XBRL Can Manage Systematic Risks
Five successful steps show you how.
October 7, 2010
Last month we deciphered the problem of systemic risk and how eXtensible Business Reporting Language (XBRL) can close existing information gaps between regulators and financial institutions. In this article we reveal practical steps on how XBRL and smarter systems can manage systemic risk.
Data Standards and XBRL
To achieve systemic health, five steps must be taken to provide regulators with the data needed for informed decision-making (Exhibit 1).
Legislative reform must improve the information infrastructure for financial institutions and regulators. Data standards on risk must be defined by regulatory authorities. Systemic risk cannot be managed unless data standards are defined for measurement. Data standards help regulators assess the health of systemically important institutions and allow them to conduct financial institution-wide comparison and analysis. Standards also facilitate the aggregation and linkage of data across the system and the ability for regulators to create a systemic view for examining the data as opposed to a singular view.
XBRL is a proven format for financial reporting that can drive the risk-management agenda in the new regulatory environment. Regulators are already key participants in the business-reporting supply chain (Exhibit 2). XBRL serves as a developed platform to collect the additional information that is needed to manage systemic risk effectively. Once standards are defined, you need to develop a systemic-risk taxonomy.
Existing taxonomies already provide regulators with an interactive window into financial institution ledgers, income statements, cash-flows, balance sheets and disclosures. So what type of additional information needs to be collected to properly monitor and reduce systemic risk? Information on derivative positions (swaps, options and forward contracts), asset positions, leverage, liquidity and concentration is necessary for regulators to make more informed decisions. Once regulators collect risk data using XBRL, they have the capability to map the build-up of risk in the financial system through simulations and what-if scenarios (i.e. too big to fail). One of the benefits of collecting more risk data on systemic interactions is that regulators have a window into counterparty risks (Exhibit 3) and are able to identify unhealthy institutions and potential spillover effects.
Significant advantages to XBRL-driven transparency are that it provides a seamless exchange of information and provides an automated format that can be used to deliver near real-time insight into large exposures across the system. During periods of crisis, regulators must react quickly, so the accessibility, uniformity and method of information exchange are integral to the effectiveness of oversight.
Information Technology Framework for Systemic Risk
To meet the challenges of systemic risk data consumption, conversion, analysis, reporting and interfacing, requires a scaleable integrated framework designed to meet XBRL processing. The information system should process real-time data, financial data models and risk scenarios from multiple internal and external systems in a variety of data formats. The consumed data should be converted into structured and unstructured information. Based on financial information, risk data and risk-data models, the system can generate real-time and aggregated reports and provide regulators information in many easy-to-access formats including spreadsheets, dashboards, charts and other standard formats. An information technology framework is demonstrated in Exhibit 4.
Components of an Integrated Systemic Risk Management Framework include:
Cloud computing offers a smarter alternative to current information technology (IT) delivery models. Applications and services are not tethered to specific hardware components. Instead, processing is handled across a distributed, globally accessible network of resources, which are dispensed on demand as a service. The technology framework can be configured as a cloud computing environment and hosted in a secure data center (Exhibit 5).
Attributes of cloud computing include:
The dynamic nature of financial markets and the information asymmetry between regulators and financial institutions require an improved transparency to foster stability. Extending XBRL and utilizing smarter systems for systemic risk creates the ability to aggregate and link risk across the system. Risk management will have an active role in the new regulatory environment so now is the time for employing XBRL as a standard.
Marlon Attiken, CPA, is a manager in IBM Global Business Services, Financial Management practice. Santosh Nair, is a senior IT specialist in IBM Global Business Services, Systems Integration practice.