Among the many impacts of the 2008/2009 financial crisis were heightened regulatory requirements for banks and financial institutions, aimed at increasing transparency and accountability. One outcome of these new rules is that banks submit an annual Recovery and Resolution Plan (or SR 14-1).
With the intent to protect the economy and ensure the industry can withstand future crises, these new regulations have saddled banking institutions with the onerous task of accounting for hundreds of thousands of contracts within their annual plans. Creating this documentation is often challenging—if not impossible—to complete manually, and contract analytics is the missing link to succeeding at this massive task.
Keep reading to understand what financial institutions are required to do under these new regulations, why manual processes won’t cut it, and how contract analytics can dramatically improve the ease of compliance.
What is SR 14-1, and What Does it Mean for Banks?
In 2010, in the wake of the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Acts were introduced. Under regulation SR 14-1, banks and major financial institutions are required to submit an annual Recovery and Resolution Plan, which includes the following mandatory information:
- Information on all third-party contracts, including provider and service details, legal entities that are parties or beneficiaries of such agreements, and other key contractual information.
- Service-level agreements.
- All documents related to property, technology systems, and software and intellectual property.
- Legal records for domestic and foreign entities.
- Information on other financial commitments, guarantees, and cross-holdings.
The goal of this documentation is to ensure that banks can demonstrate how they can withstand a crisis without jeopardizing critical services and transactions that could have economic ripple effects. As such, these regulations affect all so-called systematically important financial institutions (SIFI), including banks, insurance companies, and other entities whose failures could be large enough to trigger a financial crisis.
The Risk of Non-Compliance
For large financial institutions, compiling details of this breadth requires contract analysis across tens of thousands of documents and millions of pages. But despite the vastness of the task, it’s in the interest of organizations to comply.
Upon submission, resolution plans (also known as living wills) are graded by the Federal Reserve and Federal Deposit Insurance Corporation. If these bodies do not believe the documentation provided shows adequate compliance and preparedness, the matter may result in an immediate review, of which further failure to comply or provide a satisfactory response can result in significant fines and even the inability to pay out dividends.
These potential consequences run the double risk of being both costly up front and also inflicting long-term reputational damage that can have further financial impact.
An Impossible Task?
Given the vast and dispersed nature of organizational data, pulling together a contract risk analysis of this level would seem to be an insurmountable task. Most enterprises have contracts dispersed over a huge number of repositories, fileshares, servers, and other stores, existing in so many different formats that even cataloguing these documents (much less extracting the needed information) is a challenge that would overwhelm any team.
Meanwhile, attempting to pull and prepare the required data manually is an incredibly risky proposition. Not only would organizing and sifting through this level of information be a time-consuming challenge, but processing it all manually is a highly complex and error-prone task, requiring deep specialized knowledge and subject matter expertise.
Contract Analytics: The Missing Piece
Though this task may seem daunting, the utilization of data management systems that can standardize and organize high volumes of contracts, paired with technologies capable of readily delivering key data, is a crucial tactic in preparing living wills. A task of this magnitude has numerous technological requirements:
- Hundreds of thousands of documents must be ingested and standardized, regardless of their format or where they are stored.
- Contracts must be categorized by criteria, including type, region, and party.
- Duplicate data must be identified and eliminated.
- Rules-based workflows need to be applied so that relevant data may be extracted into useable summaries, with dashboards to display and simplify key information.
- For long-term ROI, including future resolution planning, contracts must be stored in a repository where they can be accessed for future analytics.
Together, a solution capable of performing these steps allows organizations to overcome the key challenges associated with SR 14-1 planning, enabling the automation of a greater proportion of the preparatory work. Though for a task of this magnitude, human intervention and expertise will still be required, the application of contract analytics can shrink workflows from years to months, with even greater efficiencies in future cycles.
Though intended to reduce the risk of future global financial crises, the documentation requirements of SR 14-1 place an enormous burden and risk upon organizations. The application of contract analytics has the potential to dramatically improve the accuracy and efficiency of compiling recovery and resolution plans, lowering the risk of costly fines and other consequences and easing the process moving forward.