Thanks to “Rube Goldberg infrastructure” and a lack of attention, banks “have been mixing together data that have no common thread,” said Allan D. Grody, founder of Financial InterGroup Holdings. “Now is our chance to fix the plumbing.”
Grody was the third of four panellists to address the July 22, 2014 GARP webinar on changes to risk data aggregation and reporting. His talk continued a theme of improved risk data management that he has spoken about before to GARP audiences.
The “astonishing” aftermath of the 2008 Lehman fiasco—where banks were scrambling to determine exposure to a bankrupt counterparty—“has become the cornerstone” to regulatory changes, said Grody.
Recent papers from the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) set the direction of new interdependent regulations that aim to “reduce the probability and severity of losses resulting form risk management weaknesses,” as well as improve the decision-making processes.
The Legal Entity Identifier (LEI) is the first global ID standard that should enable counterparty risk data aggregation for risk exposures across enterprises to determine credit and trading limits, but, according to Grody, it is falling short. He showed an example where the interim LEI gives no clue of the business entity that the LEI rolls up to. “Large financial businesses have thousands of LEIs,” he said. “Shouldn’t a parent code be needed?” It is crucial to efficient and accurate data aggregation.
Slides 39-42 summarize the LEI problem and give an example of how the current implementation obscures, rather than clarifies the counterparty.
There are more global ID components to come, Grody indicated, such as for swap data reporting. “Data is being reported but regulators can neither ingest the data nor aggregate it for risk exposure analysis.”
Regulators and financial institutions must solve the standardized ID problem in order to permit aggregation according to entities. It is central to good risk management: “The objective of aggregating standardized data is to allow creation of an enterprise-wide and system-wide risk management ecosystem,” said Grody. The crusade will be worth it. ª
More extensive research papers are available for download from www.FIG-UK.com – click on Research.