The IBM Data Governance Council has asked for industry assistance in creating by year-end an extensible business reporting language (XBRL) taxonomy for the reporting of risk by financial firms.
The data governance group in December announced plans to lead an initiative to use XBRL to provide transparent measurements of risk and real-time exposure. The initial discussions took place during a meeting in New York last week that included representatives from the Enterprise Data Management Council (EDM), Financial Services Technology Consortium, XBRL International—and its U.S. arm—and the Securities and Exchange Commission.
“The goal is for every regulated financial institution to provide loss-event and tail data to regulatory authorities via an XBRL-based risk taxonomy,” says Steve Adler, chairman of the IBM Data Governance Council. “Such a taxonomy will create standard practices in measuring and reporting risk, which will in turn allow central banks to manage vast databases of loss history and trend analysis.”
That information, said Adler, will help regulators and central banks make better risk-mitigation decisions, which will produce better returns. Currently, there is no common language that firms use when disclosing market, credit and operational risk, which makes it difficult for regulators to evaluate “toxic” assets and reduce the potential for risk and fraud.
At the forum, “there was a general agreement among the attendees that they would take the idea of a risk taxonomy back to their organizations and seek a buy-in from upper management,” says Mike Willis, founding chairman of XBRL International and partner at PricewaterhouseCoopers.
Michael Atkin, managing director of the EDM Council, said that his group and the IBM Data Governance Council “share a common belief that semantic consistency is an essential requirement for achieving a data-centric view of risk measurement and management.” The EDM Council, a not-for-profit organization that focuses on the application of enterprisewide data governance in the financial services industry, is working on a business semantics repository for reference data.
The IBM Data Governance Council—comprised of 50 global companies, mostly financial institutions—was created by IBM Corp. three years ago to promote best practices in risk assessment and data governance. In 2007, IBM launched a consulting service that assists companies in evaluating their data governance practices based on a benchmark created with input from the IBM Data Governance Council.
According to Adler, once several years of loss data are accumulated in the XBRL-based risk repository, an “open insurance exchange” could be launched whereby firms would underwrite their operational losses with insurance coverage. “Banks would transfer operational losses off their balance sheets to insurance vehicles,” says Adler. “Banks would pay a premium for the coverage, the market would price risk on a near-real-time basis and regulators like the SEC could govern premiums and fair-trade mechanisms.”
Under the Basel II capital accords, banks are required to report the amount of gross income they set aside to self-insure against forecasted losses. But the data that is used to calculate the risk reserves is not disclosed.
The Operational Riskdata eXchange Association’s 51 global bank members can exchange operational risk loss data anonymously for any event of at least EUR20,000 ($25,160), but participation in the initiative, founded in 2002, is voluntary. Each loss is posted using a reference identification number, an event category code and other identifying criteria. According to the Zurich-based group’s Web site, it has collected information on 102,500 operational risk losses totaling EUR34.4 billion ($43.3 billion).
Willis of PricewaterhouseCoopers said that XBRL can facilitate transparency that would not only help regulators and analysts, but also investors. “The same principles apply as in the case of financial reporting in XBRL,” he says. “There would be a democratization of the information, which would increase the audience of relevant consumers.”
Under new SEC rules, all public companies and mutual funds must submit their financial reports in XBRL by 2011. The XBRL US consortium also has been working with the Depository Trust & Clearing Corp. and messaging cooperative Swift to establish semantic interoperability between XBRL and International Organization for Standardization message types for corporate actions.
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