AnaCredit: burden or blessing
Banks in the Euro area are at this moment implementing AnaCredit: a challenging task to be compliant in time. At the moment most banks deal with the burden of this granular reporting regulation, however some positive impact may be on the horizon. Let us take a look at both sides of this balance.
With the Go-live in September 2018 almost all banks, registered as credit institutions in the Euro area will be sending granular data sets on credit and credit risk data to ECB, via the national Central banks. In most countries pilots or pre-reporting periods are already in place since Q1 2018. This enormous flow of datasets in Europe is based on the adoption of the Regulation on the collection of granular credit and credit risk data (“AnaCredit”) in May 2016 by the Governing Council of the ECB1.
As many of recent regulations or adjustments in regulations AnaCredit finds its background in the recent financial crisis. European statistical data was not providing sufficient insight for its users, leading to a broad need to improve the depth of the data provided. The ECB, assisted by the national central banks of the ESCB (European System of Central Banks), decided to develop and produce new ESCB statistics, and increase the quality of existing ESCB statistics. Goal of these changes was to become more effective in their performance of tasks, including those related to:
- monetary policy analysis and operations;
- risk management;
- financial stability surveillance2.
The ECB states it is essential that the credit database contains complete, accurate and timely information on the credit situation in the financial system. Granular credit data will be used to broadly monitor the performance of the whole euro area credit market, Therefore AnaCredit should provide high-quality and timely information on debtors and their respective credits. Furthermore, information on any risk mitigation measures securing the credits is useful to estimate the severity of losses in the event of default. Finally, the granular credit database should support reliable debtor identification as unique identification is essential for capturing the total indebtedness of debtors accurately, especially if there are cross-border exposures.
Implementation of AnaCredit
To create a useful database of credit and credit risk data over time harmonised concepts and definitions common to all participating countries are essential. Next to the regulation, 3 manuals are available to describe all data attributes and provide more details on the concepts and definitions. Interesting is that the manuals were developed in close cooperation with the banking sector in the so called The Banks’ Integrated Dictionary (BIRD) initiative. AnaCredit was the first phase of BIRD and this has been developed with the voluntary participation of many commercial banks in the Euro area.
In the definition of AnaCredit requirements several issues have been discussed intensively between ECB and ESCB and in consultation with the banks. The current limitation in the scope of instruments (loans and credit) and counterparties (only legal entities) has been agreed. Other important topics for implementation at banks are a.o. decentralised (via NCBs) reporting, loan-by-loan reporting, the reporting threshold and the scope of derogations by NCBs.
The choice for decentral instead of central reporting has had a major impact for banks, especially the banks active in more than one country within the Euro area. The choice for decentral reporting was driven by the differences in the tasks of NCBs. In 15 of the 24 EU Member States NCBs Central Credit Registers are operated by NCBs, so in more than half of the EU countries NCBs already collect granular data on credit and credit risk applying a local concept.
The burden of reporting AnaCredit data sets
By choosing decentralised reporting the ECB and ESCB accepted a limited standardization of AnaCredit reporting. National discretions e.g. in data collection strategy, timelines, mandatory attributes and accounting standards are now causing serious challenges for internationally active banks, as we experience in our client projects. Also, NCBs are becoming aware of the burden of being part of the reporting chain from banks to ECB, which is illustrated by difficulties they are now facing to implement on time for collecting and delivering data sets.
In countries where banks are not common to report on the required granularity, data quality and new reporting processes are challenging, even more as aggregated reports were not requiring the same standards.
Moreover, reporting burden is felt by banks due to the intense regulatory agenda and a new supervisory model which banks need to get used and comply to. The ECB has a data driven way of supervising and is very active with all kinds of On Site visits, TRIM exercises and other data requests. In recent years many banks have discovered that renewal of their IT and Data architecture was required to comply to new regulation like IFRS 9 and reporting requirements. This renewal of Risk & Finance IT landscapes is ongoing and, in the meantime, banks are facing deadlines requesting smart solutions to comply immediately.
What are the potential advantages of AnaCredit?
In its communication ECB and NCBs always emphasize the advantages of AnaCredit for all stakeholders involved. It is obviously that statistical data will improve leading to more effective decision making by ECB and ESCB. Also, the financial stability will be improved. However, given the limited scope of this first AnaCredit stage and concerns on data quality this effect will take some years before it is realized.
Several extensions of AnaCredit are foreseen, though not formally planned and communicated with timelines. AnaCredit is envisaged to extend the scope of reporting with respect to types of lenders (reporting population), borrowers and instruments3.
For credit institutions the advantages seem to have an even longer-term perspective, unfortunately. The resistance of the banks and its representatives during the consultation is therefore conceivable.
Information on indebtedness of a borrower (company) is not limited to national frontiers anymore thanks to the conjunction with the Register of Institutions and Affiliates Database (RIAD). Feedback loops and improved internal flow of information is expected to bring benefits to the banks. However, the feedback loop is not obliged for NCBs, leading to a difference which will probably align with the existence of a public Central Credit Register or not in a specific country.
Secondly, AnaCredit is an important building block in the European Reporting Framework (ERF) which is designed and implemented to simplify data reporting and reduce the burden for reporting agents. The ERF aims at collecting all data required for different statistical purposes and in the longer term for banking supervision under an integrated and harmonized approach in all countries. AnaCredit is currently showing that this is an ambitious goal.
Banks are facing serious challenges to implement the AnaCredit regulation to comply in time (September 2018). As many of the regulations since the financial crisis, AnaCredit is a new administrative and costly burden for banks.
In its essence, the concept of AnaCredit is improving financial stability and statistics for monetary policy, which supports the euro area in its economic development. From that perspective one can understand that postponing its implementation was not beneficiary.
However, a serious evaluation of the first stage of AnaCredit with all stakeholders is advisable, hopefully leading to more balance between the burden and advantages for all the participants involved.
2. Explanatory note on the ECB Regulation on the collection of granular credit and credit risk data; published by ECB, refer to 1 for website
3. The Analytical Credit Dataset; a magnifying glass for analyzing credit in the euro area (ECB Occasional Paper Series); J-M. Israël, V. Damia, R. Bonci and G. Wafre; April 2017