Dodd-Frank Regulations Require
Banks To Use More Flexible
Loan Valuation Systems
Executive Summary
The “Wall Street Reform and Consumer Protection Act1,” which is more popularly referred
to as “Dodd-Frank,” has now moved firmly to the implementation stage where regulations
have been or are being drafted, commented on, and put in place. The financial institutions
subject to Dodd-Frank either already have or will soon need to upgrade many of their
existing systems to comply with these new and potentially onerous rules.
Over the past year, Primatics Financial conducted a series of discussions with its internal
experts and clients to discuss how Dodd-Frank and other major financial regulatory
changes, such as stress tests and the Comprehensive Capital Analysis and Review
(CCAR), have created specific needs new and challenges for banks. The table below
summarizes our findings.
1
Public Law 111-203 was signed into law on July 21, 2010.
Summary of Regulatory Changes
Regulatory Trend
New Bank Need
Challenge In Meeting Need
Systems that can process and
maintain results at a loan level
over time
Existing systems process data at
an aggregate rather than loan level,
often do not maintain loan state over
time and, therefore require significant
process redesign
Adaptive modeling tools across
asset classes to comply with latest
reserve and capital rules
Lack of flexible modeling capabilities
along with scalable computing power
to conduct enterprise-wide stress tests
Ability to run stress tests and
scenarios across multiple
variables
Particularly burdensome for smaller
mid-tier banks
Loan-Level Data
Greater visibility into loan-level
data across time
Forward-looking Expectations
Movement away from historical
and/or incurred-loss models
towards more forward-looking
expectations in support of
reserve and capital adequacy
In-Depth Information For Multiple Regulators
Increasing regulations that require Need for deeper business insight and robust reporting
more in-depth information be
and analytics
provided to multiple regulatory
audiences
Ability to drill-down from
enterprise to loan-level
and analyze period-overperiod trends
Existing reporting systems that are
less flexible and lack robust analytical
capabilities, such as providing both
enterprise and loan-level views and
maintaining trend information over time
Uncertainty About Future Regulations
Regulatory requirements will be
constantly changing and difficult
to anticipate
Flexible systems and processes
Legacy systems are often “siloed”,
that can be updated quickly and
less flexible, and take longer and
frequently in a cost-effective manner cost more to update.
The New Regulatory Challenges
According to the Chamber of Commerce of the United States, at least 13 new regulatory
agencies, offices and boards, and 533 new potential rulemakings were established by
Dodd-Frank and other regulations2. These regulatory requirements will often intersect3
and that will force banks to comply with overlapping regulations that cut across accounting,
tax, capital adequacy, and risk management functions.
The Dodd-Frank regulatory process so far has demonstrated several clear recent trends4,
especially increased insight to loan-level information, forward-looking perspectives on
bank risk and results, and in-depth reporting requirements for multiple regulators.
Paul Atkins’ presentation, “Financial Regulatory Reform and The Dodd-Frank Act”, presented at the Primatics EvolvLIVE conference in October 2011.
Paul is the managing director at Patomak Partners, LLC, and a commissioner of the U.S. Securities and Exchange Commission from 2002 to 2008..
3
FASB’s change to fair value; FDIC, OCC and other bank regulators’ changes to capital requirements; IRS updates to FDIC and OCC regulations.
4
Recent OCC testimony, CCAR/SCAP regulation, CRE lending guidance, Dodd-Frank/Basel and stress testing guidance for banks.
2
These increased regulations and the uncertainty around future requirements from the
growing body of regulators will require that banks be agile so that they can quickly and
cost-effectively adapt in ways they have not had to do before. This will be a problem for
many institutions because existing systems and processes generally are inflexible and
difficult to scale.
Banks face the following primary challenges in complying and keeping up with the DoddFrank regulations:
• Lack of adaptive tools and technology
• Manual operational processes and disparate data across business units
• Systems and processes that maintain aggregate rather than loan-level information
• Lack of scalable systems to analyze large amounts of data
• Inflexible reporting and analytical capabilities
What Banks Need To Deal With Dodd-Frank Regulations
Given the gap between the legacy systems that banks currently use and the system flexibility
the regulations will demand, banks do not currently appear to be well positioned to keep
up with the regulatory requirements. Below find what they will need.
Scalable architecture that will:
• Capture loan-level data from multiple source systems with the ability to process
incomplete data and integrate efficiently with upstream and downstream systems
• Process large amounts of loan-level data as well as scale on-demand with a grid
computing, Software as a Service (SaaS) model
• Provide the ability to view, export, and store loan-level results and provide an
enterprise view
Tools to generate life-of-loan cash flows with robust modeling capabilities
including:
• State-full architecture that maintains information over the life of a loan
• Scalable grid-computing architecture to perform intensive estimation processes for
large volumes of data
• Robust modeling capabilities to run complex algorithms and conduct iterative stress
tests quickly under multiple scenarios
• Provide smaller mid-tier banks with access to the same stress test functionality as
larger banks including portfolio, CCAR and “hot spot” scenario stress tests
Robust reporting and analytics that provide an enterprise view with the ability
to see loan-level details including:
• Flexibility to shift from enterprise to loan-level results for deeper analysis
• The ability to customize and produce ad-hoc reports quickly without increasing costs
• The ability to report on large amounts of data while integrating seamlessly with
ongoing changes
• The ability to express results across a variety of accounting, risk and capital perspectives
Adaptive tools and processes that stay current on the latest regulatory and
accounting standards including:
• Product releases that anticipate and keep up with the latest regulatory changes
• Stress test models developed, maintained, and validated against the latest Office of
the Comptroller of the Currency stress testing guidance and requirements
• Integrated expertise across multiple bank functions
Potential Solutions To The New Regulatory Challenges For Banks
Banks have two primary ways of dealing with these new regulatory requirements.
The first is to do what they typically have done in the past: do the work manually. The
problem with this hours-intensive, simple spreadsheet strategy is the new regulatory
environment that will require constant updates to satisfy the competing demands of multiple
government overseers. In addition, the manually-conducted procedures of the past make
the loan-level analysis the regulators are increasingly requiring extremely difficult (or in
some case virtually impossible) to do.
The second option is to take advantage of automated systems that allow regulatory
changes to be integrated quickly, scale easily to accommodate increasing volumes,
provide flexible reporting with drill-down capabilities, and enable in-depth loan-level
analysis. The adaptability and scalability provided by more advanced, automated systems
is extremely difficult and laborious to accomplish with manual systems and processes.
Primatics Financial has helped clients stay ahead of regulatory changes over the past
several years, using lessons learned to continually enhance the Primatics Evolv Suite.
The Evolv Suite - an example of the second solution above - provides adaptive tools, an
on-demand scalable platform, and an integrated view on loan data with in-depth business
insight. This gives banks an edge by reducing costs and simultaneously providing the
scalability and flexibility they will need.
Primatics Financial
8401 Greensboro Drive | Suite 300
McLean, VA 22102
Telephone : +1 703.342.0040
FAX : +1 703.342.0055
Email: [email protected]
© 2012 Primatics Financial. All rights reserved. No part of this document may be
reproduced in any form without the written permission of the copyright owner. The
contents of this document are subject to revision without notice due to continued
progress in methodology, design, and manufacturing. Primatics shall have no
liability for any error or damage of any kind resulting from the use of this document.