Adler on Data Governance
Matching: taxonomy X
ComplianceWeek covered the XBRL Risk Taxonomy Forum Meeting in NY last week with an excellent article enclosed here.
It is a longer article, but this is from the front page:
Using XBRL to Attack Systemic Risk
By Todd Neff — April 7, 2009
Already hard at work making Security and Exchange Commission filings interactive, XBRL technology now finds itself at the heart of plans to save the U.S. financial system from future calamity.
A group of risk-management leaders in the financial industry has begun studying how XBRL might bring clarity and transparency to the murky world of financial risks, much the same way Corporate America has just begun using XBRL to bring more clarity to financial statements.
While any such system is a long way off, proponents say the technology is tailor-made to help regulators (and investors) root out hidden threats to corporate balance sheets before they, well, break the bank. XBRL could, for example, let a regulator peer through a bad debt line item and see the individual loans feeding it; that task would take hours of spreadsheet diving today.
But XBRL could also do much more. Steven Adler, director of IBM Data Governance Solutions, says the computer language provides a standard vehicle for regulators to track not only weeks-old summary data, but also financial positions accruing across many banks and market segments. That would shed more light on systemic risks—which, left unchecked, can bring financial calamity of the sort we’re witnessing today.
Any potent XBRL-based scheme to report risks, however, would require the reporting of daily financial positions, a major shift in how trading firms, hedge funds, and investment banks do business. To that end, Adler’s IBM Data Governance Council is spearheading a movement that would change how investment banks and hedge funds interact with regulators.
“At this point, everybody is aware change is coming,” Adler says. “And parties would rather be in the room together talking about common solutions.”
A speech Federal Reserve Chairman Ben Bernanke delivered last month shows him to be in agreement. Bernanke advocated taking a “macro-prudential” approach to risks that are “cross-cutting,” affecting many firms and markets or concentrating in unhealthy ways. It would involve “monitoring large or rapidly increasing exposures—such as to sub-prime mortgages—across firms and markets.”
You can read the full article here.
On February 26-27, I hosted an XBRL Risk Taxonomy Forum in NY at The Levin Institute in which we explored the concepts of operational, market, and credit risk. Through interactive discussions, we looked at how those concepts could be articulated in an XBRL Taxonomy and what benefits regulatory authorities and market participants could derive from new key risk indicator monitoring. We looked at the ORX example of Operational Risk loss event reporting and saw how 50+ existing banks are sharing operational loss data to better trend individual losses and learn x-industry loss patterns.
And on the last day, we explored positional reporting as a key risk indicator of market crowding and bubble formation. One outcome of the meeting was a call for a followup meeting to review the ORX example in greater depth and explore both existing risk reports and sources of positional data.
On April 23, we will meet again at the Levin Institute to focus more deeply on the ORX data model, an examination of existing regulatory reporting, and positional reporting options from Swift and DTCC.
The work will be done in English – no XML – to make it easy for everyone to participate. Our goal is to answer some fundamental questions:
1. Is the ORX data model sufficient for Operational Risk reporting on a national level?
2. What is the right business model for Operational Risk reporting and who should maintain the taxonomy?
3. What kinds of key risk indicator data are already collected by financial regulators that are either not used on a systemic basis or not shared across the government?
4. What is the most efficient method for collecting end of day/week positional data?
- from market participants directly?
- via clearing and settlement firms?
5. What should be the role of a semantic repository in the construction of risk reporting taxonomies?
6. How should the regulatory authorities build and maintain regulatory taxonomies?
7. How should the world maintain semantic consistency between many regulatory taxonomies?
8. What should a 21st Century Regulatory Information Architecture look like?
We can't possibly answer all of these questions in one day, but we can begin an informed dialog and encourage global participation - No one else is addressing these issues and I think we can make a difference doing so.
I look forward to seeing you on April 23rd.
In the last five days, a lot of people have asked many great questions that I thought I'd answer on this page to provide a better accounting of what this is all about and what we hope will result.
Q: What is XBRL?A: XBRL (Extensible Business Reporting Language) is an XML language for describing business terms, and the relationship of terms, in a report. It enables semantic clarity of terminology by standardizing a data model - the field names and their relationships - for reporting purposes.
Q: Why Do we need a Risk Taxonomy in XBRL?A: Because Risk measurement, calculation, and reporting are mysterious, arcane, and underutilized business processes in banking and financial markets and reporting standards can demystify, simplify, commoditize risk calculation as a more ubiquitous part of business decision-making.
In the insurance world, risk measurement, calculation, and forecasting are THE BUSINESS. But insurance companies don't tell you what formulas they use to calculate your premium, how they determine their own reserves, or what protocols and methods they use to pay out claims. Actuaries study for years to learn these methods, and very few business professionals - and virtually no IT professionals - have any idea how risk is measured, calculated, and reported.
Q: But what do you mean by Risk Measurement? Don't we need Risk Management?A: Sure. Risk Management is important. But only human beings can manage risk, and before we get there we need to measure past losses, compare them to current events, and forecast potential outcomes. Making a business decision without this analysis is risky. Making a business decision with this analysis is also risky, but when the inputs and decisions are recorded, we have the opportunity to learn from our mistakes and improve over time. We will never eliminate risk, but we can use scientific decision-making techniques to improve our odds.
Today, most people focus on Risk Management. They use qualitative risk assessments to imagine what kinds of vulnerabilities, loss events, and losses may be incurred from business activities. This is a valid method for forecasting and preventing potential losses. But the methods and results vary with the qualitative insight and skill of the practitioner, and they are dependent on disciplined application. Over time, it is very difficult to compare quantitative loss results to qualitative risk assessments.
We can leverage standards in risk measurement reporting to apply quantitative risk assessment to the practices of risk measurement and management so that inputs and outputs have a mathematical foundation. That foundation allows automation, and automation enables ubiquity of application. And that's the purpose of a standard - to enable widespread application and value - so that everyone can measure, calculate, and report risk; without an actuarial degree.
Q: Why do we need risk standards?A: One of the things we've seen in the current Credit Crisis is the ambiguity and confusion about risk. Regardless of whether you are a trader paid to take risks or an IT professional paid to avoid risk, it is nearly impossible to understand the incremental impact of your decisions on your department, your division, your company, your industry, your market, economy, or nation. There is just too much data today and our regulators haven't tooled up to take advantage of the information companies could produce to help regulators and markets operate more transparently.
We know now in dramatic hindsight that incremental risks have systemic impact. People can only understand that impact when they can aggregate the incremental losses in the past, compare them to current circumstances, and make forecasts about the future.
To aggregate and compare risk data, we need standards and XBRL seems to us to be the most logical and effective tool to create those standards.
Q: How could the XBRL Risk Taxonomy be Used?A: These standards will enable more effective risk measurement and reporting within firms, new macro-economic tools for regulators and policy-makers, transparency for financial markets, and a more ubiquitous use of risk calculation in decision-making across innumerable disciplines.
Let me give you an example:
The insurance industry does risk calculation all the time. If you are a doctor, lawyer, accountant, or financial advisor, chances are you buy professional liability insurance. When you apply for the coverage, you tell your insurance company about yourself, your business activities, past losses, claims, and insurance coverage. The insurance company will compare your application to their own database of insureds, losses, and rates.
The insurance company will also compare your loss profile to claims data it purchases from the Insurance Standards Organization (ISO). ISO aggregates loss data from insurance companies across the US and provides anonymous records back to the same companies. Insurance companies need that 3rd party verification of loss data for loss rating and trending. No matter how large an insurance company, and no matter how many years a company has been doing business and collecting loss history, everyone compares in-house data to aggregate industry data. Its a larger statistical sample size and it helps everyone set aside the right amount of premium from each insured for reserves to payout future losses.
We need the same kind of system in the financial markets. It is partially there today. Under the Basel II accord, banks are required to report the amount of gross income they set aside to self-insure against fore-casted losses. But they only report that in the aggregate. No one is reporting the underlying data from which the risk reserves are calculated, and data reporting on that level could have huge benefits.
One benefit is that regulators could compare reported loss information across national and international economies. This would provide enormous new insight into macro-economic trends that could help reduce business cycle volatility.
Another benefit is that banks and financial firms could compare their own loss information to very large samples of industry losses. This would make their own forecasting models far more efficient and that would help everyone manage risks more effectively and reduce paid losses over time.
A final benefit is that markets and rating agencies would gain new insights into underlying exposures in financial instruments and that would enable far more accurate and timely forms of risk rating, making markets more transparent and efficient.
Q: Why is the Data Governance Council leading this standards initiative?A: Because Risk measurement, calculation, and reporting within and between enterprises is not possible without semantic clarity around how we classify, describe, and document incidents, losses, events, formulas, and a host of other terminology. This is a very complex topic, and it is so easy to be confused and confounded by the terminology. Before we can all talk about this topic intelligently, we need a common vocabulary. That vocabulary will enable efficient communication, transferable methods and skills.
And this is very much a Data Governance challenge. The Data Governance Council has been studying these issues for four years and - together with our partners in the FSTC, EDM Council, OCEG, and other organizations - we think we can make a difference with this standard.
Q: Why would organizations want to apply XBRL to risk?A: We can see clearly from the subprime credit crisis that there are still some non-standard methods for appraising risk. We don’t have semantic interoperability to allow us to take an aggregate look at risk across multiple organizations. This makes it hard for companies and regulators to agree on what risk there is and it is difficult to consistently report the risk companies are taking. XBRL can be a tool to help organizations use common standards for the way risk is described.
Q: What benefit would XBRL for risk reporting provide companies and regulators?A: By translating risk reporting into a consistent software language, this will enable organizations to more easily perform advanced analysis, meaningful research and compare risk and loss history among multiple organizations. It could be used for internal reporting purposes or external. Regulators could use it potentially to create a global loss history database of anonymous credit, market and operational incidents, events, and losses from every institution, much like the insurance industry relies upon. XBRL could make risk simpler and more powerful and that should create broad market benefits.
Q: What are the primary obstacles to the adoption of XBRL for risk reporting?A: The real challenge is not in creating a risk taxonomy using XBRL. The challenge is getting agreement upon it and ensuring there is willingness worldwide to use it. That is why the Data Governance Council is seeking input from organizations and regulators worldwide.
Q: Who is supporting this initiative?A: In addition to more than 50 IBM Data Governance Council members, the Securities and Exchange Commission, the Enterprise Data Management Council, the Financial Services Technology Consortium, the Organization of Compliance, Ethics, and Governance, XBRL International and XBRL.US are all contributing to the process.
Q: How far along are you in the process today?A: We have a starter taxonomy that we will begin socializing at an XBRL for Risk Forum on February 26-27 at the Levin Institute in New York. The Data Governance Council’s role is that of a facilitator, seeking proposals and comments to begin defining a taxonomy for risk that can be agreed upon by many organizations worldwide. This work will continue through the first half of next year with a final recommendation expected by the end of the year.