In this article, we review the Bank of England’s Call to reduce data risk by enhancing regulatory reporting controls and increasing data lineage and data quality. 

The recent communication to banking executives, the Bank of England (BoE) highlighted persistent challenges in regulatory reporting, underscoring the importance of robust data governance, accuracy and data lineage. This Dear CEO letter, part of an ongoing initiative to enhance banking supervision, casts a spotlight on the need for improved data management within financial institutions. 

The letter outlines deficiencies identified through a comprehensive program of skilled persons reviews. These reviews, encompassing a significant sample of firms, have repeatedly uncovered lapses in data controls, governance, systems, and production controls associated with regulatory reporting. 

The BoE emphasises that the submission of complete, timely, and accurate regulatory returns is fundamental to effective supervision.   The message is clear, banks should take heed the feedback and undertake necessary remedial actions. 

A key aspect of ensuring data accuracy and governance is maintaining robust data lineage. Data lineage tracks the flow of data from its origin through various transformations to its final state, providing transparency and accountability. This capability allows practitioners to stand confidently behind the reports produced, ensuring that every data point is traceable and verifiable. 

At ALMIS® International, we’ve tackled the challenge head on with recent developments to our bank treasury data warehouse and reporting applications. All data enrichments and changes are logged per transaction with drilldown back to transaction-level accounts. 

As regulatory scrutiny intensifies, the BoE is set to continue deploying targeted supervisory tools, including the use of skilled persons, throughout 2024. This proactive stance reflects a broader industry concern about the adequacy of risk data aggregation practices, as highlighted in the Basel Committee on Banking Supervision’s (BCBS) recent progress report on the adoption of BCBS 239 standards. The report reveals that significant work remains to ensure that data accuracy and risk data aggregation are prioritised across all data types. 

The Bank of England’s letter also signals forthcoming long-term reforms through its Transforming Data Collection Programme and the PRA’s Banking Data Review. These initiatives aim to overhaul how data is collected, and which data points are prioritised, ensuring a more streamlined and effective regulatory reporting framework.  There are three key industry reforms banks will need to consider; 

• Defining and adopting common data standards that identify and describe data in a consistent way throughout the financial sector.  

• Modernising reporting instructions to improve how our reporting instructions are written, interpreted and implemented.  

• Integrating reporting to move to a more streamlined, efficient approach to data collection.  

As the BoE and other regulatory bodies intensify their focus on data management, the message is clear: data accuracy, governance, and lineage must be at the forefront of their operational priorities. As regulatory bodies tighten their oversight, financial institutions are urged to invest in their data management systems, ensuring that their regulatory submissions meet the high standards expected by supervisors. Engaging with the ongoing reforms and industry forums will be crucial for banks to navigate this evolving regulatory landscape effectively, whilst balancing the cost of compliance with operational efficiency. 

About the Author 

Matt Poole is an experienced CertBALM-qualified Product Owner at ALMIS® International specialising in data warehousing and banking risk calculations for treasury, ALM, and regulatory reporting.  

ALMIS® International has a team of experts in bank Asset Liability Management, Regulatory Reporting, Hedge Accounting and Treasury Management supporting over 65 Financial Institutions. Please get in touch to learn more about how we can help

Industry Leaders share their insights 

Following  the Prudential Regulatory Authority’s (PRA) recent publication of ‘scenarios for banks and building societies not part of concurrent stress testing‘ our latest webinar with Luke Di Rollo, Chief Product Officer  joined by special guests  Nick Lock, former Senior Advisor at the Bank of England, and Simon Garrett, Director at ALM Financial Solutions, explored the published scenarios in more detail, the incentives of the regulator, and how non-systemic firms could use these to add value to their internal risk analysis. 

• There is a growing critical role for stress testing as part of the supervisory process, specifically in measuring the resilience of individual banks and building societies with a particular focus on capital and liquidity. These scenarios build on the incumbent model by providing a wider audience with a tool to benchmark the types and severity of economic shocks that are expected to be considered. 

• With reference to the Supervisory Statement on the ICAAP and supervisory review and evaluation process (SREP), it is essential to understand that all firms are responsible for designing their own stress tests. By publishing two differing scenarios, the PRA’s aim is to encourage firms to consider the type, characteristics and severity of stress that their business model is vulnerable to. This means that Banks and Building Societies should consider the scenarios, which depict a series of macroeconomic dynamics, within the context of their business and specific risk drivers. 

• Historically, stress testing has been subverted into a compliance exercise with the regulator demanding an ICAAP document in which specific stresses are run – institutions take the parameters in the stress test, run them against their business to produce an output and the supervisor tells them what their capital requirement is. Ideally what would happen is that each firm thinks about its own risks and risk drivers and stress test for those, which may be based off reverse stress testing to know which areas they are most vulnerable or are most material. 

• The instructions outlined by the PRA signal a transition to a more effective framework, which incorporates effective risk management at an individual and encourages firms to optimise their management of capital or liquidity. More emphasis is placed on the ‘internal’ and ‘process’ aspects of the ICAAP, while also satisfying the PRA’s requirement of a minimum requirement on a consistent basis. While banks have a deep understanding of their own business models and customer behaviours, what is particularly valuable here is the credible external assessment of the macroeconomic parameters provided by the PRA. This external perspective ensures a comprehensive approach to stress testing, incorporating broader economic factors that banks might overlook. 

 Reviewing the scenarios for non-systemic banks 

The scenarios for non-systemic banks and building societies are the same as those used for the concurrent stress test. Both scenarios are designed to be severe and broad enough to assess the resilience of the UK banking system. Within each scenario there is a domestic and global recession, with UK GDP falling by 5%, unemployment rising to 8.5%, and house prices falling by 28%. World GDP falls by 3%. The macroeconomic scenario results in sharp moves in other asset prices. There are assumed to be further falls in UK and global commercial real estate (CRE) prices, equity prices fall, government bond term premia rise, and corporate bond spreads widen. 

The demand shock scenario sees a severe negative global aggregate demand shock and global recession, resulting in falling inflation. This prompts Bank Rate to fall rapidly from 5.25% to 0.1%, remaining below 0.5% for two years, to support the recovery and return inflation to target. 

The supply shock scenario sees a severe, negative global aggregate supply shock from an increase in geopolitical tensions and global commodity prices and supply-chain disruptions. This leads to higher-than-expected inflation across advanced economies. High inflation is assumed to lead to expectations of higher inflation in the future and global policymakers increase interest rates to bring inflation back to target. In this scenario, Bank Rate rises to 9% and stays there for a year. 

Can firms use this opportunity to develop one suite of stress scenarios that can be used as part of ICAAP, ILAAP, Recovery Planning and Operational Resilience? 

“I was keen to get Nick’s perspective on whether firms could use this opportunity to develop one suite of stress scenarios that can be used for as part of ICAAP, ILAAP, Recovery Planning and Operational Resilience. From my experience working with a majority of the target audience, stress testing has become a myriad of distinct and overlapping exercises, which Simon reiterated. There was unanimous agreement on a systematic approach to stress testing at an institution level, but I appreciate the management actions forming part of a stress test are nuanced, and where management actions to protect capital are likely to deviate from that in a liquidity stress. Or that there are some idiosyncratic type liquidity shocks that aren’t necessarily balance sheet driven and more akin to your funding model. 
 
Having taken time to digest the discussion I am reminded of a UK ALMA presentation many years ago where it was suggested that the global financial crisis was exacerbate by a failure of imagination – to think critically of the specific risks inherent within the financial system or one’s individual balance sheet. Nick’s experience as a supervisor over many years is that firms tend to be very good at projecting upsides but not so good at thinking about where they could go wrong, and so having modelling capability that you can plug new inputs or separate the extras are really important to manage the business. ‘Imagination’ and modelling capability really need to go hand in hand for this to be realised.” Luke Di Rollo 

We now have a proxy for the severity of the stress but how does it apply to my balance sheet and where do you start when designing internal scenarios? 

Having spent a decade working with banks and building societies on their risk model designs Simon’s recommendation is to start with the corporate plan. This should have an approximate 5-year time horizon, sufficient periodicity to ensure no inter-period risk, and appropriate granularity to allow the flex of business assumptions. Overlaying the macroeconomic parameters provided by the PRA, can lead to spurious assumptions and so it is helpful to consider the key business metrics in context of the stress: 

In conclusion, the Prudential Regulatory Authority’s recent scenarios offer a valuable framework for banks and building societies to enhance their internal risk assessments and ensure resilience in the face of economic uncertainties.    

By integrating these scenarios into their internal risk management processes, institutions can better prepare for potential shocks, aligning their capital and liquidity strategies with both regulatory expectations and their unique business models. 

Adopting a proactive and tailored risk management approach encourages a deeper understanding of individual risk drivers and the potential impact of various stress factors, fostering a culture of resilience and strategic foresight within the industry. 

Start with the corporate plan to incorporate the PRA’s macroeconomic parameters in a nuanced manner provides a clear pathway for institutions to develop comprehensive and effective stress testing frameworks. By leveraging these scenarios and maintaining a balance between regulatory compliance and internal risk management, banks and building societies can navigate the complexities of today’s financial landscape with greater confidence and stability. 

Successful stress testing is not merely about meeting regulatory requirements but about fostering a deeper, more imaginative approach to understanding and mitigating risks. By doing so, financial institutions can not only comply with regulatory standards but also enhance their strategic decision-making, ensuring long-term sustainability and resilience in an ever-evolving economic environment.  

About the Author 

Luke Di Rollo, Chief Product Officer, is a seasoned professional in the banking industry with nearly a decade of experience specialising in Asset and Liability Management (ALM) and Interest Rate Risk in the Banking Book (IRRBB). Throughout his career, he has developed and implemented several widely adopted models within the UK banking sector. Luke holds a CertBALM qualification and is a member of the Association of Corporate Treasurers (ACT), underscoring his expertise and commitment to the field. 

ALMIS® International has a team of experts in bank Asset Liability Management, Regulatory Reporting, Hedge Accounting and Treasury Management supporting over 65 Financial Institutions. Please get in touch to learn more about how we can help

Over the past decade the needs of Bank Treasury Management have evolved due to the financial system’s ever evolving landscape. Timely adaptations to prudential, regulatory and technological obligations are typically onerous due to an institutions’ existing systems, data quality and resource constrains.  This article provides an overview of the key considerations to ensure the Treasury Management System you invest in can deliver saleable growth, optimise prudential reporting and risk management as well as meet the expectations of the regulator or audit committees.

2024 year end surveys conducted by EY and Deloitte highlight a continued reliance on spreadsheets and a lack of integration across the treasury departments. Most often a myriad of vendor solution models, proprietary built models and spreadsheets are implemented within the same Bank for the purposes of capturing market data, deal capture, valuations, risk metric calculations, monitoring of limits, stress testing, reporting and planning/forecasting. The incumbent is inefficient in the long run due to high and unforeseen costs of maintenance, update, manual work arounds and time-intensive data analysis, with most banks also foregoing areas of significant value due to technical challenges.

Prior year financial results show strong profitability and growth for most institutions, however, headwinds of margin compression and increased competition for funding, alongside changing customer needs are likely to pose challenging for the years ahead, exacerbated by the aforementioned business challenges. Adopting a Treasury Management System which has been built to accommodate bespoke bank treasury operations is therefore an area for competitive advantage, allowing organisations to accommodate and automate the integrated processes within this malleable domain.

Implementation and upgrade timelines are one of the major determents when deciding what system(s) to adopt. Treasury personnel resource spent on implementing/upgrading systems or manual spreadsheets continues to trend upwards at the detriment of time spent analysing exposures and protecting the Bank’s economic position. 

By partnering with SaaS providers on a subscription model, FINTECHs are encouraged to ensure continued customer success. The resultant is a hands-on implementation process with project management lead by the supplier and a commitment to timely completion. The providers should have integrated solutions for importing data along with comprehensive reporting to streamline reconciliations. New version releases are also offered frequently, containing improved functionality to avoid migration resistance and are designed to minimise testing resource from the Bank’s side due to modern testing approaches such as integration, automation and regression tests. The potential ROI on these solutions is truly exponential, leaving treasury teams to focus on their day-to-day activities.

Integration with real-time market data and payment systems have seen marked improvements in recent times. The sourcing of yield curves, market prices and FX rates has historically been a double edged sword. Most treasury management systems can integrate with 3rd parties such as Bloomberg or Refinitive to provide real-time market data, however, this comes at an extortionate cost due to the additional licence requirements and multiple sources required. The alternative has been a provision of this data from smaller providers but this solution lacks the timeliness needed to gauge the competitiveness of trades at the point of the transaction. Swap counterparties, for example, will look to maximise returns on these trades. Actual trade prices reflect the true consensus value of forward rates at the point of trade, incorporating all available market information and the real balance of supply and demand. The fair value is therefore a truer representation of market conditions and how competitive swap prices actually are.

Nevertheless, the TMS market consists of providers that can balance this double act, providing integrated API’s that source data from live markets and construct prices or yield curves in a cost effective manner rather than passing on the burden to the Bank. This can save the Bank hundreds of thousands on licensing costs as well as provide the tools required to maximise net interest margin by ensuring counterparties remain competitive and minimise the hedged rate.

Accommodation of all treasury products and transactions is another challenge due to the sophistication and variability of terms from counterparty to counterparty. To be truly scalable, and to ensure cash positions can be anticipated precisely, Treasury Management Systems need to cater for the bespoke market conventions used throughout the industry.

In truth, these conventions differ counterparty by counterparty and may require manual adjustments or regular reconciliations to identify gaps that are not fully understood. As an example, the SONIA linked collateral swap agreements offered by HSBC, Lloyds, Natwest and Barclays differ based on whether and how often they compound along with the rounding of the rate used to calculate interest settlements. Furthermore, over-the-counter swap agreements can vary on lags or shifts. These simple examples show the intricacies involved with even small discrepancies causing regular headaches in cash projections, settlement reconciliations or GL postings. A TMS built on industry feedback will accommodate for these idiosyncrasies, removing the operational challenges involved and providing treasury departments with true clarity.

Flexible reporting can now accommodate no-code solutions. Out of the box reports can be customised per user/institution without the need for downstream spreadsheet transformations or complex report writer functionality befitting of skillsets held out with the user’s domain. Desired changes to report structures/calculations frequent regularly and legacy systems or spreadsheets do not possess the adaptability to give Finance Directors or Treasurers the positions they want to see on a timely basis.

In conclusion, selecting the right Treasury Management System  is pivotal for modern bank treasury operations. The evolving financial landscape demands systems that not only ensure compliance with regulatory standards but also offer robust risk management and prudential reporting capabilities. Traditional reliance on spreadsheets and disparate vendor solutions is increasingly seen as inefficient and costly. Therefore, a TMS that integrates and automates complex processes can provide significant competitive advantages. Ultimately, the right TMS not only addresses current operational challenges but also positions banks for sustainable growth and adaptability in a dynamic financial environment. Investing in a modern, integrated TMS is not just a technical upgrade but a strategic imperative for any institution aiming to thrive in today’s competitive landscape.

About the Author

Luke Di Rollo , Chief Product Officer, is a seasoned professional in the banking industry with nearly a decade of experience specialising in Asset and Liability Management (ALM) and Interest Rate Risk in the Banking Book (IRRBB). Throughout his career, he has developed and implemented several widely adopted models within the UK banking sector. Luke holds a CertBALM qualification and is a member of the Association of Corporate Treasurers (ACT), underscoring his expertise and commitment to the field.

ALMIS® International has a team of experts in bank Asset Liability Management, Regulatory Reporting, Hedge Accounting and Treasury Management supporting over 65 Financial Institutions. Please get in touch to learn more about how we can help.

BCBS Consultation Paper – Recalibration of shocks for interest rate in the banking book

In February this year, the Basel Committee on Banking Supervision (BCBS) released consultative document for recalibration of shocks for interest rate risk in the banking book, issued for comment by 28 March 2024.

In April 2016 the Basel Committee published its standard on interest rate risk in the banking book (IRRBB), which was most recently updated with SPR98 on 15 December 2019. The standard requires banks to calculate measures of interest rate risk for their banking book exposures with the measures based on a specified set of interest rate shocks for each currency for which the bank has material positions. The Committee noted the severity of the specified shocks would be subject to periodic review. The purpose of December 2023’s Consultative Document is to detail a set of prescribed adjustments to the specified interest rate shocks in the IRRBB standard, alongside adjustments to the current methodology used to calculate the shocks. These changes are deemed necessary to address problems with how the current methodology captures interest rate changes during periods when rates are close to zero due to fundamental shortcomings in basic risk management of traditional interest rate risk.

Current Interest Rate Shocks

The IRRBB standard requires banks to apply specified interest rate shocks to risk-free yield curves for each currency for which the bank has material positions. Under the standardised approach, banks must determine the impact of these shocks on their economic value of equity (EVE) and net interest income (NII). The shocks that must be applied to the risk-free yield curve for each currency is set out in the following table, which is derived from historical data during the period from January 2000 to December 2015:

The methodology used to produce the specified shocks combined three elements: (i) average interest rates for each currency; (ii) global shock parameters that are applied to the average rates for each currency; and, (iii) application of a floor, a set of caps and rounding.

Average interest rates were calculated for each currency using interest rate data from the calculation period, covering tenors from 3 months to 20 years:

The next step used to calculate the specified shocks was to multiply the average interest rates by the following set of global shock parameters:

Applying the global shock factors to the average interest rates for each currency gives the following unfloored, uncapped, unrounded interest rate shocks:

The IRRBB standard notes in SPR98.60 that the methodology can lead to unrealistically low interest rate shocks for some currencies and to unrealistically high shocks for others. To ensure a minimum level of prudence and a level playing field, a floor and a set of caps are applied. The floor is set at 100bp and the caps are set at 400bp for the parallel shock, 500bp for the short-term shock and 300bp for the long-term shock. Finally, the amounts are rounded to the nearest 50bp.

Problems with methodology used to calculate global shock parameters

The main objective of the Committee’s review of the interest rate shocks in the IRRBB standard was to update the interest rate data that is used in the calibration of the shocks. The current standard uses data from the period January 2000 to December 2015 and the Committee would like to extend that period to cover the period January 2000 to December 2022. Expending the period used, however, reveals a problem with the above methodology for calculating global shock parameter.

The shock parameters are generated from the average of 99th and 1st percentiles of rolling six-month percentage changes in interest rates (i.e. [rate in six months – current rate] / current rate). When rates are close to zero, the rate of change can be very large. For example, when the rate went down from 0.02% to 0.001% (0.019% difference) in six-months for a certain currency, the shock parameter is 95%. In another example, however, when the rate went up from 5.5% to 5.519% (the same 0.019% difference), the shock parameter is just 0.35%. The same calculation generates huge differences depending on the original level of interest rates. Therefore, in addition to updating the data period used to calibrate the interest rate shock parameters, the Committee has agreed to propose revisions to the way the shock parameters are calculated.

Comparison of existing and new methodology

• Expansion of the time series used in the calibration from December 2015 to December 2022.
• Removal of the global shock factors calculated using rolling six-month percentage changes in interest rates. These are replaced with local shock factors calculated directly for each currency using the averages of absolute changes in interest rates calculated over a rolling six-month period.
• Move from a 99th percentile value in determining the shock factor to a 99.9th percentile value, to maintain sufficient conservatism in the proposed recalibration.

The table below shows the interest rate shock parameters calculated using the proposed new methodology, with the data through to end-2022. The colours in the table show whether the shock sizes under the proposed new methodology results in an increase, decrease or are unchanged relative to the existing shock factors:

The following table quantifies the impact of the proposed change to the interest rate shock of each currency:

For most currencies the standard shocks have increased, e.g. the current 250bps parallel shock for GBP and 200bps parallel shock for EUR are proposed to increase to 300bps and 250bps respectively. If introduced, this would likely lead to banks revisiting their IRRBB framework including risk appetite, modelling, and hedging capacity

About the Author

Luke Di Rollo , Chief Product Officer, is a seasoned professional in the banking industry with nearly a decade of experience specialising in Asset and Liability Management (ALM) and Interest Rate Risk in the Banking Book (IRRBB). Throughout his career, he has developed and implemented several widely adopted models within the UK banking sector. Luke holds a CertBALM qualification and is a member of the Association of Corporate Treasurers (ACT), underscoring his expertise and commitment to the field.

ALMIS® International has a team of experts in bank Asset Liability Management, Regulatory Reporting, Hedge Accounting and Treasury Management supporting over 65 Financial Institutions. Please get in touch to learn more about how we can help.