In 2010, Basel Committee on Banking Supervision (BCBS) recommended Basel III implementation in the wake of financial crisis in 2007-08. Basel III guidelines are aimed at strengthening the capital adequacy of the banks by indicating the level of financial reserves that banks need to maintain to absorb any potential losses. In accordance with these guidelines, the US Federal Reserve Board and EU Parliament have begun the Basel III implementation.
In July 2013, the Federal Reserve Board approved the rule implementing the Basel III regulatory capital standards. The final rule was developed by the Federal Reserve in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). The rule requires banks and other financial institutions to maintain stronger capital buffers. The agencies are proposing a substantial phase-in period for the capital adequacy rule with an effective date of 1 January2018.
Earlier in April, the European Parliament approved a fourth edition of the Capital Requirements Directive (CRD IV). The new set of rules, which are commonly referred to as the CRD IV Package is in alignment with the Basel III guidelines of BCBS. The legislation has been published in the Official Journal in June 2013 and the official date for EU-wide implementation of the CRD IV Package will be 1 January 2014.
It looks like there is convergence in the implementation plans of Basel III in EU and USA. Are the regulators in these territories ready to collect data using web data standards such as XML and XBRL to monitor compliance? What tools are available at their disposal? Let us examine.
Web Data Standards (XML and XBRL)
The European Banking Authority (EBA) has a very specific mandate for developing and Implementing Technical Standards (ITS) related to prudential reporting requirements and including Data-Point Models and XBRL taxonomies, which will form part of the pan-EU single rulebook.
The Federal Reserve Board started using XML and XBRL in 2007. Its Call Report Modernization Project uses XBRL to collect and distribute reported financial institution data for Federal Financial Institutions Examination Council (FFIEC) agencies. The Call Report taxonomies follow the US Generally Accepted Accounting Principles (GAAP) taxonomy and have been recognized by the XBRL Standards Group. The Uniform Bank Performance Report (UBPR) database within the Central Data Repository of FFIEC containing all data appearing on report pages for all financial institutions can be downloaded in XBRL format.
The FDIC also requires banks’ call reports to be filed using XBRL. During the 2008 financial crisis, almost two years’ worth of quarterly data collected by the FDIC in the XBRL format have given the Treasury Department valuable insight into which financial institutions have suspect holdings.
Commenters (representing all types of banking organizations) to the Federal Reserve’s rule on Basel III expressed concern that the complexity and implementation cost of the proposals would exceed their expected benefits. According to these commenters, implementation of the proposals would require software upgrades for new internal reporting systems, increased employee training, and the hiring of additional employees for compliance purposes. Some commenters urged the agencies to recognize that compliance costs have increased significantly over recent years due to other regulatory changes and to take these costs into consideration prior to implementation.
In light of the above, I believe that the Federal Reserve Board, the FDIC and the OCC are likely to be cautious in placing further regulatory burden on banking organizations. Reporting using XBRL taxonomy as envisaged in the EU is certain to be cost-effective and the Regulators in the US would benefit from following their EU counterparts’ XBRL strategy that would avoid additional compliance costs.
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