The essentials of robust data governance in risk management

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Risk management is an important aspect of any industry, but it is especially relevant in the banking industry. During the 2008 financial crisis, the world was exposed to the shortcomings of the big banks. These problems are mainly due to a lack of reliable risk management. However, the world quickly learned from these mistakes and decided to correct them by introducing regulations and guidelines such as BCBS 239.

The purpose of these guidelines was to ensure that financial institutions have more transparent processes to improve risk management. While some may argue that it has not done enough, BCBS 239 provided a framework to better recognize the risks to which banks and other institutions were exposed.

The history of BCBS 239

The Basel Committee on Banking Supervision Standard 239 (BCBS 239) was a set of standards and regulations designed to prevent many of the abuses that sparked the 2008 financial crisis. The standards included stipulations on the implementation active monitoring and surveillance, thereby preventing abuse and misuse of data.

He made sure that important data was checked and reviewed multiple times so that small inaccuracies could not pile up and cause billions of dollars in damage as was done in 2008. To do so, he established several standards to which financial institutions had to comply.

BCBS 239 Standards and Principles

The BCBS 239 was designed around 14 principles to ensure transparency, accuracy and security.

  • Governance and data infrastructure

Two standards have been designed around the principle of DATA governance. The first regulation focused on putting in place a data quality governance system to improve communication between institutions and ensure reporting accuracy.

The second principle concerns the aggregation of risk data. It introduced standards to ensure that banks have the necessary infrastructure to support the automation of the data aggregation chain. In addition, other principles have established the framework to ensure data accuracy and integrity, timeliness and completeness.

The following five principles were devoted to risk reporting. Since the first principles were about discovering and managing risk, the next five were to create a clear process for communicating and sharing relevant information. The principal describes how institutions should report risk exposure and what the report should involve. It also provided a standard for who this information should be shared with.

The last three principles dealt with the supervision and supervision of financial institutions. These were designed to ensure full respect for the previous 11 principles and to monitor the current situation. It also included the implementation of corrective actions and measures in the event of non-compliance.

With these principles in place, BCBS 239 provided standards for banking institutions to use data to improve risk management. Not only within the institution itself, but also with the sharing of information between them. Although the legislation is not perfect, it provided a solid basis to ensure that the 2008 financial crisis does not happen again.

Data governance in financial institutions

While BCBS 239 represented one of the most significant compliance actions taken in recent history, other laws have also been introduced. The main purpose of the legislation was to ensure the accuracy of reporting and verification of data. With this new focus on data and information, the importance of data governance has come to the fore. Instead of being an “IT problem”, data governance has become a pillar of banking.

Data has quickly become one of the most important resources of the 21st century, and it remains true in the financial industry. Banking regulations require strict data regulation and management, which is where data governance comes in.

Data governance is a set of standards and processes that establish reliable management of data throughout the organization or enterprise. Collecting accurate and reliable data is an integral part of managing risk, which is why data governance is so important. Regulations now require validation of much of the information collected by banks, and an in-depth data governance process tracks and records the data journey through the organization.

Data Warehouses (DWH) have become an integral part of the day-to-day operations of these institutions due to the importance of reporting accurate data. Cyber ​​security also plays an important role in ensuring that this data remains intact and consistent throughout its journey.

With so many different aspects needed to maintain data for risk management, strong data governance is imperative. Organizations should have a well-detailed process in place that identifies stakeholders and sets standards for data organization, data quality, and data lineage.

Data lineage plays a crucial role in data governance because it provides a clear and defined path of travel. It records the origin of the data, when and where it was modified and where it ended up. It basically follows the entire process, from creation to consumption of the data. This is an integral part of validating data accuracy and adhering to appropriate data management protocols. It also provides an evidentiary record to verify the proper use of all data across the business.

The importance of data governance in risk management

Data governance dictates the processes and standards in place to ensure the security and validity of data. As governments put more pressure on reporting and verifying accurate data, good data management is an integral part of any risk management strategy. An appropriate data governance plan will track data across the organization through the use of data traceability and other verification tools. This ensures data integrity and provides the necessary evidence to report to any required supervisors or supervisory parties.

While BCBS 239 introduced a considerable number of standards and regulations, it was done for the betterment of the financial industry. The implementation of these standards establishes a control environment in the management of bank data and the accuracy of financial reports. This ultimately ensures that something like the 2008 financial crisis does not happen again by protecting against fraud or fake data. With increased accuracy and data reporting, the financial market takes a step forward in taking appropriate precautions to ensure that fraudulent or inaccurate data is filtered out and financial assets are protected.


About the Author

Nathan (Netaniel) Segal is an expert in financial solutions and technical business analysis. With over 20 years in the financial market, Nathan has built a solid reputation in the financial industry, particularly in the area of ​​compliance and regulation. His unique background and knowledge in the financial field has produced several years of experience and equivalent results due to his unique blend of business and technological knowledge.

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