The European Central Bank's Analytic Credit (AnaCredit) regulation significantly expands European banks' regulatory reporting architecture and will drive more granular data reporting. It is expected that this granular reporting will likely be replicated in many, if not most, regulatory jurisdictions. To help better understand this specific effort and its larger consequences, this article summarizes AnaCredit's rationale, presents its historic and future timelines, and highlights its features and challenges. The article concludes by offering some guidance on how institutions can best meet the challenges of and benefit from the work required by AnaCredit.
Since the banking crisis, there has been an extensive overhaul of the global banking regulatory framework. The overhaul has been led by Basel III but also encompasses regimes including IFRS 9 and stress testing.
An overarching theme of the changes is much more extensive reporting, and banks are now required to create a much wider set of compliance reports. They must complete significantly more work to consolidate data, calculate results, and submit reports to regulators, using a predefined format.
Analytical Credit Datasets, or AnaCredit for short, is a new regulatory framework that will be introduced in the eurozone. It will take a different approach to regulating banks. Rather than submitting a report for review, it calls for banks to submit comprehensive, granular datasets for detailed analysis by regulators. AnaCredit will run in parallel to the existing frameworks.
AnaCredit will require significantly more exposure-by-exposure credit risk information, such as collateral values and probabilities of defaults (PDs), as well as significantly more accounting metrics. It will be rolled out in phases starting in September 2018, and will feature results and provisions computed according to the new IFRS 9 accounting standard being introduced in January 2018.
Although AnaCredit will be for the eurozone, it is anticipated that its granular approach will be replicated in most regulatory jurisdictions.
This article summarizes the rationale behind AnaCredit, as well as relevant timelines, features, and challenges. It concludes by offering some guidance on how institutions can best meet AnaCredit challenges and benefit from the work required.
Credit institutions around the world are in near-constant communication with their regulators. This communication provides regulators with information about institutions' liquidity conditions, capital levels, and credit exposures. Lessons from the banking crisis have driven regulators to have access to more specific, credible, and timely information so they can identify and address real and potential issues.
During the crisis, eurozone banks were unable to identify and aggregate credit exposures, despite the widespread availability of credit data and elaborate reporting architectures. Credit exposure data gaps around particular branches, or the total borrowings of a firm across institutions, persist to this day. In addition, the constantly evolving regulatory reporting architecture is a significant burden on regulated institutions, which are responsible for both reporting their data and monitoring regulatory changes.
To address these problems, the European Central Bank (ECB) has established a high-level roadmap. One element focuses on incremental efforts, such as common data dictionaries and a common data reporting framework. The other element, AnaCredit, is a much more comprehensive regulatory initiative which emphasizes more frequent and much more granular data submissions.
The goal of AnaCredit – to create a eurozone-wide Central Credit Registry – will be a new development in the European regulatory landscape. Before this, many national rules and technology hurdles inhibited the aggregation of data outside of individual states. Post-crisis, the arrival of a European Union (EU) banking union and the emergence of new powerful statistical and data-handling technologies (“big data”) have enabled the creation of AnaCredit.
AnaCredit will fundamentally transform the European regulatory landscape. It will push frequent, fine-grained, and comprehensive data submissions to the center of regulation and compliance. Regulators will use this data as their primary means to monitor and mitigate credit issues at the institutions they regulate. It is critically important for these credit institutions to implement the systems and data processes needed to successfully deploy AnaCredit.
The European System of Central Banks (ESCB), comprised of the ECB and the National Central Banks (NCBs) of EU member states, is driving the AnaCredit framework.
AnaCredit builds on Central Credit Registers (CCR) now used in many eurozone countries by NCBs to collect credit data and monitor and manage credit risk. Financial institutions under the Single Supervisory Mechanism (SSM) will need to submit much more granular data, on more obligors, more frequently to their NCBs. The NCBs, in turn, will provide this data to the ECB to form AnaCredit.
AnaCredit will be established in stages. The first stage will start on September 1, 2018. Submissions during this first stage will include information on debtors who are legal entities and who have instruments which 1) give rise to credit risk and 2) total €25,000 or greater. All credit instruments of these debtors will be reported.
Two subsequent stages, though not currently spelled out in the regulation, are likely to be implemented in 2020 and 2021, respectively. Stage Two will likely include Information on instruments such as financial derivatives, other accounts receivables, and off-balance sheet exposures. Stage Three will likely include anonymized information on mortgage loans to households and credit granted to sole proprietors.
Credit institutions operating within the eurozone, along with the resident foreign branches of credit institutions, are subject to AnaCredit rules. It is not anticipated that institutions would have to report loans booked at a branch headquartered outside the eurozone; however, countries may have discretion over this requirement. Additionally, in some circumstances, national central banks may opt to exempt certain small credit institutions from reporting.
The key highlight of AnaCredit is that data is taking the place of reporting. Instead of specifying a report layout, the proposed regulation specifies data tables and data fields that need to be reported. Credit instruments are the centerpiece of this proposed data model, and the data is proposed to be collected on a loan-by-loan and borrower-by-borrower basis. The regulation proposes reporting a minimum of 95 credit risk and accounting attributes, along with seven identifiers. However, at national discretion, some authorities may require reporting of additional data attributes, potentially 100 or more data elements for each credit exposure.
The ECB proposes reporting 10 interrelated datasets, each organized around individual instruments or a single counterparty, as shown in Figure 1. All datasets would include internal identifiers, which are intended to have no meaning outside of AnaCredit. These internal identifiers would allow data to be cross-referenced and uniquely identified.
The proposed reporting frequency for these data types is monthly, quarterly, or when the data changes. A significant challenge will be to keep track of the changes in data, to avoid reporting the data set twice, before and after the change.
AnaCredit will require extensive harmonization with other frameworks with regard to data and reporting concepts and definitions. Related frameworks include:
- The European Reporting Framework (ERF): This harmonization of primary regulatory reporting covers credit, balance sheet, income, and interest rate reporting, among others.
- The Banks' Integrated Reporting Dictionary (BIRD): This covers common banking data terminology and data transformations.
- The ECB's Single Data Dictionary (SDD): This defines common data terminology and transformations for use in reporting within the ECB and the NCBs.
- The ongoing LEI effort to standardize obligor identification.
Banks will need to utilize advanced analytic and "big data" tools to manage this significantly increased data.
AnaCredit presents institutions with significant technological, data management, and operational challenges, including the following:
- Consolidating and processing data from different sources in the institution. AnaCredit requires banks to consolidate and process data from across a range of systems which can be highly complex. Banks will likely need to revisit their processes and data aggregation tools.
- Maintaining data quality. AnaCredit requires an extensive set of information for individual credit exposures. Some information may be either very hard to find, or never collected in a systematic fashion. Banks will need to carefully consider how to fill in, proxy, or otherwise account for this missing data. This will likely be subject to detailed regulatory scrutiny.
- Implementing accurate and robust reporting systems. Banks must ensure the data assembled for AnaCredit produces results that are consistent with all other reports of the same information, including COREP and Pillar 3 disclosures. The size and frequency of AnaCredit submissions requires a reliable and robust reporting platform.
- Aggregating and presenting group and standalone data. AnaCredit focuses on individual exposures as well as differing national Central Credit Registries across the eurozone. A bank with an obligor with borrowings across several countries in the eurozone will need to report these exposures in different ways on a country-by-country basis.
- Complex implementation. AnaCredit significantly expands the data that institutions must provide. This presents challenges for banks, as they will likely need to enhance their data management and reporting processes. Banks have already made extensive investments in managing compliance with Basel III, stress testing, and capital planning, and now will need to do the same with AnaCredit.
There may be a light at the end of the tunnel. The ECB hopes that the comprehensiveness and granularity of AnaCredit will help reduce the volatility of reporting changes. This should help to reduce reporting implementation costs going forward. The ECB also hopes that banks will benefit from the standardized loan-level taxonomy of AnaCredit which will simplify the acquisition of new entities and ease integration of this data into new systems.
Banks also hope that modern data and statistical management tools that can scale to analyze terabytes and petabytes of volatile data can be used in AnaCredit initiatives.
A key challenge for banks is finding a way to balance the need for expanded and more closely monitored data requirements and more frequent reporting, with an efficient and effective data management and reporting process.
An optimal solution for implementing AnaCredit should deliver the following results:
- The seamless consolidation of risk and finance data from different sources into a central internal repository
- Accuracy and consistency so that common data definitions and calculations shared between AnaCredit, Basel III, and IFRS are always consistent
- Automation to drive efficient, accurate, and cost-effective compliance and reporting
At its core, the optimal solution needs to consolidate all the loan-level and counterparty data into a unified data set to provide solid foundations for AnaCredit calculations and reports. It needs to have powerful data cleansing capabilities, so managers can quickly identify and address data that does not meet the bank's data quality standards. The solution also needs to be open and flexible, so it can import risk and balance sheet information quickly and easily.
The solution also needs to have a fully integrated, credit risk-weighted asset calculation engine so banks can compute their credit risks at loan level. Furthermore, the solution needs to have an integrated IFRS 9 calculation engine that can calculate the expected credit loss provisions at loan level.
Finally, the solution should leverage a powerful, integrated data publishing solution that can consolidate risk, finance, and other results from across the business to meet the frequent reporting requirements of AnaCredit. The solution should also allow banks to apply AnaCredit reporting templates to streamline the reporting process and assure accuracy.
This consolidated approach to AnaCredit reporting can lend itself to integrated reporting for Basel III, IFRS 9, and stress testing.
Consolidated reporting helps a bank deliver a consistent, accurate message across multiple regulatory regimes, while leveraging a single data source to deliver cost-effective regulatory compliance and reporting.
AnaCredit is a major change to eurozone reporting architectures as it moves regulatory compliance away from ever-changing reports to a more data-rich submissions framework.
In the short- to medium-term, focus should be on ensuring reporting architecture is as efficient and transparent, both internally and externally, as possible.
In the longer term, there is potential for reduced reporting costs due to more stable reporting processes, greater use of automation, and the application of powerful new tools.
AnaCredit project, European Central Bank, 2016.
Draft: Regulation on the collection of granular credit and credit risk data, European Central Bank, December 2015.
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Analyzes IFRS 9, delves into its effects on future impairment calculations, and provides recommendations on how financial institutions can implement and leverage forward-looking credit loss models.
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