments required. In general projects should progress through the following stages:

    1. Establishing budgets (Initiation stage): This includes evaluating existing infrastructure and resources and determining the gaps with what will be required, as well as receiving quotes from vendors to address those gaps. Because banks tend to follow a cycle where projects are decided the year before execution, many run into problems at this stage because they missed the window to budget for an EFS implementation. Some banks also have policies whereby an approved budget that goes unused due to delays has to undergo an additional round of approvals within the same year. Emphasising the importance and relevance of the APRA reform may be the only way to push the project forward in such cases.

    2. Project proposals and approvals (Acceptance stage): Following budget approvals, the bank may decide to enlist the help of a vendor or develop solutions in-house, depending on its circumstances and resources. Engaging a vendor can be productive in several ways; because vendors can share knowledge and best practices from the case studies they’ve seen elsewhere in the industry, the best vendors act as consultants, helping their clients think ‘outside the box’ of their own organization’s standard practices as they tackle the reform. 

    During this stage, it is also prudent to not only base decisions on what regulators are looking for, but also consider why specific requirements have been introduced. This will ensure a more strategic approach to problem-solving. For instance, regulators are increasingly placing greater emphasis on the qualitative aspect of regulatory reporting. It is no longer sufficient to just have the right answer; banks must also explain how the answer was derived. Solutions which have data quality assurance at their core should be well placed to solve both immediate and forthcoming requirements.

    3. Building project teams (Early implementation stage). With the APRA EFS only a year away project teams should be built or hired (where necessary) as soon as possible, with the necessary roles clearly defined.

    Understandably, for most banks cost will be the biggest concern around EFS implementations. To keep budgets under control, banks should:

    • Distinguish between what users need and what they want. Normally the user ‘wish list’ will be above and beyond what the project actually requires, because users will take the opportunity to request ‘nice to haves’ (anything from more detailed data used for other purposes, to processes that help them gather information they used to collect manually) that tend to increase total project costs. Program managers have to determine whether such requests make sense from a budgeting/cost vs. benefit perspective.
    • Track the progress of the project regularly, and where required re-estimate and re-plan. Having clear milestones in place helps this process.
    • Create ‘Plan Bs,’ and incorporate buffers into the project plan to account for the inevitable bumps and surprises. Project managers should also identify other groups within the bank with spare capacity and relevant skills that could be mobilized to support the project if required.

     

    Banks should not underestimate the data management challenge. For large banks in particular, high data volumes mean extract, transform load (ETL) and ensuing processes typically run overnight. That means they’ll have to be reworked for the EFS in a way that ensures they don’t flow on to the next business day. Banks looking to leverage their current infrastructure for EFS should also be aiming to minimise the re-mapping of source data.

    Even as they scramble to address APRA’s present requirements, banks should plan projects with one eye on the future. The regulator is clearly in change mode with numerous updates scheduled over the next few years. APRA has already released its D2A consultation and capital adequacy framework; we expect further reforms relating to derivatives reporting (ARF 722 consultation); interest rate reporting; provisions-related reporting; loan-related reporting; and the profit and loss reporting set.

    To avoid reinventing the wheel with each round of regulatory updates, banks should consider these changes holistically and determine the inter-dependencies that may arise. For example, if there is a requirement for a particular type of reporting for derivatives in one APRA update, banks need to think about how it affects the reporting of derivatives in other forms, and analyze the derivatives requirements likely to emerge in future.

    This ‘cross-checking’ of regulatory dependencies has already started, with ARF 731 (international exposures) highlighting an approach to derivative netting that many banks are now asking APRA how to apply across forms. Working with a vendor that structures solutions to work across systems, and that has the experience and domain expertise to gauge the future trajectory of regulatory change, will help banks achieve this more holistic view and develop infrastructure capable of withstanding subsequent waves of reform.

     

    The next article in this mini-series on APRA’s Economic and Financial Statistics will explore how firms can make the most of current systems and new data demands. 



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