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New requirement: Banking, compliance go hand in hand

Shah Md Ahsan Habib | Published: August 05, 2019 21:18:00 | Updated: August 08, 2019 22:13:22


[Concluding part of a three-part article titled 'Addressing regulatory compliance and reporting challenges in banking']

Compliances and regulatory reports by banks are crucial tools of the 'Bangladesh Bank' (BB) for monitoring and supervising the country's banking industry. By applying reported data, the BB conducts its monitoring and supervision mechanism; identify and address problems, prepare BOP (balance of payments), formulate monetary and other policies, and undertakes data analyses and conducts research for publications.

Information of certain regulatory report are used for public disclosures so that investors, depositors, and creditors can better assess the financial condition of the reporting banks. These data are also related to transparency and protection of the consumers or clients of the banking and financing industry.

In line with the global development, the BB brought remarkable changes in the regulatory reporting environment. Following the most recent financial and economic crisis, enforcement of stringent prudential rules, capital adequacy requirements and liquidity management (under Basel III) changed compliance and regulatory environment.

CHANGES REQUIRED FOR THE BANKING INDUSTRY: The changing regulatory compliance requirement brought about visible changes in the monitoring and reporting arrangement of the central bank. Notable transformation has taken place in recent years in terms of introducing new regulations and reporting requirements of the BB. Most of these are prudential regulations and related to reporting requirements to ensure more stringent rules to restrict banks against undertaking excessive credit-related risks, ensuring transparency, and addressing financial crimes. These have visible implications in the volume of regulatory reporting, efforts and costs. These are burdensome but cannot be bypassed.

Practically, in the current complex scenario, better banking business and better reporting and compliance go hand in hand. There is no scope to consider compliances and regulatory reporting requirements as operational hazard, rather these are risk management tools. Banks must have right kind of attitude to address the complexity.

To comply with the increased regulatory reporting requirement and demand, reporting banks are required to install sound internal governance and control mechanism. International governance and controls of regulatory reporting in banks are crucial for ensuring data quality and accountability arrangement. There should be structured arrangement for data collection and screening, report preparation, review, and communication of regulatory reports.

Other than a few multinational and local private commercial banks, banks in Bangladesh hardly have adequate and organised internal setup for regulatory reporting and compliances. Centralised data gathering and processing arrangement, review system, and central report submission setup are hardly found.

Most of the banks do not have senior bankers/specialists specifically responsible for regulatory reporting and compliances. Probably it is time for all the reporting banks to install effective internal governance and control mechanism for better compliance and regulatory reporting ultimately for sustainable business.

Increased regulatory requirements have cost implications. There are evidences of some duplications of regulatory reporting to different departments of the central bank. These have cost and business implications for the banking industry of Bangladesh.

BANGLADESH BANK'S INTERVENTIONS: There are initiatives on the part of the central bank to address data duplication and redundancy issues.  Apparently, there are a lot of scope for improvement.  Cost burden might be too stressful for the small-sized banks. As a future step, the regulatory reporting requirements may vary according to the size of the reporting banks and the use of products and the associated risks.

Compliance and reporting requirements may vary given the country circumstances. Growing financial crimes is a cause of concern for the policymakers and the central bank of Bangladesh. Especially trade-based money laundering has become a key area to address. In this connection, the country's reporting requirements and perspective cannot be matched with major developed countries such as the USA, the EU and Canada.

In the context of Bangladesh, relying on formal payment arrangement and stringent reporting and monitoring framework are very relevant. Trade facilitating banks need more efforts and investment in this connection.

Greater harmonisation and standardisation of data, and greater coordination amongst the key stakeholders are seen as the key elements for addressing systemic risks and for ensuring effective regulatory reporting and compliance requirements. Supervisors and industry must have formal platform for sharing thoughts on the necessity of regulatory reporting, necessary arrangements and demand for greater compliance. Alongside the bank management, Bangladesh Association of Banks (BAB) and Association of Bankers Bangladesh (ABB) may have roles to play.

Banks in the country have been using banking software for their operations and service delivery. Banking software being used so far by banks have differential features and are not always equipped with the data processing and management required for the regulatory reporting.

Most of the banks are yet to attain centralisation in their banking operations though some have transformed to the centralised systems and some are in the process. Differences in the banking operations and systems are barriers to having harmonised and standardised data set for ensuring quality and comparable data.

EFFICIENT MANPOWER IS THE KEY: Quality people are at the centre. Compliance and reporting roles in banks are generally considered less important, as some senior bankers say. Banks are required to develop a set of expert executives to ensure due compliance by enforcing regulations and meeting regulatory reporting requirements of the central bank.

Major training academies like Bangladesh Institute of Bank Management (BIBM) and Bangladesh Bank Training Academy (BBTA) organise very limited number of courses/workshops on the regulatory compliance and reporting issues; and training institutes of banks also have very limited number of courses on these areas. Practically, other than a few multinational banks operating in the country, commercial banks hardly find the necessity of attending or organising capacity development events on these issues.

Multinational and reputed banks operating around the globe have started taking regulatory reporting and compliance issues seriously following some incidents of penalties imposed by the regulatory authorities in recent years. Generally, the country's banking industry is yet to attain due approach to the necessity of ensuring regulatory compliance and reporting.

'Trained, well-informed and efficient employees' is the key. Quality and capable bank executives should be placed for playing such vital roles. Thus, with introduction of new set of compliance rules and new regulatory requirements, there must be arrangement for due capacity development of the bankers.

Training and capacity development institutes, especially BBTA and BIBM, may be engaged in the process to play the roles. BBTA or BIBM may organise joint training programme with the concerned department of Bangladesh Bank following introduction of a new regulatory reporting and compliance requirement. Top management and board of banks should also be brought under capacity development programmes for better enforcement.

In essence, it would be very difficult to get away with regulatory compliance without installing an adequate level of automation. It is thus no surprise that emerging technologies and business models are equipping banks with the strategies and capabilities needed to address these challenging new requirements. Banks have no option but to invest in RegTech. In particular, distributed ledger technology has some promising applications which are currently being evaluated by the global banking and financing industry. The current template-driven regulatory reporting model may be replaced by cube-based arrangement.

In the near future, regulators and banking industries must embrace updated technology to create an effective platform for automated regulatory reporting.

Dr Shah Md Ahsan Habib is Professor and Director (Training) at BIBM.

ahsan@bibm.org.bd

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