Risk management is an important aspect of any industry, but it’s especially relevant in banking. During the 2008 financial crisis, the world was exposed to the inadequacies of big banks. These issues primarily came to be due to a lack of reliable risk management. However, the world quickly learned from these mistakes and moved to correct them by introducing regulations and guidelines like BCBS 239.
The goal of these guidelines was to ensure financial institutions had more transparent processes to improve risk management. While some may argue that it didn’t do enough, the BCBS 239 provided a framework to recognize better the risk banks and other institutions were exposed to.
The history of BCBS 239
The Basel Committee on Banking Supervision’s standard number 239 (BCBS 239) was a set of standards and regulations designed to prevent many of the abuses that caused the 2008 financial crisis. The standards provided stipulations on establishing active oversight and supervision, preventing the possible abuse and misuse of data.
It ensured important data was checked and reviewed multiple times so that small inaccuracies couldn’t accumulate and cause billions of dollars of damage like it had done in 2008. It did this by establishing multiple standards that financial institutions needed to adhere to.
BCBS 239 standards and principles
The BCBS 239 was designed around 14 principles to ensure transparency, accuracy, and security.
- DATA governance and infrastructure
Two standards were designed around the principle of DATA governance. The first regulation focused on establishing a data quality governance system to improve communication between institutions and ensure accuracy within reports.
The second principle has to do with risk data aggregation. It introduced standards that ensured banks had the infrastructure to support the automation of the data aggregation chain. Other principles further established the framework to ensure data accuracy and integrity, timeliness, and completeness.
The next five principles were dedicated to risk reporting. Since the first several principles were dedicated to uncovering and managing risk, these next five were to create a clear process for reporting and sharing the relevant information. The principal outline how institutions should report risk exposure and what the report should entail. It also provided a standard for who that information should be shared with.
The last three principles dealt with the oversight and supervision of financial institutions. These were designed to ensure full compliance with the previous 11 principles and monitor the ongoing situation. It also included the implementation of corrective actions and measures in the case of non-compliance.
With these principles in place, BCBS 239 provided standards for banking institutions to use data to improve risk management. Not only within the institution itself but with the sharing of information between each other as well. While the legislation isn’t perfect, it provided a solid base to ensure that the 2008 financial crisis doesn’t happen again.
Data governance in financial institutions
While BCBS 239 represented one of the largest compliance measures taken in recent history, other legislation was also introduced. The legislation primarily focused on ensuring accurate reporting and verification of data. With this new focus on data and information, the importance of data governance rose to the top. Instead of being an “IT issue,” data governance has become a mainstay in banking.
Data has quickly become one of the most important resources in the 21st century, and that remains true within the finance industry. Banking regulations require strict regulation and management of data, which is where data governance comes into play.
Data governance is a set of standards and processes that establish reliable data management throughout the organization or enterprise. The collection of accurate and reliable data is integral to risk management, which is why data governance is so important. Regulations now require the validation of much of the information gathered by banks, and a thorough data governance process tracks and logs the data journey through the organization.
Data warehouses (DWH) have become integral to the daily operations of these institutions due to the importance of accurate data reporting. Cybersecurity plays an important role as well to ensure this data remains intact and consistent throughout its journey.
With so many different aspects needed to maintain data for risk management, robust data governance is imperative. Organizations should have a well-detailed process in place that identifies stakeholders and establishes standards for data organization, data quality, and data lineage.
Data lineage plays a crucial role in data governance as it provides a clear and defined path of travel. It records the origin of the data, when and where it was changed, and where it ends up. It essentially tracks the entire process from the creation to the consumption of data. This is integral to validating the accuracy of data and ensuring proper data management protocols are being followed. It also provides a record of proof to verify the proper use of any data throughout the enterprise.
The importance of data governance in risk management
Data governance dictates the processes and standards in place to ensure the security and validity of data. As governments put more pressure on reporting and verifying accurate data, proper data management is integral to any risk management strategy. A proper data governance plan will track data throughout the organization through the use of data lineage and other verification tools. This ensures data integrity and provides the proof needed to report back to any required overseers or supervising parties.
While BCBS 239 introduced a considerable number of standards and regulations, it was done for the betterment of the financial industry. Implementing these standards helps to establish a controlling environment within the banks’ data management and accuracy of the financial reports. Which eventually ensures something like the 2008 financial crisis doesn’t happen again by protecting against fraud or false data. With increased accuracy and data reporting, the financial market takes a step forward in proper precautions to ensure fraudulent or inaccurate data is being filtered out and the financial assets are being protected.
About the Author
Nathan (Netaniel) Segal is an Expert in Financial Solutions and Technical Business Analysis. With over 20 years in the financial market, Nathan has built a strong reputation in the financial industry, specifically within compliance and regulation. His unique background and knowledge in the financial field have produced several years of experience and tantamount results due to his unique blend of business and technology knowledge.