XBRL and Basel II: Standards for Communicating Risk
The Basel II Accords are intended to revise the capital adequacy requirements for internationally active banks. This effort helps to establish a common language for communicating the risks of banks around the world so that the banks themselves, their supervisors and the public markets have a more thorough understanding of the risks in banks, while in some cases enabling banks to reduce their overall capital requirement. Conceptually, Basel II is on a clear path to achieve this. This framework, however, has been designed by humans for humans, even though the exchanges of information under Basel II will be almost entirely electronic, computer-to-computer exchanges.
Without a standards-based technology solution expressing the Basel II concepts, wherever a Basel II system either for a bank or a bank supervisor is deployed it will include assumptions and interpretations made by the systems developers about the data model itself. Also, the formats for exchange are likely to take many different forms keeping consultants and systems integrators busy and profitable as they cobble together methods for moving data from one system to another. These inconsistencies will inevitably exist without a standards-based technology solution and will introduce unnecessary inefficiencies into the processes of sharing Basel II information.
What is XBRL?XBRL is the standard for exchanging business information over the Internet and it is a truly global standard. The XBRL International Consortium boasts a membership of regulators, accounting firms, technology providers and consultants in excess of 300 and fully-fledged or in-development jurisdictions in over 20 countries. XBRL addresses standardization on two levels: the standardization of a technology framework for defining taxonomies (or data dictionaries) and data sets, and the standardization of the content of the data dictionaries. Examples of standardized taxonomies that the consortium has approved or been a part of the development of are the US GAAP taxonomy, the IFRS taxonomy, and the in-development COREP (COmmon REPorting) Basel II taxonomy for Europe. It is standardization at both of these levels that creates the real power of XBRL to share and compare information quick and easily. XBRL has been stable at version 2.1, since the end of 2003, and Gartner Group has called it a “transformational technology”, one that will cause a paradigm shift and have significant impact on the marketplace. |
There is a unique opportunity to do things differently, better than they have been done in the past when deploying systems to comply with new regulations. Expressing the concepts and models established under the Basel II accord with XBRL (eXtensible Business Reporting Language) makes it possible to share Basel II information in a standards-based language that can be understood consistently by systems around the world. This would allow for consistency and comparability of data with minimal effort when this information moves between banks, supervisors and the markets.
Coupling XBRL and Basel II makes good sense from a business perspective and from a technical perspective, but it will take the leadership of the supervisors and regulators to bring these two standards together for the benefit of the banking community. Fortunately, there is leadership for this cause in Europe. The Committee of European Banking Supervisors has released consultative papers recommending XBRL for both risk and financial reporting for banking supervision across the EU. Additionally, while the US has not made any public declarations about the use of XBRL for future Basel II reporting, the FDIC, Federal Reserve Board and the Office of the Comptroller of the Currency are rolling out a new XBRL-based Call Report System in October 2005 and they seem to be on the path for more broad usage of the standard.
XBRL was the brainchild of a CPA from Tacoma, WA, Charlie Hoffman. Charlie recognized that standardized data dictionaries for financial reporting coupled with a standardized electronic format for exchange would radically improve the way CPAs do their jobs and the movement of financial information throughout economies. The development of XML by the W3C paved the way for XBRL, but XML alone wasn’t enough to address the broad use cases of financial reporting.
Charlie’s prophetic vision for the standard is becoming a reality today: the technology is sound; the XBRL consortium is growing; and significant deployments are underway. One article on XBRL and Charlie Hoffman explains that ‘XBRL reduces inconsistencies – such as ambiguous terms and myriad data formats – that often necessitate manual intervention and slow financial reporting’. This is true, however, the application of XBRL is no longer limited to the work of CPAs and improving the exchange of financial statements. It has grown to become the standard for business reporting.
Europe is embracing XBRL for Basel II risk reporting because the objectives of CEBS align with the benefits of XBRL. CEBS desires to implement a harmonized framework across Europe, maintain high levels of transparency and accountability, and reduce regulatory burden. With the adoption of XBRL, bank supervisors will benefit from comparability of discrete data items, improved transparency, the ability to require pre-validation of data by the preparer against the same established set of semantic relationships that are used by the supervisor and the market resulting in reduced errors, and, most importantly, the ability to achieve these benefits with automated processes.
XBRL was designed with a sophisticated extensibility model. This model will enable each of the countries in Europe to supplement or restrict the use of the COREP data dictionaries to meet the needs of their population without breaking the supranational data dictionary. This architecture maximizes flexibility and comparability, and should reduce the reporting burden on multinational banks, as they will be able to report in consistent ways across jurisdictions.
At a recent XBRL-US event, Mike Bartell, the CIO of the FDIC, explained that: “If we are truly serious about disclosure and transparency, we need to move aggressively toward the adoption of XBRL”. The US bank regulators are definitely serious about these issues and are moving towards adoption. From 1 October 2005, all banks in the US will be submitting their quarterly call reports to the banking supervisors in XBRL. The three supervisory agencies will now share data from a common system, but the most important change with the biggest processing benefit is the requirement for pre-validation of the data. The US federal government is not implementing XBRL just because XBRL improves transparency. They are doing it because it will streamline their data consumption and analysis processes and also save them money. By implementing XBRL, they will become more efficient and free resources to do better analysis. They will also have in place flexible systems that will enable them to quickly adapt to future market changes.
Coincidentally, the ideas for both XBRL and Basel II were birthed at almost the same time. The Basel Committee released its first round of proposals for revising the capital adequacy framework in June 1999. In 1998, Charlie Hoffman engaged the AICPA to explore the development of XFRML, which has become XBRL. These two contemporaries – XBRL and Basel II – are a logical fit. Each compliments the other to deliver on the promise of a common language for communicating banking risk.