AnaCredit: Time for a Reality Check

FinTech Finance recently asked Nicos Kynicos, Senior Regulatory Reporting Specialist for Wolters Kluwer’s Finance, Risk and Reporting business for an overview of AnaCredit and what banks can expect from a tech perspective. First off, can you provide an overview of the regulation? The AnaCredit project started in 2011 to form a core set of low level and harmonized data on credit granted by euro area financial institutions. On the 18 May 2016, The European System of Central Banks (ESCB) settled plans for stage one of its Analytical Credit Dataset (AnaCredit). The purpose is to enable the work of the Single Supervisory Mechanism (SSM) by providing a full, true and up-to- date view of Eurozone credit data. So what has changed? Firstly, the ESCB delayed AnaCredit by six months and now goes live on the 1st September 2018. By no means is the delay reason enough to lean back, instead, the delay gives banks the chance to evaluate the gaps they have to fill and find the right solution. The threshold to report past due loans has also been raised from €100 to €25,000 – so that it is now the same as non-past due. The final rules also add three new data items and removed nine; please see Table 2 for more details. Five data items have also had either their name or definition updated. What are the key challenges for banks? From our conversations with banks that are in scope for AnaCredit, we see a number of challenges and concerns;

1. Data quality, completeness and availability: front office and back office systems, particularly older ones do not capture the data that needs reporting. Therefore system enhancements, their lead times, training staff all add extra work and complexity.
2. Overlap with IRFS9 project(s): outputs from IFRS9 projects need to feed into AnaCredit reporting e.g. Stage Assessments, Accumulated impairment amounts etc. Can firms resolve this dependency in an operationally efficient way?
3. Risk system dependencies: For example, stage 1 of AnaCredit requires the counterparty PD of eligible debtors (as per the CRDIV definition), but the final text does not clarify if this is only required only where the reporting firm has IRB approval.
4. Reconciliation: Stage 1 only focuses on a subset of instruments, so how easy is it for firms to filter their balance sheets to have a sensible benchmark to reconcile? This is required to ensure that all applicable exposures are reported and the challenge is where and how will this be done, especially if another tactical solution is implemented? It would make more sense to leverage an existing regulatory reporting solution that can cater for this. In addition, firms will have to consider reconciliation to their COREP and FINREP submissions to which many of the data items will relate.
5. Vendor risks: Some vendors are using AnaCredit as a platform to launch new products, this is the certainly the case in Germany. What risks and challenges does this present to firms e.g. un-tested technology, an additional platform means another silo and consequently reconciliation and data consistency challenges as well as new skills to be learnt to implement and support the solution.
6. National discretions; the risk here is that local regulators will extend the scope of AnaCredit to meet local objectives, but in the same ECB time-line. For example, local regulators are discussing integration with local credit registers in Germany and Spain.
7. Capacity and centralization vs localization: Many (larger) institutions who have numerous subsidiaries and branches in Euro member states are already in the midst of large transformation programs to replace tactical reporting solutions with more holistic strategic ones. However, due to the timelines for AnaCredit, these programs cannot be leveraged. The sensible decision would be to implement a centralized solution to AnaCredit for these firms, but the reality is more likely to be local solutions, which do not deliver economies of scale.

And what is the impact of the regulation? AnaCredit will affect people, processes and systems at firms that are in scope and as such, to implement a solution firms can expect a high cost. Before a solution can be defined people across finance, risk, data management and IT will need to receive training to work out what they need. Firms should start with gap analysis projects in order to right size their teams, IT architecture and processes to ensure compliance with the deadline and achieve operating efficiency once AnaCredit goes live. Crucial to the success of the project will be the skill with which firms collect, assure and validate granular credit data efficiently and accurately. Firms who are already using software, which is capable of adapting to the AnaCredit regulation, will be able to build on the investment they have made, as they will only need to focus their efforts on the missing items rather than all. AnaCredit will not be a success if firms solve it in isolation from other projects that will be running at the same time. For example, IFRS9 projects will need to overlap with AnaCredit projects given that the Accounting dataset attribute “Type of impairment” requires firms to report the Stage (1, 2 or 3) of the loan. It is highly likely that AnaCredit and IFRS9 projects will also run at the same time as projects to implement the revision to the Standardized approach for counterparty credit risk and the fundamental review of the trading book. This will put even more pressure on people, processes and systems within the finance, risk, data management and IT teams to deliver a truly efficient strategy and operating model in the midst of skill gaps and strategies to drive down costs to raise margins. Banks will benefit from choosing the right experts who can provide support with a holistic approach to Finance, Risk, Compliance, Data Management and IT who can support the internal teams of a bank in defining various attributes, such as:

• data sources and owners
• your level of compliance
• changes to processes and systems
• business needs
• target architecture
• target operating model
• implementation scope, planning and deliverables

So what one piece of advice would you give to banks on the subject? Quite simply that firms need to start work on their AnaCredit solution today. Firms will require a total solution, which is able to respond to finance, risk and reporting needs, including the capability to extend to the requirements of AnaCredit. Firms should also ensure that the chosen solution will be flexible to also accommodate the Stage 2 and 3 requirements once they have are confirmed by the ECB. Firms do not want to have a start again when the requirements for Stage 2 and 3 are confirmed and this is a real risk if you chose the wrong partner or solution to Stage 1. Full details of the scope and timelines, for anyone interested, can be found here: http://www.wolterskluwerfs.com/onesumx/commentary/AnaCredit-time- for-a- reality-check.aspx