By Hugh Wallis – Director, Regulatory Analysis, Certent
In my last blog I wrote about the myriad reporting requirements currently in effect in the ever more complex landscape of European reporting. That was just scratching the surface as there are many agencies other than those I discussed who are always seeking information of a supervisory or statistical nature from all kinds of companies who do business in Europe, all in the name of preventing or at least mitigating the adverse effects of any future financial crisis.
Before getting into the details of a few new requirements that are coming along, I would like to address WHY these reporting requirements are so important particularly in a European context although most of this chain of logic applies globally as well. I will set it out in bullet point form so as hopefully to make the logic clear.
- The Eurozone is a currency union (i.e., one currency) but NOT a fiscal union (e.g., different tax and public pension rules).
- The lack of a fiscal union severely limits the ability of leaders to respond to crises.
- Banks own highly significant amount of sovereign debt.
- European banks are estimated to have incurred losses approaching €1 trillion between the outbreak of the 2008 financial crisis and 2010.
- Insolvency of sovereigns has severe negative economic and labour market effects, which leads to political instability, exemplified by the fact that 10 of 19 Eurozone countries experienced power shifts because of the sovereign debt crisis Greece, Ireland, France, Italy, Portugal, Spain, Slovenia, Slovakia, Belgium, Netherlands, Also, UK (outside Eurozone).
Therefore, solvency of banks is paramount to the solvency and stability of entire countries – indeed the entire continent. Additionally, insurance companies are not exempt from this responsibility. Their operations are inextricably intertwined with those of the banks since the quantities of money involved are so enormous. Failure of an insurer can set off a domino effect across the entire system, as was seen following the AIG bailout in 2008. As a result, there needs to be supervision by the appropriate authorities and this requires regular reporting of key data to the supervisors so that they have the information necessary to conduct their work.
We have seen numerous reporting mandates implemented across Europe and some of these have been addressed in my previous blog postings. Today I want to talk about two new requirements that have surfaced recently and mention one that is rumoured to be likely to come along in the next little while.
First let’s take a look at the Directive on Institutions for Occupational Retirement Provision (IORP). This affects pension funds and, although it originally came via the European Central Bank and was targeted at Eurozone countries, the European Central Bank (ECB) and EIOPA have been collaborating so that there can be a single data flow for reporting by the industry. It is widely understood now that the requirements will be merged into those for Solvency II reporting which, in turn, suggests that upcoming releases of the Solvency II taxonomy framework will include additional templates and XBRL taxonomy components to support this requirement. While EIOPA have not officially announced anything in this regard it is believed that this will most probably happen as either a hotfix or an update to the 2.3.0 taxonomy scheduled for release in July 2018, and will most likely be released in the 4th quarter of 2018 either named 2.3.0 hotfix or possibly 2.3.1. We can expect some more news on this from EIOPA in the next month or so.
The submission mechanism is expected to be the same as for the current ECB add-ons that are included as part of the Solvency II framework. That is, entities submit the whole package to their National Competent Authority (NCA) and the NCAs then split the data into that which goes to EIOPA and that which goes to the ECB. One significant wrinkle that appears not to have been resolved yet is that this regulation is binding on Eurozone countries, but non-eurozone EU member states are expected to implement measures that would allow the collection of statistical information needed to fulfil the ECB’s requirements. In the end it will probably be the NCAs of the non-Eurozone countries themselves that will decide the mechanics of collecting this data in their jurisdiction.
The second additional aspect that we will look at comes from Portugal where the Banco de Portugal (BdP) have mandated additional reporting requirements on their banks related to risk on their Real Estate portfolio (risco imobiliário). In late 2017 Excel templates were published by the BdP for reporting key data points. Recently they created additional templates along with a Data Point Model and resulting XBRL taxonomy known as IMOREP, which is an extension of the European Banking Authority (EBA)’s FINREP framework, so that the necessary data can be reported as a Portuguese specific add-on to the FINREP reporting. This is planned to be the required method of reporting this information to the BdP starting in July 2018 (hitherto submission of the Excel workbooks was accepted).
It is interesting to note that Portugal have a track record of being ahead of the central authority – especially with FINREP. They were one of the first countries to require FINREP “Solo” reporting (i.e., for subsidiaries, not just at the group level), a requirement that was later adopted by the EBA. It remains to be seen if this Real Estate reporting initiative from Portugal will also be adopted more widely.
Lastly, it is rumoured that the EBA are developing a taxonomy related to Banking Resolution that is anticipated to be included in the version 2.8 of their Data Point Model for CRD/CRR IV reporting. It is not clear whether this would be in addition to the current Single Resolution Board (SRB)’s taxonomy or whether it would replace it. We should watch out for announcements about this. One suggestion is that it might be related to MREL (Minimum Requirement for own funds and Eligible Liabilities) which is specified under the Bank Recovery and Resolution Directive (BRRD). The templates for MREL reporting certainly do appear to be suitable for Data Point Model analysis and eventual XBRL taxonomy creation.
These are just a few examples of how the reporting landscape is constantly changing, mostly with additional reporting requirements being mandated all the time. It is thus important for companies to remain constantly vigilant for supplementary requirements to be imposed upon them and to ensure that they build and maintain their data handling infrastructure in such a way that they can adapt to these new requirements with the minimum of difficulty.