Is it possible that the pendulum has swung too far the other way? Are we creating a situation where regulators are at risk of failing to obtain useful insights that could identify emerging signs of the next crisis because there is too much focus at a granular level?
Consider this: in the EU, the Capital Requirements Directive’s new financial reporting requirements mean some large banking groups have to submit over 50,000 data fields quarterly. In the US, meanwhile, an application to become a Swaps Execution Facility typically takes several thousands of pages of data and information, as a result of new rules introduced by the Dodd-Frank Act.
Meeting the new regulatory requirements is a big task for financial institutions – and one that requires urgent and major IT investments. Bank IT systems are typically old and patched together. So regulators are concerned not only about the potential for system crashes, but about how difficult it can be for banks to rapidly respond to requests for different data.
But it is also becoming increasingly clear that the new regulatory requirements are just as great a challenge for the regulators themselves, particularly as they launch into the world of big data. Having access to the right data is a critical starting point, but having the appropriate resources, technology and institutional skills to use that information is just as important.
One lesson from the crisis is that we can rely too heavily on data. Another lesson is that data is only useful to the extent it is reliable. Total paralysis is a danger if regulators rely on data and analysis entirely: human judgement will always be needed. Integrating the data effectively into decision-making is paramount, and skills and resources are vital.
There is no one single answer to how you prevent a future financial crisis. But to limit the chances of a wide-ranging banking system meltdown, four critical elements need to be in place. First, a sustainable and flexible regulatory system with the resources, skills and institutional knowledge to effectively balance data analytics with human judgement. Secondly, better information (which is not the same as more information). Thirdly, a more responsible financial services sector. And finally, more engaged consumers, who take on greater responsibility for their own financial decisions.
This is not an argument for less regulation. It is a call for bank regulators to focus more on the quality of data than on the amount, and to bring together the required specialist skills and resources to really get insight from the data to identify risks to the system.
Michael Izza is chief executive of the Institute of Chartered Accountants in England and Wales.