Since March 2020, banking regulators worldwide have responded to COVID-19 issues, including its impact on the core banking activities of lending and borrowing. These responses include instructions to banks when dealing with borrowers adversely affected financially by COVID-19: that is, retail, public sector and corporate clients who find themselves unable to repay as per contractual loan terms. Many clients have access to a range of measures such as government-guaranteed lending schemes, payment deferrals and loan restructuring to stave off loan defaults. Consequently, banks are feeling the knock-on effects on their balance sheets, capital and liquidity positions and risk management operations.
In the United Kingdom, for example, the Prudential Regulation Authority (PRA) has urged banks to follow IFRS 9 and the transitional Capital Requirements Regulations (CRR) on Expected Credit Loss. The PRA has issued a number of statements between March and June on this topic. Through its guidance, the PRA highlights that it expects banks to isolate the effects of COVID-19 from other causes of banking risk. The PRA has also expressed its wish that banks apply a more closely-aligned definition of ‘default’ between regulatory capital and financial accounting rules.
Regulatory requirements in the light of COVID-19 have been fluid, rapidly-changing and applicable almost instantly since March 2020, and are expected to remain so for the foreseeable future. Uncertainty around COVID-19 means volatility and unpredictability in future government financial support to lenders and borrowers; short-notice regulatory guidance; loan covenants between banks and clients; and borrower behaviors. In terms of technical specifications, data definitions and taxonomies, the EBA technical standards and PRA rules on regulatory reporting have changed minimally. Yet banks and other CRR reporting institutions have to make major and immediate shifts in their commercial judgements to compile the data now needed for reporting capital and credit risk.
Not adapting promptly to these new circumstances could have potentially seismic impacts on accounting and regulatory capital in the sector as a whole and the wider economy. Since both types of capital - and the links between them - are publicly disclosed in banks’ Pillar 3 reports, inconsistent or delayed approaches to expected credit loss could also severely compromise financial stability across the board. Banks are therefore under added pressure to be transparent to regulators in their prudential reporting – and to investors in their financial statements - due to uncertainty in the present stressed environment.
Regulators will inevitably be scrutinizing incoming data on loan repayments for some time to come. They will seek to distinguish credit deterioration under exceptional COVID circumstances from longer-term, ‘business as usual’ defaults and losses. Regulators are likely also to monitor the IFRS 9 and CRR adjustments closely in regulatory data, assessing how the measures about the definition of default are impacting capital, credit risk exposures and liquidity over time.
In the UK, for instance, the PRA can be expected to zone in even more closely on banks’ capital projections (for example, PRA103 capital forecast data), reviewing them in the light of historic actual data in COREP reports. Other key information on loans and impairments is provided in the FSA015 return, a longstanding UK-specific report tracking credit quality deterioration in the banking book. Starting from year end, half-yearly or quarterly reporting periods in June 2020, the consequences of COVID-19 reporting changes will therefore have a long tail. More widely in the European Union, the EBA Guidelines on reporting and disclosures for COVID-19 are being adopted by certain countries to varying degrees, taking account of proportionality.
Beyond the numbers themselves, initiatives around regulatory data quality may be paused for now but remain firmly on the agenda. In the UK, the PRA had already begun an assurance review program of all banks and building societies’ regulatory data quality and reporting processes before COVID-19 measures were introduced. Under the ‘Section 166 skilled persons review’ announced in October 2019 institutions were notified that they must be able to explain their interpretations of requirements; data governance and controls; and any major reporting errors - or face greater risk of regulatory penalties.
The Section 166 skilled persons review has not been cancelled, just delayed. Banks will want to focus on preparing for that to minimize the risk of increased capital charges under Pillar 2 and/or Pillar2A. Some human and economic resources in banks therefore need to be diverted in the immediate term to ensure risk and control processes and sign-off procedures are robust, up to date and documented.
Traceability of regulatory data, efficient analytics and robust operational processes for reporting are therefore of utmost importance for institutions and regulators alike in the immediate term and for the foreseeable future. Government and regulatory reactions regarding COVID-19 could continue to drive data revisions at short notice. Banks need to be able to produce and reconcile financial and regulatory data confidently, ready to adapt almost instantly to unplanned changes of direction. The challenge is intense against a background of other, known data-related amendments on the horizon such as the reissued Implementing Technical Standards on supervisory reporting and Pillar 3 disclosures applying from June 2021.
Standardization, industrialization and automation of regulatory reporting processes all contribute towards freeing up resources, meaning financial institutions can focus more on making judgments and decisions, and conducting analysis.
Through its innovative technology, the Abacus360 Banking solution automates the reporting process from data delivery, data analysis, audit and reporting, including calculations and validation, through to transmission to supervisory authorities in the necessary electronic file formats. Abacus360 Banking enables scalable, flexible reporting capabilities for corporate and retail banking. Application management and outsourcing as managed services also free up personnel to execute the organizational and business changes necessary for more effective supervisory reporting.
Considering the extraordinary current circumstances for banks and regulators, it might seem counterintuitive to embark on RegTech transformation at this point. But moving towards cloud-enabled data and analytics capabilities sooner rather than later equips banks to adapt more efficiently in the short term - and keep pace in the future - with new, fast-moving regulatory approaches and the resulting operational and technical challenges.
Regulatory reporting is not solely a finance function: it also involves people and processes across risk, treasury, compliance and technology areas. Personnel training needs and future capabilities therefore also have to be addressed.
We offer comprehensive training with our training partners IFF on regulatory reporting, ideal for both experienced professionals and onboarding staff, whether in financial institutions or supervisory bodies. The Mechanics of Regulatory Risk Reporting combines risk, finance and practical reporting skills in a highly-accessible distance learning format. The 14-week learning program is accredited by Middlesex University and participants can opt for a postgraduate Masters (Level 7) certification. Enrolment is now open for the next intake starting on 30 September 2020.
 Statement by the PRA on the CRR ‘Quick Fix’ package (30 June 2020): https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/2020/statement-on-crr-quick-fix.pdf?la=en&hash=74FBF81BF3D65D59AC5014A558708F114F376E2C and Statement re guidance on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges of Covid-19 (22 May 2020): https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/2020/statement-on-application-regulatory-capital-ifrs9.pdf?la=en&hash=C284FCD84FFE3D0381068B50AE6942F0945547DF; letter to Chief Executive Officers of UK Banks (26 March 2020) https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2020/covid-19-ifrs-9-capital-requirements-and-loan-covenants.pdf?la=en&hash=77F4E1D06F713D2104067EC6642FE95EF2935EBD
 Guidelines on COVID-19 measures reporting and disclosure (2 June 2020): https://eba.europa.eu/eba-issues-guidelines-address-gaps-reporting-data-and-public-information-context-covid-19
 PRA Letter to Chief Executive Officers of PRA-regulated banks and building societies (31 October 2019): https://www.bankofengland.co.uk/prudential-regulation/letter/2019/reliability-of-regulatory-returns