The far-reaching transformation of the financial industry in past years – both in regulation and in the market – has led to rising costs and falling revenues for many players and directly impact business models. Regulatory costs alone have reached USD 70 billion for the banking sector according to a study Regnology conducted with Chartis Research in 2018.

And despite this significant spending on regulatory reporting by financial institutions and attempts by European supervisors to harmonize the regulatory framework, the system of banking regulation continues to suffer from a lack of data quality – due to historically grown IT systems, difficulties in organizing the cooperation of financial institutions for data-model standardization, and a lack of functioning outsourcing solutions.

Three major trends will shape banking regulation in the next five to ten years:

  • Granularity, near-to-real-time reporting, and triple-entry accounting
  • Standardization of data models and data processing logics
  • "Coopetition" in the financial sector

Trend #1: Granularity, near-to-real-time reporting, and triple-entry accounting

Historically, institutions were required to report data in templates, providing data sorted and aggregated according to given criteria and delivered according to a set frequency. At present, we see a clear trend away from collecting aggregated data towards requiring granular data sets, which must be reported promptly and validated at a detailed level, e.g., transaction-based reporting for derivatives and AnaCredit. This trend provides supervisory authorities with comprehensive data that can be examined based on many different characteristics. That granular information from two counterparties must be directly complementary to each other, known as triple-entry accounting, will increasingly become the focus of supervisory bodies in the future.

Trend #2: Standardization of data models and data processing logics

Clearly defined standards for data models and the associated data processing logic are necessary to provide regulators with flexible, prompt and granular data. Despite many projects, such as BIRD and IReF at the European level, and a clear mandate from the legislator under Article 430(c) of the CRR II, progress here has so far been modest. Currently, data is queried several times for different reporting frameworks (e.g., liquidity, solvency, statistics). Instead, at least one output data format should be specified that defines the necessary information for a business data set with which the regulator can perform all its tasks within the existing regulatory frameworks. In many cases, it would even be useful to define an input data format based on which data can be uniformly processed.

Trend #3: "Coopetition" in the financial sector

Banks compete in both core and non-core businesses. While competition in the core business should be the main revenue driver, competition in non-core business is often meaningless. In banking regulation, it contributes neither to individual business success nor to social welfare. For this reason, a state of "coopetition" is called for, i.e., competition in core business and cooperation in non-core business, in which resources in non-core business are shared to reduce costs. Coopetition models are becoming more interesting in the financial sector as a result of increased digitization, the expansion of cloud infrastructures, the increase in computing and storage capacities and the ongoing development of platform business models. In the case of regulatory reporting, for example, banks could share significant portions of the costs for IT infrastructure, IT deployment, IT maintenance, IT licenses, regulatory analyses, and their design.

Transforming Managed Services into a "RegTech Factory" - the logical next step

In our opinion, a joint utility model in conjunction with the standardization and granularization of data delivery and processing initiatives is the only way to counter the regulatory wave and sustainably reduce regulatory costs. Our RegTech Factory is a comprehensive, modular, and individually configurable form of Managed Services which rewards cooperation. RegTech Factory builds on our existing Managed Services offering, with its support of the reporting process and/or the application management of the reporting software, and it extends it by an infrastructure service shared by several banks. By sharing infrastructure services and Regulatory Reporting as a Service offers, banks can reduce cost and effort for the operation of the reporting system - both on the IT side and on the functional side. This generates "economies of share". Synergies from the joint use of computer capacity and regulatory reporting expertise lead to cost savings for participating customers.

With the RegTech Factory, we are effectively setting a new market standard. Financial institutions can particularly benefit from our extensive regulatory experience and our good cooperation with regulators and supervisors. Our goal is to ensure that the RegTech Factory not only meets the expectations of the reporting institutions, but also those of supervisory authorities. With our solutions, we want to contribute to global financial stability.

Dr. Maciej Piechocki, Member of the Management Board and responsible for regulatory topics

By sharing a common infrastructure, computer capacities are only used when they are needed. This also brings the application of "public" or "private" clouds into focus, to create further elasticity for users. The introduction of distributed computing procedures on the software side - also known as horizontal scaling - will enable increased scalability with reduced hardware requirements in the future. Applying distributed computing, the factory can take advantage of the fact that often not all participants need the full computing power at the same time.

Furthermore, the use of the RegTech Factory allows the establishment of a regulatory reporting network consisting of a consortium of banks. Through knowledge exchange and the continuous expansion of the network, the consortium can set de facto industry standards in reporting and thus actively shape the industry.

Moritz Plenk

Moritz Plenk

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