Data Quality and Data Management in Banking Industry. Empirical Evidence from Small Italian Banks

Elena Bruno, Giuseppina Iacoviello, and Arianna Lazzini

Abstract This chapter addresses the problems created by fragmentation of performance management systems, i.e. having different systems for storing, reporting and analysing data for different business functions, locations and units. These problems are the result of organizations focusing IT investment on systems that support the efficient day-to-day operations, making it difficult to access and use data to support management decision-making. Relevant data is likely to be spread over multiple databases in different systems, in multiple formats and even over multiple organizations.

Keywords Information technology • Credit quality • Standardization report • Credit risk • Asset quality

Introduction

With the rapid evolution of information and communication technologies (ITC), information systems (IS) have assumed a central importance in the organizational and functional structure of all kinds of business. The spread of technologies linked to the use of the Web has, moreover, favoured the redesigning of the very boundary lines of the company [1] which today appears increasingly open and connected with other entities and information systems.

In this context, the implementation of information systems capable of managing a plurality of information types coming from various information sources as well as

E. Bruno (*) • G. Iacoviello

Department of Economics and Management, University of Pisa, Pisa, Italy e-mail: This email address is being protected from spam bots, you need Javascript enabled to view it ; This email address is being protected from spam bots, you need Javascript enabled to view it

A. Lazzini

Department of Communication & Economics, University of Modena and Reggio Emilia, Modena, Italy

e-mail: This email address is being protected from spam bots, you need Javascript enabled to view it

© Springer International Publishing AG 2017 21

K. Corsi et al. (eds.), Reshaping Accounting and Management Control Systems,

Lecture Notes in Information Systems and Organisation 20,

DOI 10.1007/978-3-319-49538-5_2

the adoption of effective policies of information security assumes a crucial importance. The continuous and rapid changes in technologies, on the one hand, and the considerable operational, organizational and financial commitment, on the other, make this process extremely arduous. This is particularly important for banks which today have to meet new needs and challenges. On the supply side, it can be observed that, if the guarantee of secure and reliable services has always constituted a factor of primary importance, today it becomes one of the main components of competitive advantage.

From an operational point of view, the regulations require increasingly strict controls and the implementation of standardized, automated processes in order to manage better and reduce the various components of risk to which a bank is subject. The measurement and management of credit risk have in recent years assumed increasing importance in the process of risk management for financial institutions, also in the light of the recent crisis that has involved economies of many countries. Credit quality impairment has mainly affected small and medium-sized enterprises which constitute the life blood of the Italian productive system. The negative economic cycles that have involved Western economies in the last few years have made it very difficult for businesses to comply, in the agreed times, with the terms of finance contracts signed with financial intermediaries. In this context of credit risk aversion, there are important new developments of a regulatory character regarding the correct representation of impaired credit information.

The first concerns the introduction by the Bank of Italy of the “archive of the losses historically recorded on default positions” which requires the annual notification of losses suffered on non-performing loans (non-performing receivables, substandard, doubtful, restructured loans and expired and/or over-limit impaired exposures). Objects of detection are the exposure at the moment of default, any variation in the exposure, the value of the recoveries obtained, the costs connected with the recovery activities and information details relating to aspects such as technical form and system of guarantees. The second innovation regards the recent provisions of the International Accounting Standards Board (IASB) on the subject of the impairment test. Taking up again the cornerstone of prudence, which has always been central in the Italian system of financial reporting, but in the past underestimated in the international approach, there will be a change from the incurred loss model to the expected loss model with the aim of predicting losses in advance and avoiding their manifestation only in moments of crisis.

The activity of credit risk control is a critical and complex process that involves management at several levels and a multiplicity of business functions, primarily the function of risk management. As well as technical-quantitative skills, the employees performing the functions must possess transversal knowledge of the operating processes of the bank and soft skills such as independent judgement, critical spirit, authoritiveness and flexibility. The IS must perform a decisive role in ensuring that the process of risk management is prompt. Indispensable goals are the integration at group level of the information systems, the safeguarding of data quality and the structuring of the information flows and of the reporting activity so that important information reaches, promptly and at the appropriate time, the desk of whoever has to decide. The comparability of the data in time and space constitutes a critical aspect. It requires an activity of standardization which, today, cannot but be based on computerized processes and languages (see the paragraph 3).

Up to a decade ago, there had been very little standardization of regulatory reporting across the European Union. Standardized electronic formats and data models such as XBRL and Data Point Model (DPM) were only introduced by the Committee of European Banking Supervision in 2004 and the European Banking Authority shortly after. These standards, however, remained nonbinding until the introduction of the Single Supervisory Mechanism at the European Central Bank (ECB) in 2014 [2]. It is crucial to note that this is no longer just “the next step” in reporting, but rather represents a radical change in regulation and supervision. This is because prior initiatives to standardize regulatory reporting focus on how organizations exchange data (and thus mainly resulted in requirements for the need for Information Technology function). The enforcement of standards such as XBRL and DPM, however, affects functions of organizations’ data collection and data compilation chains (and thus mainly results in requirements for business departments). This represents an example for the continuously growing demand for regulatory reporting within the financial industry.

Some recent regulatory changes that emphasize the role of the Risk Management (RM) in the process of producing financial reporting of credit monitoring are moving in the same direction (see the fifteenth update of the Bank of Italy Circular n. 263 of 27.12.2006). The monitoring of organized activities was mainly “visual and manual” until the progressive introduction of computer technology into business operations. IT is often implemented to manage, control and report credit risk, market risk and other types of core business risk. “However, the IT applications and infrastructure elements are still within the operational risk domain, regardless of their specific purpose. As an example, the failure of a credit risk measurement application is an IT failure and, therefore, a “systems failure” in the sense of operational risk” [3].

On the basis of the above remarks, the aim of this present chapter is to analyse the effects that the enhancement and modernizing of information systems are having on credit portfolio quality, in the light also of the recent regulatory changes that have taken place in the banking sector.

A limitation of actual research concerns the lack of studies that analyse the issue of IT in the process of quality credit risk in small banks, while more surveys that have been conducted refer to the IS in large banks and more recently to smaller banks [4, 5]. A few contributions focus on the implementation of advanced IT solutions in small banks to contribute to loan portfolio management with a view to improving asset quality [6].

The remainder of the chapter is organized as follows: paragraph two outlines the background and literature review, paragraph three the application of the new model to activities of credit risk control and paragraph four discusses the research objective and method and the final paragraph presents evidence and conclusion providing a critical review of alignment between theory and practice.

 
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