Bad data peak

Exceptional times have resulted in a myriad of ad hoc processes. Even under stable conditions, these new processes cause significant issues for a treasurer. Married with an exceptional trading environment, emergency funding priorities and other fire-fighting activities, issues will fester into disasters, unless something is done soon. 

Treasurers, if you are reading this, well done. Your BCP plans must have paid off (or you have scrambled well) – your business has survived the initial turmoil that the markets have thrown. But don’t pause for too long…

Of course, there were things that could have been done better and things you would have improved. Your teams should focus their attention on preparing and improving your BCP but your focus should be elsewhere.

The peak of COVID-19 infections in many countries may have passed (we hope), but for your business, a different sort of peak is looming on the horizon; and this needs to be managed. With banks around the world attempting to sure up their balance sheets – raising capital, reassessing their funding requirements and still attempting some form of reporting – never before has treasury data been so valuable.

The peak of exceptions

While you have been busy implementing the BCP, front-office teams have been busy serving customers and, to enable this, forcing systems and processes to accommodate situations and eventualities that they were not designed to cope with. What this means in a banking context, is that these ‘tactical fixes’, ‘work around solutions’, ‘ad hoc processing’ or simply ‘exceptional processes’ are off-system. As a result, consumption of critical data can be masked, omitted or outright manipulated by systems’ exceptional processing (a.k.a forcing a system to do something that it wasn’t designed to do).

And this is all assuming that changes are even properly recorded and not just noted on a new Excel spreadsheet – the go-to default system… Arguably, these issues are felt most at Central Treasury.

And this is all assuming that changes are even properly recorded and not just noted on a new Excel spreadsheet – the go-to default system… Arguably, these issues are felt most at Central Treasury.

During the scramble, a wide variety of exceptions are popping up. For example, unexpected payment holidays on loans (for new subsets of customers), well-capitalised/ credited customers going into default, unexpected drawdowns on large overdrafts, break clauses on savings exercised at large volumes, creative liquidity solutions or unusual product switching – the list goes on. While we might well be, from a treasury perspective at least, in the class of ‘known unknowns’, what we can be certain of is that these unpredicted exceptions come with many issues. 

It is now more important than ever to have a clear and detailed view of your balance sheet and liquidity. Yet, the forces described here are conspiring to make this view unattainable, or at best, severely damaged. To put it another way, at the very time you find yourself most reliant upon treasury data to give you an accurate picture of your business, it is failing to do so effectively. This problem is not going away and will only get worse the longer you leave it and the closer we get to the peak- we are not there yet.

Controlling the peak

As we have seen in the responses to COVID-19, the quicker and more decisively we act, the easier this problem is to resolve. Once we hit the treasury peaks, it will be too late.

As we have seen in the responses to COVID-19, the quicker and more decisively we act, the easier this problem is to resolve. Once we hit the treasury peaks, it will be too late.

As with many things in business, the most important step is putting the right people in a room (virtually of course!) and providing them with the tools and mandate they need to develop a solution. This is an approach practiced by governments when facing uncertain and unexpected challenges; think of the UK government’s ‘COBRA’ committee – which brings together relevant experts and government officials to deal with crises as they arise. These people do not necessarily need to be the most senior individuals in your organisation, but they should be the people with the right skills and expertise to solve the problem at hand. Such a group should have five core aims as its focus:

  1. To educate front-office and product control teams on where they can help. Give them the understanding of what an exception is, the impact of those exceptions and how they should deal with them (i.e. by speaking to you before executing)
  2. Understand from FO and Product Control teams where and how exceptions will crop up and how they will, or perhaps more importantly won’t, be captured in your systems
  3. Engage with Quants to understand how well-calibrated your current models are and where any pitfalls may lie. If nothing else, this is an opportunity to refactor the sensitivities that are being applied
  4. Bring in your economists to understand the impacts of macro changes – e.g. credit impacts on probability of default
  5. Engage your regulator (of course) but don’t expect them to guide your response – that needs to be the preserve of this core team. Regulatory changes will undoubtedly come, but not in time to avoid the damage to your business. In order to survive, you should be the one driving the change.

These issues obviously will have an immediate effect on the bank, but the longer tail of impacts is bubbling under the surface.

These challenging times have drawn out exceptions – in processing systems, processing behaviours and, ultimately, people reacting before communicating and planning. These issues obviously will have an immediate effect on the bank, but the longer tail of impacts is bubbling under the surface. Left unchecked, it will infect your treasury and funding models, your credit data and your ability to understand your risk and funding positions while also causing client and audit issues.

If uncontrolled, this has the potential to cause a catastrophic failure. And, if unsuccessful in controlling, it will linger in your data for years to come. Clouding your ability to make critical business decisions and eroding the investment you made in your data prior to the crisis. In a previous article we talked about the challenges of getting data clean in order to generate a clear view of your business. Now, there is a real risk of undoing all that work.

Unlike the catalyst of these current unprecedented times, there is a cure for the ‘Bad Data Peak’ for treasurers… implement the steps and communicate with your teams to regain stability and integrity. We can help, talk to us today.