The Data Governance Council at Armonk, N.Y.-based IBM is seeking to create a global standard for risk reporting. According to the company, the goal is to provide businesses worldwide with consistent tools for measuring aggregate risk in the financial world and to provide a more a real-time view of market exposure.
The inconsistent and proprietary methods companies have today for reporting risk often make regulatory oversight complex and cumbersome. The Council says the first step to creating this transparency is semantic clarity, a precise method for describing and reporting risk across all organizations. It proposes to use of eXtensible Business Reporting Language (XBRL) to achieve this goal. XBRL is a software language for describing business terms in financial reports. The Council hopes to port these same principles to the risk world.
"XBRL is a business reporting language that is in use around the world. Because of its widespread regulatory and business adoption, it is a good vehicle for risk reporting," Steve Adler, chairman of the IBM Data Governance Council, told BS&T. "In fact, some Basel II reports on risk capitalization are already processed in XBRL in Europe. What we are proposing is a natural extension of these reports—the reporting of specific kinds of operational, credit, and market incidents, events, losses and other risk information."
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. This, says Adler, is the first step in creating a global framework for reporting. 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.
Adler says the Council will look at other models as a way to further the adoption of a global standard for reporting. "The current credit crisis illustrates the need for these kinds of reports. But there are also successful self-regulatory models that illustrate why this would work," he explains. "The Operational Risk Exchange (ORX) is a consortium of 41 banks from around the world that have been aggregating anonymous loss data in a common database for their own trend analysis. We feel that ORX is a valid model for the financial services world at large, but that regulators should be collecting this data for all financial institutions."
In doing so, he believes all parties involved would benefit—policy makers would gain more advanced macro-economic trending tools for better economic forecasting; financial institutions could compare their own losses to national and global trends with new analytical tools; and markets would also benefit from increased transparency, according to Adler.
The Council is immediately seeking proposals from financial institutions, corporations, vendors and regulators 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.