The financial crisis in 2008 revealed significant gaps in the regulatory landscape. Systems were both antiquated and fragmented, with a lack of transparency within and across financial institutions. The economic crash coupled with the scope of emergency assistance to Systemically Important Banks (SIBs) created the perfect storm for new financial oversight and regulation. As a result, the US enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, which reorganized the financial regulatory system to protect consumers. Shortly thereafter, the Comprehensive Capital Analysis and Review (CCAR) and other regulatory frameworks were enacted in the United States.
In 2010, CCAR was created as an annual review conducted by the Federal Reserve. It ensures financial institutions have enough capital to cope with a severe economic or financial downturn while assessing their risk modeling practices. CCAR requires that large financial institutions have well-defined capital planning processes and sufficient capital in place to continue operations through times of significant financial stress.
As specified by the Federal Reserve, CCAR includes supervisory and company-run stress tests that are conducted as a part of the Dodd-Frank Act Stress Tests (DFAST). The stress testing process is meant to reassure the banking public that their dollars would be well-protected if the economy was to meltdown again. Additionally, CCAR includes the required sizing of each firm’s stress capital buffer and a qualitative assessment of a firm’s capital plans. Besides having a minimum amount of available capital at all times, the Federal Reserve expects firms to be able to continue operating and lending even during times of economic and financial market turmoil.
According to the Federal Reserve, CCAR compliance in 2020 is required if a financial institution (as of December 31, 2019):
CCAR is an important part of the regulatory framework instituted by the United States Federal Reserve and the results are disclosed to the public.
Financial institutions face key challenges in addressing CCAR and other stress testing requirements.
Data Quality and Integrity
The foundation for effective risk modeling and risk management is built on reliable data. To achieve compliance, data must be continuously complete, consistent, correct, and timely for internal testing and submission to the Federal Reserve. Meeting the stringent timeline of the CCAR review process and submitting quality data are challenging for financial institutions. The challenges are rooted in enterprises’ lack of an end-to-end view across the organization, and therefore they experience difficulty in matching data quality issues to the context of the error. Banks must ensure data quality and integrity through effective data management practices and strong data governance frameworks.
Gaps in Internal Controls
Regulators expect financial institutions that are subject to CCAR to have a robust internal regulatory framework, and effective risk modeling and governance processes. When trying to make improvements, many firms face hurdles in remediating gaps or shortcomings within their internal controls and risk models. Banks are expected to maintain, update, acknowledge, certify, and validate internal controls that pertain to risk management; therefore, a flexible architecture is required.
Technical Expertise
A key element of CCAR compliance is building sophisticated risk models that meet Federal Reserve requirements. Financial institutions continue to hire staff with the necessary expertise to build, monitor, and maintain these risk models. As additional stress testing requirements emerge and compliance becomes a year-round activity, financial institutions must become more sophisticated in regulatory compliance and reporting. As a result, organizations are trying to implement a common taxonomy and nomenclature used to communicate across business units and functions to achieve consistency.
Governance and Transparency
Financial institutions struggle to ensure governance and transparency of processes required for risk management, capital planning, and regulatory processes. Any gaps and limitations in capital planning and risk management must be discussed among multiple governance committees prior to approval. All of the operating groups involved in these regulatory compliance activities (all the way up to a company’s Board of Directors) must be involved continuously early within the CCAR cycle. Participation is key to understand any identified risks associated with products that might impact stress testing. Therefore, successful CCAR compliance requires enhanced governance and transparency.
Currently, there are many commercially available solutions on the market for financial institutions to address CCAR compliance and risk management. Yet financial institutions continue to experience data quality challenges when it comes to providing complete, consistent, correct, and timely data for reporting. Using existing metadata tools, financial institutions are unable to monitor data quality throughout the data’s lifecycle. As a result, they struggle to measure timeliness across workflows, efficiently conduct root cause analyses, and unlock enterprise knowledge.
It is important for financial institutions to implement an effective data governance framework. With baseline data governance processes in place, financial firms can confidently assert their data’s consistency, transparency, and trustworthiness. By making data governance an integral part of a long-term strategy, financial institutions have a better understanding of their strengths and weaknesses, their ability to meet evolving regulatory requirements, and their means to respond to reporting requirements in the future.
In a previous article, we discuss the differences between an active and passive data governance model. The most effective approach to CCAR compliance and risk management is through active data governance. Through automation and ongoing data quality checks, this approach not only remedies existing data issues but also continuously manages and monitors data throughout its entire lifecycle. By having high-quality data to rely on, enterprises have more accurate reports, clearer insights, and strategic advantages when it comes to producing reports and complying with regulators.
PeerNova’s Cuneiform Platform is an active data governance tool that helps enterprises stay compliant with regulatory requirements. The solution addresses some of the key challenges that financial institutions face in meeting CCAR compliance.
Provides E2E Data Quality Through Active Data Governance
Data quality is a critical component of CCAR compliance. The Federal Reserve Board (FRB) provides detailed rules called schedule instructions, which define the specific checks that must be performed against a financial institution’s data. In PeerNova’s solution, Data Quality and Data Timeliness rules are perpetually run on live data. Cuneiform’s active data governance framework provides end-to-end (E2E) lineages that quickly identify data quality and process issues, and address them immediately. This means that high-quality data and metrics around data quality are always current.
Auto-generates dictionaries, glossaries, catalogs, and rule repositories
A strong data management platform is required in order to address CCAR needs. Specifically, there should be a flexible architecture that supports the scale of CCAR requirements, and a development process that responds flexibly to rapidly changing circumstances. Each year, requirements are enhanced to account for newly discovered risks. With complex reporting, it is key that solutions have an evolving set of tools to simplify and automate the process. PeerNova’s Cuneiform Platform automatically builds, updates, monitors, and optimizes the foundation of a firm’s data management, and provides an E2E governance framework.
Reduces Cost and Risk
Regulatory reporting can be extremely expensive for financial institutions. The cost quickly increases when new regulations are created or when significant changes are made to current requirements. The Cuneiform Platform streamlines the process of compliance, through data integration, analytics, and reporting. When a new regulatory requirement is put in place, it is often based upon the same data. Cuneiform allows extension of the current configuration to account for new requirements. Additionally, the platform’s self-serve model enables firms to create simplified regulatory and governance reports, translating into lower costs, and reduced risk.
Captures Expertise Through E2E Lineages
There are often only a few individuals within a bank who understand CCAR’s regulatory requirements, which can cause delays in both documentation and reporting. This lack of technical expertise is an issue that financial institutions face on an ongoing basis. PeerNova’s Cuneiform Platform provides the ability for all processes and expertise to be captured as part of E2E lineages. The platform automates the generation, running, and maintenance of metadata and rules across E2E flows This enables an organization to retain and reuse information in the future, regardless of the current technical knowledge.
Integrates with Existing Tools for Faster Deployment and Flexibility
As a continuous process, CCAR review and reporting occur monthly, quarterly, and annually—typically with additional requirements for every iteration. This requires an agile development process that can remain flexible and adaptable, responding easily to rapidly changing circumstances. PeerNova’s Cuneiform Platform easily integrates with existing tools, applications, and infrastructure, to provide fast deployment of new features and emerging applications. The solution combines existing data management and governance tools with additional capabilities to automate regulatory and risk reporting.
Today, the banking system is much more resilient than it was prior to the last financial crisis, due to supervisory and regulatory requirements now in place.
In the U.S., CCAR compliance was achieved by all participating financial institutions in the 2019 cycle. The firms in the test have significantly increased their capital since the first round of stress tests in 2009. In particular, the largest and most complex firms have more than doubled their common equity capital from around $300 billion to roughly $800 billion during that time (Source). Most major financial institutions are increasing staff for CCAR compliance and stress testing with large teams in finance, risk management, and IT. It has become extremely costly to keep track of the rapidly changing processes, models, and business data.
More recently, DFAST and other forms of stress testing have also been extended to smaller financial institutions worldwide, including regional banks and credit unions. It is imperative—now more than ever—that all size firms have an active data governance model in place to meet regulatory requirements like CCAR.
PeerNova’s Cuneiform Platform addresses data quality and data integrity challenges through active data governance. The platform is currently in production or in trials at major financial institutions. If your institution is looking for an active data governance tool to help you stay compliant, be sure to get in touch with us and request a demo of the Cuneiform Platform today.
Sources:
Federal Reserve. “Comprehensive Capital Analysis and Review 2020 Summary Instructions – March 2020.” Board of Governors of the Federal Reserve System, 2020, Link
Federal Reserve. “Federal Reserve Releases Results of Comprehensive Capital Analysis and Review (CCAR).” Board of Governors of the Federal Reserve System, 2019, Link
