The importance of effective data governance for banks

Posted by Billy Burnet
The importance of effective data governance for banks

With the pressures of changing regulations and data security continuing to increase, banks and credit unions must remain vigilant when it comes to their data. Ensuring that data is of high quality, accessible and secure is key to keeping up with this changing environment. In addition, institutions should determine how they can make better use of the data already being collected.

One of the changing regulations is FASB’s move to a current expected credit loss (CECL) model. A key topic that has been brought up by FASB, regulators and associations and vendors is the need for loan-level data to more accurately project a life of the loan loss estimate. Unfortunately, many institutions aren’t currently capturing the data in an accessible format to enable them to do this.

During recent Sageworks webinars, attendees were asked about their CECL preparations and data adequacies. In November of 2015, more than 400 attendees were asked about what their institution was currently doing to prepare for CECL. Only 31 percent said they were archiving loan level detail. And, in February of 2016, more than 500 attendees were asked how they would describe their data adequacy and archives. Only 30 percent said their data archives were sufficient.

Preparing for a regulatory change like CECL is a great opportunity to improve data processes and procedures across the institution.

A recent article by Crowe Horwath’s Mohammad Naser and Christopher Sifter, “Establishing Effective Data Governance in Your Bank”, highlighted some of the impacts facing institutions with poor data quality, access or security. Here are a few of top impacts:

• Inability to deliver accurate forecasts
• Reduced productivity across the institution
• Exposure to risk and regulatory compliance issues, including inaccurate credit assessments and higher compliance costs
• Financial performance, including delays in cash flow, higher IT expenses and potential missed opportunities 

To minimize those impacts, Naser and Sifter recommended three pillars to establish effective data governance.

Pillar 1: People and Organizational Structure
In the article, Naser and Sifter mention that everyone in the institution is responsible for “maintaining accurate, accessible and secure data in support of business needs and priorities.” They recommend dividing key stakeholders into two groups. The first group contains individuals responsible for establishing the vision and strategy for data governance, while the second is responsible for execution.

Pillar 2: Data Governance Processes
When institutions establish data management policies and procedures, it is recommended that all four phases of the data management life cycle are addressed.

1. Collection
2. Management
3. Protection
4. Delivery

Pillar 3: Data Governance Technology
For data governance to be effective, the institution must have the tools and technology to maintain and manage the data so it is accessible and reliable. Naser and Sifter mention that in many banks, “data technology consists of a disconnected series of one-off applications and solutions, each designed to meet a specific need, with no centralized and consistent governance.” Data platforms and frameworks should provide accountability and transparency, regardless of if they are internally-developed or from third-party vendors.

Overall, Naser and Sifter suggested an effective data governance program should include four critical criteria: trust, consistency, commitment and clarity.

To learn more about data requirements for CECL, access the CECL Data Prep Guide.

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