Historically, regulatory reporting requirements were relatively static with the changes incremental in nature. For the most part, reporting requirements were initiated by policymakers through written announcements, regulators websites, and notices in the Federal Register. The new reporting requirements typically had long lead times and the changes managed by corporate finance/ regulatory reporting functions. Because of implementation schedules and technology challenges, often the reporting solutions were siloed and tactical, involving manual processes.
Optimizing your legal entity regulatory reporting process
Background for legal entity reporting
Depending upon the legal entity structure and headquarters of a parent bank, several different reporting forms are used to identify legal entities and associated information, including their purpose and type of legal form. This information is used for monitoring compliance with laws and regulations including by the Federal Reserve Board of Governors (“Federal Reserve”): the Dodd-Frank Act, the Sarbanes-Oxley Act, the Gramm-Leach-Bliley Act, Regulation Y (Bank Holding Companies and Change in Bank Control), Regulation YY (Enhanced Prudential Standards), and Regulation QQ (Resolution Plans). This information is also an important component in regulators determining an institution’s level of complexity.
As events occur that affect a firm’s organizational structure, a report is filed to record the event driven (FR Y-10, Report of Changes in Organizational Structure). Annually, the end of the parent company fiscal year, a report is submitted that includes an organization chart and information concerning shareholders and public financial statements (FR Y-6, Annual Report of Holding Companies1, and FR Y-7, Annual Report of Foreign Banking Organizations2). The information from the event-driven forms are compared to the annual organizational chart. All of this information is commonly referred to as banking structure data.
Notwithstanding the importance of a sustainable governance structure and high-quality data, perhaps the most critical element of an effective regulatory reporting program is proper investment in human capital.
Unfortunately, in many cases, firms have underinvested, both in number and types of resourcing, in the human capital component of their reporting programs. This could be a result of senior management viewing the regulatory reporting organization as a “back office” function, where skills needed are limited to basic financial accounting knowledge with an operations orientation. Traditionally, staff in a regulatory reporting function that was part of corporate finance were long tenured and knew legacy processes well. Conversely, staff in the business lines, who were responsible for providing data to corporate finance, had little knowledge of reporting requirements or the impact of this data. This approach worked as long as the data concepts were not complex, data requirements were static, and the processes supporting the report preparation process were not subject to frequent change.
Regulatory reporting operating model – A new paradigm
Heightened regulatory expectations for regulatory reporting requires institutions to focus on preparing high-quality reports. One key element of this focus should be a governance structure that enforces accountability, measures data quality, mitigates reporting and operational risks, and allocates resources to address data and financial reporting challenges.
An “optimized” regulatory operating model involves managing and measuring regulatory reporting risk as a firm-wide activity. As such, the regulatory reporting operating model should follow a centralized framework, where corporate finance, risk, and business line executives create an equal partnership. Current regulatory expectations reflect that the historical operating models, such as projects with little accountability at the business line, are too often ineffective. That is, the historical model cannot support the demand for high quality, fit-for-purpose data at a granular level with ever increasing complexity.
The Federal Financial Institutions Examination Council (FFIEC) recently announced significant changes to bank regulatory reporting requirements (including the “Call Report”) that are expected to result in reduced reporting burden. The changes originated in December 2014, when the FFIEC launched an initiative to reduce burdens associated with the Call Report. Since then, the FFIEC and its member agencies—the Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), and National Credit Union Administration (NCUA)—have taken several actions to meet this goal, including the creation of a new streamlined Call Report for smaller institutions (FFIEC 051) that took effect with the March 31, 2017 report date.
The goals underlying this initiative coincide with a focus on simplifying, rationalizing, and recalibrating aspects of the regulatory framework, including regulatory reporting. In support of the burden efforts, the Treasury Department urged regulators to “streamline current regulatory reporting requirements for all community financial institutions” by focusing their efforts on the applicability of each line item.1
Below is an overview of three recent developments with respect to the Call Report,2 the FFIEC 002 (Report of Assets and Liabilities of US Branches and Agencies of Foreign Banks) and FFIEC 002S (Report of Assets and Liabilities of a Non-US Branch that is Managed or Controlled by a US Branch of Agency of a Foreign (Non-US) Bank),3 and the FR Y-9C (Consolidated Financial Statements of Holding Companies), as well as the key takeaways for covered institutions.4
Although large banking organizations are likely aware of the Federal Reserve Board’s (FRB) recent proposed rules to impose prudential requirements and limitations on certain physical commodity activities1 and modify the capital planning and stress testing rules for “large and noncomplex” firms,2 they may not have paid sufficient attention to the regulatory reporting components of the proposals.
Importantly, these two proposals would make changes to the following reports:
- FR Y-9C, which collects consolidated financial statements for holding companies;
- FR Y-9LP, which collects parent-only financial statements for large holding companies; and
- FR Y-14A/Q/M series related to capital assessments and stress testing.
In addition to understanding the impact of the FRB’s proposals on their businesses, covered US and foreign banking organizations should carefully review the proposed changes to these key regulatory reports and understand what actions are required in order to comply.
Posted by Craig Brown, Deloitte Advisory managing director, Deloitte & Touche LLP, on June 2, 2016
As large foreign banking organizations (FBOs) prepare for the July 1, 2016 compliance date to establish their intermediate holding companies (IHCs) under Regulation YY, regulatory reporting has become a key area of focus. Regulators have increased their expectations with respect to governance, controls, data, and ownership over reporting, especially in connection with the FR Y-14 reports related to capital assessments and stress testing. Although many IHCs will be subject to certain of the Federal Reserve Board’s (FRB) regulatory reports for the first time, these firms should be prepared to meet regulators’ heightened expectations across their US operations.
On May 31, 2016, the FRB finalized the initial application of several regulatory reports to IHCs—including the FR Y-14 series, the FR Y-9C (Consolidated Financial Statements for Holding Companies), and the FR Y-15 (Banking Organization Systemic Risk Report)—beginning with the reporting period ending on September 30, 2016. In addition, IHCs must comply with the information collections associated with applicable regulatory capital rules beginning on the July 1, 2016 IHC compliance date.
Although the FRB adopted the regulatory reporting framework for IHCs largely as proposed in February 2016, there are certain key changes and clarifications that IHCs should understand now.