Principles for Effective Risk Data Aggregation and Risk Reporting
Background and Impetus for RDARR
The global financial crisis revealed that many banks had inadequate practices for timely, complete, and accurate aggregation of risk exposures. These limitations impaired their ability to generate reliable information to manage risks, especially during times of economic stress. These limitations resulted in severe consequences to individual banks and the entire financial system.
Whether or not your bank is designated as an SIB, we expect your regulator to apply the Principles. You may wish to proactively enhance your RDARR. RiskSpan’s RDARR Advisory Services team has decades of finance, accounting, data, and technology expertise to help banks meet these increasing supervisory expectations.
Responding to this pervasive systemic issue, the Basel Committee on Banking Supervision (BCBS) issued the “Principles for Effective Risk Data Aggregation and Risk Reporting” (RDARR).
Objectives of RDARR
The BCBS RDARR prescribes principles (the Principles) with the objective of strengthening risk data aggregation capabilities and internal risk reporting practices. Implementation of the Principles is expected to enhance risk management and decision-making processes in order to:
- Enhance infrastructure for reporting key information, particularly that used by the board and senior management to identify, monitor and manage risks;
- Improve decision-making processes;
- Enhance the management of information across legal entities, while facilitating a comprehensive assessment of risk exposures at a consolidated level;
- Reduce the probability and severity of losses resulting from risk management weaknesses;
- Improve the speed at which information is available and hence decisions can be made; and
- Improve the organization’s quality of strategic planning and the ability to manage the risk of new products and services.
The Principles of RDARR
Fourteen Principles are structured in four sections:
Overarching governance and infrastructure
2. Architecture/ Infrastructure
Risk data aggregation capabilities
3. Data Accuracy and Integrity
Risk reporting practices
7. Reports Accuracy
9. Clarity and Usefulness
Supervisory review, tools and cooperation
The BCBS prescribes requirements and practices for each Principle that define compliance.
Scope of RDARR
The Principles are initially prescribed to systemically important banks (SIBs) as designated by the international Financial Stability Board (FSB). Initially, they were expected to be fully implemented by January 1, 2016.
The BCBS “strongly” suggests that supervisory bodies apply the Principles to a wider range of banks, proportionate to the size, nature and complexity of these banks’ operations.
Consistent with other recent supervisory pronouncements, we expect these principles to eventually be applied by other regulators.
Progress in Adopting RDARR
The BCBS has conducted multiple self-assessment surveys of SIBs to measure preparedness for compliance with the Principles and identify common challenges, along with potential strategies for compliance.
The survey results indicate many banks continue to encounter difficulties in establishing strong data aggregation governance, architecture and processes, often relying on manual workarounds. Many banks failed to recognize that governance/infrastructure practices are important prerequisites for facilitating compliance with the Principles.
Many banks indicated that they will be unable to comply with at least one Principle by the January 2016 deadline.
Impact of the Principles
This guidance has increased the required capabilities of RDARR for measuring and reporting risks.
The new paradigm for risk data aggregation and risk reporting imposes many new standards, most notably:
- A bank’s senior management should be fully aware of and understand the limitations that prevent full risk data aggregation.
- Controls surrounding risk data need to be as robust as those applicable to accounting data.
- Risk data should be reconciled with source systems, including accounting data where appropriate, to ensure that the risk data is accurate.
- A bank should strive towards a single authoritative source for risk data per each type of risk.
- Supervisors expect banks to document and explain all of their risk data aggregation processes whether automated or manual.
- Supervisors expect banks to consider accuracy requirements analogous to accounting materiality.
Due to the wide and comprehensive scope of RDARR Principles, many SIBs have struggled to identify and implement the enhancements to facilitate full compliance.
Examples of RiskSpan RDARR assistance include:
- Interpret Principles and Requirements – Interpret the Principles and their application to your existing risk, data, risk reporting, IT infrastructure, data architecture, and quality.
- Assess Current Capabilities – Assess your existing risk data, risk reporting, IT infrastructure, data architecture, and data quality to identify gaps in the capabilities prescribed by the Principles.
- Develop and Implement Remediation – Develop and implement remediation plans to eliminate gaps and facilitate compliance.
- Develop and Implement Standard Risk Taxonomies – Develop standard risk taxonomies to meet the needs for risk reporting, regulatory compliance.
- Develop or Enhance Risk Reporting – Develop automated risk reporting dashboards for market, credit, and operational risk that are supported by reliable source data.
- Document and Assess End State RDARR – Develop good documentation of the end state to demonstrate compliance to regulators.
RiskSpan RDARR Advisory Services
Whether or not your bank is designated as a SIB, recent trends indicate that your regulator may soon expect you to apply the Principles. You will need to pro-actively enhance your RDARR.
The Basel Committee on Banking Supervision Principles for Effective Risk Data Aggregation and Risk Reporting guidance has increased the burden on you for measuring and reporting risks. This new paradigm for risk data aggregation and risk reporting imposes many new standards.
RiskSpan’s RDARR Advisory Services team has decades of finance, accounting, data, and technology expertise to help banks meet these increasing supervisory expectations.
About The Author
Steve Sloan, Director, CPA, CIA, CISA, CIDA, has extensive experience in the professional practices of risk management and internal audit, collaborating with management and audit committees to design and implement the infrastructures to obtain the required assurances over risk and controls.
He prescribes a disciplined approach, aligning stakeholders’ expectations with leading practices, to maximize the return on investment in risk functions. Steve holds a Bachelor of Science from Pennsylvania State University and has multiple certification