In a move to provide businesses worldwide consistent tools for measuring aggregate risk in the financial world and provide a more a real-time view of market exposure, the IBM (NYSE: 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.
Today, organizations have inconsistent methods and vague language for disclosing operational, market, and credit risk. These inconsistencies make regulatory oversight both extremely difficult and complex. The first step to enabling new transparency of risk and exposures in the financial services industry is semantic clarity - a precise method for consistently describing and reporting risk across all organizations. Such transparency could provide a new macro-economic 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.
The IBM Data Governance Council is exploring the use of Extensible Business Reporting Language (XBRL), a software language for describing business terms in financial reports, to risk reporting. XBRL could be used to provide a non-proprietary way of reporting risk that could potentially be applied worldwide. It is already widely used for financial reporting throughout Europe, Australia and Japan, and the SEC has proposed its use among American firms in 2009. The widespread use of this standard ensures adequate skills and understanding among firms and regulators.
"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," said Steve Adler, chairman of the IBM Data Governance Council. "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 buiilding 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.
"XBRL is gaining widespread adoption among global capital markets, banking and securities regulators, and plays an important role in market reforms by contributing to transparency and process enhancements," said Anthony T. Fragnito, chief executive officer, XBRL International, Inc. "XBRL International is pleased to be a part of this important initiative by the IBM Data Governance Council."
The Council is immediately seeking proposals and discussion on this topic to help drive a year-long effort to create a proposed specification for XBRL for risk reporting. The next meeting about this specification will take place February 26-27, 2009 in New York City in a combined effort with the Securities and Exchange Commission, 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 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, Ltd, Bank of Montreal, Bell Canada, Citibank, Deutsche Bank, Discover Financial, Kasikornbank, MasterCard, Nordea Bank, Wachovia, and the World Bank, among others, that have pioneered best practices around risk assessment and data governance to help the business world take a more disciplined approach to how companies handle data.
Data governance helps organizations govern appropriate use of and access to critical information such as customer information, financial details and unstructured content, measuring and reporting information quality and risk to enhance value and mitigate exposures. IBM's work in this area supports and furthers the company's Information on Demand strategy, that has delivered results through consistent earnings growth, hundreds of new customer wins, strategic acquisitions and industry-first software offerings.