Help Your Bank Exceed Its Regulatory Requirements

Three-Step Approach to Bank Data That Can Help Your Bank Exceed Its Regulatory Requirements

New reporting requirements are coming to community banks. It’s only a question of when.
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Regulators are moving down the asset spectrum. They’re currently pre-occupied with banks of more than $50 billion in assets, but eventually some or all of the reporting requirements that have been applied to large banks are going to be applied to community banks.

For many of the banks that we speak to and work with, the looming requirements are, at best, an annoyance, and at worst, a significant disruptor to their operations and constant drain to the bottom line. Add in the potential for punitive fees for banks that fail to provide adequate reporting, and the new requirements start looking like a big spoonful of medicine with very little sugar.

However, with a little preparation your bank may be able to transform the reporting process from an onerous and costly task to one that may even be empowering. And it all starts and ends with one thing: the quality, breadth and accessibility of your bank’s data.

As you know, data is at the core of modern banking. Every time a customer applies for a loan or makes a deposit, new data is generated. Generally, though, this data is maintained for a limited time or is sequestered in isolated files or databases, since it’s generally assumed that ongoing customer activity and loan performance data will be sufficient for all anticipated analysis and regulator requests and that the extensive credit data gathered at origination or refreshing key elements will not become critical.

When we begin work with many of our clients, we start by looking at and consolidating as much available data as possible into a useable form. Capturing data, retaining as much data as possible and storing that data in an electronically accessible medium is the biggest thing that a bank can do to lay the foundation for a solid reporting structure that can exceed regulatory requirements.

Given the growing importance of data for banks, how should banks go about preparing for this new level of scrutiny?

We recommend that banks consider the three following steps for beginning their data management program. This isn’t all you’ll need, but it’s a good place to begin your thinking about how your bank can collect, organize, and maintain data for the long-term.

  1. Review data capturing processes
  2. Chances are, at one point you had or still do have important data that is not currently available to you for analysis or reporting.

    1. Seek guidance from regulators or industry experts to establish a data element capture priority plan.
    2. Complete a preferred data element inventory, identify;
      1. Important data currently captured requiring trust level certification, consolidation and organization
      2. Key elements available for capture and a capture process plan
      3. Opportunities to enhance data captured efficiently through current processes
      4. Data elements that would add analytical value as proxies (educated, fact based estimates) when it is unlikely data will be available or becomes too cost prohibitive to gather
    3. Think of enhanced data as a tool for empowerment, not as regulatory requirement. Go on the offense. Start by identifying things you wish you knew and build from there.
    4. Five primary areas where data is usually available but not captured for analysis;
      1. Residential 1-4 and other consumer loan Origination data detail
      2. Updated Credit scores and automated property valuations on Consumer customers
      3. Commercial Loan financial statement spreading information and property detail data at origination
      4. Incorporating analysis derived from updated information received from Commercial borrowers to satisfy loan covenants and during annual loan reviews
      5. Original and updated Collateral Values
  3. Consolidate data in a single, accessible location
  4. It is important to realize that you don’t need to embark on an expensive and complex project to vastly improve your analytical capabilities. Knowing what data is available, knowing the trust level of the source and being able to append/consolidate the data in one accessible location is the primary goal.

    1. Expensive data warehouses are great, but a simple Excel spreadsheet that consolidates multiple sources of data in a controlled, consistent and organized way can be a giant step.
    2. Always try to make sure your analysts have a solid understanding of the products or assets that you will be reporting on to make sure consolidated data passes the reasonableness test and errors or bad data issues can be identified and corrected prior to external consumption.
    3. Know and disclose the accuracy and trustworthiness of your data. Unlike customer facing or official customer record information that must be 100% accurate, analytical data can be very meaningful without being perfect.
    4. Too often banks abandon data consolidation projects and lose all of the analytical and reporting capabilities because they can’t certify 100% of the fields. The more trusted your data the better, however data can be trusted and useful without being 100% certified.
  5. Create a process for cleaning and updating data
  6. Building and maintaining a trusted comprehensive database is an ongoing process that requires constant diligence, focused effort and controls.

    1. Constantly challenge your data for reasonableness and inconsistencies. Simple filters combined with an educated look can easily identify areas where data needs to be cleaned up. When you find issues, quantify and correct them. This can be as simple as aligning internal product and loan type codes or making sure all adjustable loans have indexes and margins.
    2. Take advantage of current processes to confirm and validate data, whether through standard audits, file reviews or current trusted control processes.
    3. As you confirm that a data element is trusted, make sure your database reflects that it has been validated.
    4. Document how your data is sourced, processed and consolidated. Ensure that multiple people in your organization are familiar and knowledgeable about the process so you don’t run the risk of being hostage to an individual employee.
    5. Make data integrity and data integrity improvement a well communicated and a companywide priority.

While just collecting and maintaining data won’t satisfy reporting requirements, it can go a long way toward making the reporting process easier, and even rewarding and empowering for banks. A bank that has a lot of well-organized data that is easily accessible can produce analysis that showcases that bank’s efficacy in its decision-making and performance, which will go a long way toward convincing regulators that your bank is capable of responsible self-management.

Once you commit to a more comprehensive data collection and management program, you’ll be preparing your bank for even greater benefits in the future.

Mark Shepherd
Managing Principal, Gateway Asset Management