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In a move to provide businesses with consistent tools for measuring aggregate risk in the financial world and to provide a more a real-time view of market exposure, the IBM Data Governance Council is seeking input from banks and financial institutions, corporations, vendors, and regulators to create a standards-based approach to risk reporting.
The IBM Data Governance Council is also exploring the usefulness of XBRL (Extensible Business Reporting Language), a software language for describing business terms in financial reports, in risk reporting, said Steve Adler, chairman of the IBM Data Governance Council, in an interview with eWEEK. XBRL could be used to provide a nonproprietary way of reporting risk that could potentially be applied worldwide, Adler said. It is already widely used for financial reporting throughout Europe, Australia and Japan, and the SEC (Securities and Exchange Commission) has proposed its use among American firms in 2009.
“What we’re doing here is we’re announcing a standards-based initiative for risk reporting,” Adler said.
Adler noted that risk comes in many forms-from the financial exposure to credit, market and operational risk to the broader societal exposure to economic, pandemic and natural catastrophe risk. At the heart of the current economic downturn are the credit and liquidity problems that have stemmed from the inability of many financial firms to track or measure their risk positions. In all its guises, risk is difficult to track, even harder to measure and model, and almost impossible to completely avoid.
Adler said in today’s environment, organizations have inconsistent methods and vague language for disclosing operational, market and credit risk. And such inconsistencies make regulatory oversight extremely difficult and complex. The first step to enabling new transparency of risk and exposure in the financial services industry is semantic clarity-a precise method for consistently describing and reporting risk across all organizations, he said.
Such transparency could provide a new macroeconomic tool and greater fiscal accountability for regulators, investors and central banks worldwide, making it easier to identify toxic assets on the books, mitigate fraud, help prevent wide-scale fiscal crisis and rebuild confidence in financial systems, Adler said.
“Individual participants are unable to adequately measure the impact of their decisions on other entities,” Adler said. “We have so much data flying around that you have no way of tracking the impact of a decision on the aggregate. With this announcement we’re trying to figure a semantic reality to better understand risk.”
XBRL and Semantic Clarity
Moreover, “Creating a risk taxonomy using XBRL will provide a vocabulary and a common language allowing everyone to understand what risk means, and that’s the first step in making it easier to calculate and report,” Adler said in a statement. “When we have semantic clarity around the way organizations describe risk, incidents, events, losses, claims, exposures, forecasts and reserves, it gets easier to aggregate loss information, analyze it with standard actuarial methods, compare past exposures to present conditions and opportunities, and forecast potential outcomes.”
According to the Council, an XBRL Taxonomy of Risk could serve as a fundamental building block to enable interoperability and standard practices in measuring risk worldwide. Such standards could potentially enable Central Banks to manage vast databases of loss history and trend analyses that could better inform policymakers and member banks, helping to minimize risk and produce better returns.
Anthony Fragnito, CEO of XBRL International, said his organization is glad to be involved with the IBM council effort.
“XBRL is gaining widespread adoption among global capital markets [and] banking and securities regulators, and plays an important role in market reforms by contributing to transparency and process enhancements,” Fragnito said.
The council is seeking proposals and discussion on its proposed specification for XBRL for risk reporting. The next meeting about this specification will take place Feb. 26-27, 2009, in New York in a combined effort with the SEC, the Enterprise Data Management Council, the Financial Services Technology Consortium, XBRL International and XBRL.US.
“This is an opportunity for both improving the effectiveness of the risk management function and the quality of reports,” said Dan Schutzer, executive director of the Financial Services Technology Consortium. “XBRL for risk reporting also holds the potential for cost reduction through the development of consistent, clear and comprehensive reporting standards.”
The IBM Data Governance Council is a group of 50 global companies, including Abbott Labs, American Express, Bank of America, Bank of Tokyo-Mitsubishi UFJ, Bank of Montreal, Bell Canada, Citibank, Deutsche Bank, Discover Financial, Kasikornbank, MasterCard, Nordea Bank, Wachovia and the World Bank.