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AnaCredit to shine a bright light on credit exposures to HNW borrowers

David Attenborough, AxiomSL, Business Development Manager, London, 17 August 2015

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AnaCredit is the European Central Bank's plan to create a central database of information about the credit exposures of banks in Euroland. As part of the new regime, banks will have to report granular data about the loans they have made to high-net-worth individuals and other entities.

The European Central Bank’s (ECB) plans to create a centralised register of information about credit exposures has made many people sit up and take notice. There are domestic credit registers in many European countries but the new Analytical Credit and Credit Risk Dataset (AnaCredit) system promises to be different in a number of ways. The reporting threshold  is going to be disquietingly low (the ECB has suggested €25,000), so the volume of information will be very high and a wide range of financal institutions (including private banks and wealth managers) will be affected. Another worry is that banks will have to report a lot of data of a kind never reported before.

As part of AnaCredit, firms in Euroland and other European Union (EU) countries that choose to participate (such as Sweden and Denmark) will be obliged to report granular data about their credit exposures at "borrower level." The final report templates are expected to include more than 140 data attributes, including information about the lender and the borrower; features of the exposure; the valuation, risk and loss measures; and the condition of the balance sheet.

The data referred to in ECB discussion documents includes items that are not currently needed for external reporting purposes. As a result, firms are unlikely to have all of the data that is needed for AnaCredit at present. The information that each firm does have is bound to be distributed across different IT systems and spreadsheets. As a result, it will have to aggregate and normalize this disparate information.

The highest standard of quality for the greatest amount of data

The fact that AnaCredit obliges participating firms to report information about their exposures to individual borrowers is significant. Until now, regulators have usually asked for aggregated credit risk data. The move to entity-level data will give them a better grasp of the accuracy of the information they are receiving in the reports. For example, under AnaCredit, it will be apparent if there are differences in the data that two banks report on their exposures to the same entity. To avoid awkward questions from the regulators, firms will therefore have to ensure that their data is of the highest standard of quality.

The ECB’s plan to set the threshold for reportable exposures at €25,000 also marks an important change, as this is much lower than the current norm (e.g. the Deutsche Bundesbank’s Million Loan register requires reporting of loans of more than €1.5 million). This will not only force more institutions to report this kind of data than ever before; it will also oblige firms to submit reports on many more exposures than before.

Monthly and quarterly reports

A final challenge presented by AnaCredit is the frequency of reporting. The ECB is expected to require firms to report non-prudential data on a monthly basis and prudential data quarterly. Again this is a significant change from the current requirements of domestic credit registers. It means that, under AnaCredit, firms will have far less time to produce far more detailed reports on a much larger number of credit exposures.

How long do market participants have to prepare? The draftsmen are working on the relevant regulation, which is expected to be submitted for approval in October. However, the ECB published a provisional implementation timetable in April. The plan is to roll out AnaCredit reporting requirements in three stages:

  • from the end of 2017 firms will need to start reporting on credit granted to legal entities;
  • from the middle of 2019, they will also need to report on a consolidated basis on significant institutions under ECB banking supervision; and
  • from the middle of 2020, they will need to start reporting anonymised data on mortgage loans to households and credit granted to sole proprietors.

Due to the sheer breadth of the requirements, most firms have already started to plan for AnaCredit. In fact, the regulation has become a recurring topic in the requests for proposal (RFPs) issued by banks. [NB An RFP is a solicitation, often made through a bidding process, by an agency or company interested in procurement of a commodity, service or valuable asset, to potential suppliers to submit business proposals.] Although the regulation has yet to be finalized, firms already have a clear idea of the jobs their regulatory reporting systems will have to do if they are to comply.

Steps towards compliance

Firstly, in view of the similarities between the data needed for AnaCredit and other requirements - including Common Reporting (COREP), Financial Reporting (FINREP) and incumbent, domestic credit disclosure rules - each firm should consider managing all of these regulations on a single platform. This will prevent it from duplicating work by loading and processing the same data multiple times. It will also encourage consistency between the data in different reports.
 
As much of the data needed for AnaCredit is likely to be maintained in different systems, it is clear that firms will require sturdy software to aggregate, "normalise" and enrich data and to gather all the data together to complete their reports. Before submitting their AnaCredit disclosures, firms ought to reconcile them with related regulatory returns in order to spot any signs of inconsistency. Meanwhile, IT that is good at checking the 'lineage' of data should help them respond to the regulator's questions quickly and to justify any apparent discrepancies.

Firms should also check to see whether their systems and processes can accommodate AnaCredit's high volumes. These systems and processes may be capable of managing the credit disclosure requirements of today, but the number of reports and the frequency of reporting are going to mushroom under AnaCredit. Some firms are undoubtedly still sending reports off to their domestic credit registers manually. It is unlikely that this can continue.

Finally, firms should evolve sign-off policies and work out how best to vet the quality of the reports they be submitting in large volumes. Each firm will require a platform that not only automates the reporting process, but also provides "business dashboards" [software products that let the user look at complex sets of data and key performance indicators at-a-glance] and handles management information [reports on operations for every level of management]. This will make it possible for users to check and "sign off" their reports before the firm submits them. AnaCredit will make significant changes to the way regulators monitor credit exposures and bring in a vastly more onerous amount of scrutiny. As the ECB continues to finalise the details, it is time for firms to act.

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