Changes in banking regulatory reporting post Covid

Updated On : March 2022

COVID-19 came as an unprecedented calamity, stirring a revolution for banks and financial institutions worldwide. As a key sector of the economy, the financial services industry has been affected greatly and found themselves having to adapt their processes quickly to meet the new regulatory reporting requirements.

The COVID 19 pandemic led to governments shutting down economies, all over the world, to contain the spread of the virus. In a world where global financial systems work together as an organism, their movements hugely affect the world economy. It became crucial for global regulators to ensure the health of this system by adopting a systematic approach to regulatory reporting and banking supervision. It was their topmost priority to ensure the economic and operational resilience of the financial system globally.

Banks had to continue lending despite the challenges of growing liquidity risks, shrinking revenues, pressure to cut costs, and remote working staff. While regulators tried to balance between implementation of suitable measures for risk assessment and mitigation to avert a big financial crisis, they relaxed other activities like -

  • Loosening implementation deadlines of new regulations
  • Existing regulatory reports submission deadlines deferred
  • Suspending non-critical supervisory examination activities
  • Allowing early adoption of risk/ exposure calculation methodologies

All over the world, banks rose to the occasion and continued to provide liquidity and credit to the economy. With a remarkable degree of coordination between authorities, national and international supervisors and regulators acted with the common goal of promoting financial stability and ensuring that funds reached those who needed it the most.

Banks went ahead and provided regulatory relief to financial intermediaries, and restricted the distribution of dividends so that more capital is available to tackle losses and support lending, in the face of uncertainty. Banks also offered relief measures for debtors by granting pre-approved loans or forward-moving the payment of pensions and unemployment benefits.

RBI regulatory measures for Banks

In February 2021, the Reserve Bank of India (RBI) published a statement that introduced policy measures for banks, including regulatory changes brought about by the COVID-19 relaxations. This statement highlights that

  • RBI decided to defer implementing the last tranche of the capital conservation buffer (CCB) of 0.625%, from April 01, 2021, to October 01, 2021, to help in the COVID recovery process
  • RBI decided to defer implementing the Net Stable Funding Ratio (NSFR) from April 01, 2021, to October 01, 2021.

The following are the other highlights:

  • Including NBFCs under TLTRO on Tap Scheme
    The TLTRO on Tap Scheme was introduced in October 2020 by RBI. It was to be available up to March 31, 2021. Banks under this scheme made funds available to NBFCs for incremental lending to these sectors.
  • Extension of marginal standing facility relaxation
    On March 27, 2020, RBI extended the marginal standing facility to banks to avail funds by dipping into the SLR by going up to an additional 1% of the net demand and time liabilities, making it cumulatively 3%. Banks were provided comfort on their liquidity requirements by continuing with the marginal standing facility relaxation till September 30, 2021.
  • Limits under SLR holdings increased in the held-to-maturity section
    On September 01, 2020, RBI increased the held-to-maturity limits from 19.5% to 22% of net demand and time liabilities for SLR-eligible securities acquired on or after September 01, 2020, up to March 31, 2021. It has now been extended to March 31, 2023, to include securities acquired between April 01, 2021, and March 31, 2022. Starting from the quarter ending June 30, 2023, limits would be restored to 19.5% again in a phased manner.
  • Provision of credit to MSME entrepreneurs
    Scheduled commercial banks can deduct credit disbursed to new MSME borrowers (those who have not taken credit facilities as of January 1, 2021) from their net demand and time liabilities calculating the cash reserve ratio.

Compliance and regulatory reporting are extremely crucial for banks but at the same time, it is a highly challenging area to navigate. During the pandemic, the regulatory pressures grew with a massive number of data points needed at a high frequency and absolute accuracy. This is done with over 750 global regulatory bodies following 2,500 compliance books and creating an average of 201 regulatory alerts daily.

The infrastructure and risk data aggregation functions experienced significant difficulty trying to monitor the impacts and risks with the required promptness and accuracy. Time was a major challenge with the current processes and IT systems mainly designed to run official reports every quarter.

As the financial system continued to supply the financing the economy required, it is even more clear that a robust banking sector, backed by effective global regulatory standards is paramount. Financial institutions faced several challenges around core regulatory reporting, such as -

  • The Increasing complexity in the reporting system and keeping pace with frequent changes
  • Trying to correctly interpret changing regulatory requirements
  • Tighter reporting timeframes
  • Dependence on manual processes, multiple siloed systems
  • Data quality issues as reported by 31% of institutions as a major hurdle to effectively meet compliance requirements
  • Analysts have to spend more time on data collection and organization than on data analysis
  • Maintaining end-to-end data lineage

Going ahead, to increase effectiveness, compliance will need to strategically plan and adopt Big Data and AI Technologies to handle the challenges faced by banks better. Real-time regulatory reporting giving regulators direct access to source data will be the trend of the future, doing away with the labour and time-intensive process of repeated reformatting of data.

While digitalization will revolutionise how banks operate, risks and challenges that come with it will have to be maneuverer. Supervision and Regulation will have to factor in long-term structural changes in the ecosystems with far-reaching impact and rebalance the risk sensitivity of the global frameworks.

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