1.0 Look Beyond the Necessary to the Useful 1.1 Regulatory Reporting Systems This research will examine the drivers pushing the acquisition or upgrade of regulatory reporting systems involved with statutory reporting of financial conditions and economic status as well as general financial disclosure for publicly traded banks. Interfaces between the general ledger and related accounting systems collect information from the general ledger and related accounting systems to enable central bank monitoring of the firms and all constituent legal entities:
- Regulatory capital to ascertain the safety and soundness of the bank, both overall and at the individual legal-entity level
- Systemic risk in the banking and financial systems
- The effects of monetary policy (measurement and operations)
- Cross-border flows (individual exposures and position of countries)
Statutory reporting of this sort consists largely of financial data drawn from profit-and-loss, balance sheets and cash-flow statements, comparing current financial performance with that of prior periods or against a model. 
Gartner believes that the next wave of "must do" system upgrades in the banking industry will be the replacement or adoption of regulatory reporting systems, especially those involved with statutory reporting of financial conditions, economic status and general financial disclosure for publicly traded banks. In general:
- This is a worldwide trend. Pressure to upgrade will be felt most directly by banks with uncoordinated, yet time-sensitive reporting obligations in multiple national jurisdictions, and a need to represent a single, unified image of the truth.
- The situation is complicated by the rising need to meet demand for financial performance-related data from nonregulatory stakeholders.
- Further, bank managers require more-comprehensive and more-detailed sets of management reports, in the style and format of the external financial statements, but richer in content (for example, budget and forecast data) and complexity (for example, a product's or an organization's hierarchies).
Compliance is a key managerial competency and mission-critical function. In some cases regulatory or reporting violations can lead to revocation of the institution's charter to operate, confiscation of capital and the incarceration of managers. In general:
- Banks understand their "home turf" well, and have historically been highly influential in the development of public policy related to their regulation. The roles and requirements of governmental regulators are well known, highly publicized and widely discussed well in advance. Emergencies excepted, it would be difficult in most countries for a bank to pay so little attention to events as to be totally surprised by new regulations in the main area of its operations. Even regulations as sweeping as the 2009 U.S. "New Foundations" proposals are firmly rooted in international agreements, public speeches, and prior legislative attempts.
- Banks face literally hundreds of regulations and reporting requirements in each jurisdiction in which they operate and have shown limited skill in predicting how local politics will be embodied in banking regulations. Gartner's interaction with its customers over the years has shown that most lack the skills and staff necessary to track public policy development until very late in the process. Further gaps exist in translating the regulations into bank policies, procedures and new technology.
This situation has driven multiple generations of specialty applications focused on the tracking and reporting compliance efforts. Most are invisible outside of their niche. Some, though, can make an underlying contribution to the inherent manageability of the institution that will rebound in unexpected ways. Their output can be mission-enabling and enhancing for a wide range of other applications.
2.0 Other Consumers of "Regulatory Information" 2.1 The Nongovernmental Regulators Banks are further embedded in a poorly understood web of stakeholder expectations and ad hoc demands for information from a vast complex of outside interests (see Figure 1). Nongovernmental stakeholders — anyone who has a fiscal or emotional (including ideological and regulatory) interest in the future of the bank — worldwide are acting as "informal regulators" and have stepped up demands for transparency, auditability and accountability relating to matters of their immediate concern. Figure 1. Consumers of Regulatory Information 
Source: Gartner (October 2009)
Because of this, focusing compliance and reporting efforts purely on government regulations is a formula for disaster. Many individuals and organizations feel they have the duty — and even the right — to demand accountability and to influence organizational behavior, and to demand compliance with their positions. Meeting the information needs of powerful constituencies can be costly, time-consuming and distracting.
2.2 Past Approaches Are Maladaptive The standard approach to selection of reporting and compliance tools (often summarized as "find the cheapest solution that gets us past the national regulatory threshold") will yield results that may not be in the bank's best long-term interests. Rather than being tightly focused on local regulatory requirements, we suggest that banks focus proactively on the underlying need to improve transparency, speed, analytics and ad hoc reporting to serve stakeholders. If banks can get the right information to the right place at the right time to meet internal management concerns and the demands of stakeholders, compliance reporting will become routine. With this research, Gartner will use the STEEP macroenvironmental framework to expose hidden drivers that should influence the selection process and strategy of regulatory reporting systems. We will provide a general framework for understanding the market forces surrounding regulatory reporting systems and present some policy/strategy implications of these drivers on their decision criteria.
3.0 Macroenvironmental Drivers Macroenvironmental drivers are independent, uncorrelated, imprecisely aligned, and largely outside the control or influence of market participants. The drivers will vary in force, urgency and prominence, based on jurisdiction and local culture, representing long-term stable trends and tendencies that often change so slowly as to be thought of, if at all, as immutable laws of nature. All must be balanced to optimize outcomes and avoid wasteful duplication of functionality. The specific drivers suggested represent the types of considerations that should be added to the selection of a reporting system.
This driver comprises the civil society in which the bank operates, including demographic considerations, education levels, attitudes toward businesses, societal trust, mobility between social classes, values, ethics and religious traditions. These are invisible to most analysts, as they are the tightest part of the "box" they must look outside of when "thinking outside the box." Societal trust (for these purposes, how widespread and in what way belief in the honesty, integrity and reliability of others is expressed) is a key factor in the latitude banks are granted by regulators to determine their own actions. In general, there is an inverse relationship between societal trust and degree of regulation.
3.1.1 Key Trend: Banks and No Trust This driver of increased demand for reporting is shaped by societal distrust of banks. Recent U.S. national surveys, for example, show a continuing decline in public trust in banks as institutions. Consumers indicate that their views of banks are linked to economic problems, in general, and the sharp downturn in familial net worth starting with the 2005 real estate downturn. There will be increasing pressure on banks to demonstrate that data is accurately gathered, processed and transmitted without the opportunity for mischance or manipulation. Gartner notes, however, that regaining trust — especially at the consumer level — is not just about more reporting. Figure 2 shows consumers' responses — segmented by age group — in a May 2009 Harris poll. Respondents were asked if they considered banks to be honest and trustworthy in the sense that they would normally believe a public statement from a bank's employee. Figure 2. Consumer Trust of Banks by Age Group 
Source: Harris Poll (May 2009)
Figure 2 shows consumer responses in a June 2009 Gallup poll when they were asked how much confidence ("a great deal," "quite a lot" or "very little") they had in banks. The trend line tracks the total of responses indicating "quite a lot" and "a great deal" over a 10-year period starting in 1999. Figure 3. Public Confidence in Banks, 1999-2009 
Source: Gallup "Confidence in Institutions" poll (June 2009)
3.1.2 Key Trend: More Demands to Be Met One key trend of immediate concern is the rise of nongovernmental regulators. Stakeholders — anyone who has a fiscal or emotional (including ideological and regulatory) interest in the future of the company — often have the opportunity, and sometimes the unquestioned right, to access or influence all or part of a financial services provider's resource allocations — the bank's strategy. These highly influential parties may be requiring analysis at varying levels of granularity, combining factors differently, and requesting additional supplemental data not required by other parties. Focusing a search for reporting systems solely on compliance-related issues will fail to capture the full range of usefulness for these products in meeting the needs of other parties.
3.1.3 The Impact of This Driver on the Selection Decision The combined impacts of low trust and increased demands for information should increase the need for reporting tools that can both generate required submission-ready reports for all jurisdictions in which the bank operates and enable management to respond swiftly to ad hoc demands for information on more granular aspects of bank operations. Banks will not swiftly regain societal or consumer trust. Equivocation or errors in reported results will swiftly damage the bank's reputation and raise consumer concern about its safety.
3.2 The Technological Driver This driver comprises the impact of technology on the fulfillment of corporate objectives.
3.2.1 Key Trend: The Slow Rise of XML-Based Reporting This driver is most clearly seen, at present, in demand for regulatory reporting, where XBRL (an XML-defined standard for tagging financial and other business performance information) tagging of data elements facilitates automated data validation, processing, analysis, comparison and distribution. To date, regulatory and tax agencies have been among the most aggressive adopters of XBRL. Thirty-three countries, including most major economies, have or are establishing local XBRL jurisdictions. To the extent that multiple regulators request the same information, it enables their needs to be fulfilled from a single source document. While XBRL adoption is currently looked at as an unfunded compliance-related mandate on the IT department outsourced in some cases with other accounting details, it has the potential to dramatically improve transparency for internal corporate consumers of financial information, thus speeding decision makers, and increasing both agility and resilience.
3.2.2 Key Trend: Electronically Enhanced Agility Gartner defines "agility" as the organizational ability to sense and respond effectively and efficiently to environmental change. Immediate access to highly reliable real-time performance data, as provided by the newer reporting tools, can significantly increase decision-making speed, strengthen negotiating positions and improve management understanding of potential operational risks. Conversely, improved access to regulatory reports of company data by competitors and investors decreases the ability to use surprise as a tool.
3.2.3 The Impact of This Driver on the Selection Decision Adoption of XML-based regulatory reporting tools improves transparency for all, including competitors. Significant efforts will have to be made to ensure that information "traditionally buried" in obfuscatory footnotes does not achieve unintended prominence when reported accurately. Banks should expect efforts by regulators and investors to control and limit the use of private XBRL taxonomies for reporting purposes to news they issue. For regulatory reporting, the taxonomies are dictated by the regulators, so these are not private. Significantly, however, the Securities and Exchange Commission (SEC) is allowing filers to create their own extensions, something no other regulator has done.
This driver includes not only current economic conditions, but the distribution, velocity and degree of central control of resources used by and passing through the society in which the bank operates. This includes cultural attitudes as to whether the economic transactions in which banks participate are considered a positive-sum (both sides win), a zero-sum (for every winner there is an equal loser or group that has lost) or a negative-sum game (either both parties involved lose, or society, as a whole, loses).
3.3.1 Key Trend: "Down" Is a Relative Thing Gartner projects that economic conditions will continue to fluctuate for banks — at least in the U.S. — through 2012. Gartner's most likely forecast for global IT spending this year has been revised down to -3.8% annual growth in U.S. dollar terms.
3.3.2 Key Trend: The Urge to Merge The economic outlook will be further shaped by regulator-led merger and acquisition activity, plus opportunistic activity by stronger banks. In the U.S., the Department of Justice, which regulates competitive activities, expects bank mergers to increase in the second half of 2009 and further into 2010.
3.3.3 The Impact of This Driver on the Decision Criteria Economic conditions in the banking industry are mixed in 2009, with no clear consensus on current conditions, much less potential outcomes. In many markets, only technology products offering immediate or very-short-term return on investments are being considered for adoption, and even function-rich upgrades are being set aside until profits improve. Compliance-related functionality that can be duplicated by existing software, provided by manual labor or flat-out demanded as a no-charge service upgrade from accounting firms seems to be languishing, unless a clear, short-term return on investment or other strategic gain can be demonstrated. Facing the same conditions, other banks are boldly launching multiyear system upgrades. Gartner expects the only clear influence of this driver will be that banks will pay unusually deep due diligence to the financial condition of mission-critical suppliers in general, especially software providers.
Gartner breaks IT-related ecological issues down into "green," "lean" and "corporate social responsibility" (CSR) components, because they are separate issues requiring distinct — if interlinked — resolution plans. The required behavior for success in any of them may raise difficulties in either or both of the other goals. This will require careful planning and tracking to ensure that conflicting demands are tracked and analyzed, so that progress against one set of expectations is not offset by increased problems in another.
3.4.1 Key Trend: The Evolving Need to Differentiate Between and to Support Green, Lean and CSR Expectations Reporting banks face increasing pressure from regulators, investors and other stakeholders to show that they are operating in a publicly acceptable, nonexploitative and sustainable manner, while meeting all regulatory standards and service-level expectations:
- Green drivers include requirements to operate in an "environmentally sustainable manner." An example would be the need to report the percentage of lending into "environmentally sensitive" areas, in support of favored industries, or toward officially promoted activities, or the ability to report the percentage of profits derived from clean energy.
- Lean drivers include the need to reduce the cost of operations, especially expenditures for natural resources, such as energy for data center operations and cooling.
- CSR drivers include an ever-shifting set of social themes requiring banks to exceed legal performance requirements relating to business ethics, corporate contributions, community development, corporate governance, diversity, environmental policies, human rights and workplace issues.
3.4.2 The Impact of This Driver on the Selection Decision The ecological drivers will enhance the need to reuse and augment regulated data with unprecedented flexibility and absolute reliability. A mistake on a government form might mean a significant fine, but a mistake in meeting the demands of a social activist could result in massive, years-long blacklisting without the right of appeal and permanent enshrinement in Web archives as an "eco-bashing," noncooperating entity. While moving to a "single version of the truth" and filling all information needs from that source, rather than by running separate and distinct reports, should, in theory, result in less demand for data processing (thereby reducing expenditures for heating and cooling), claims that it is working in practice should be viewed with skepticism. Vendor-supplied case studies documenting reduced demands on IT resources experienced by bank users of their regulatory reporting system should be viewed with deep interest and skepticism, unless conducted by third parties with widely recognized domain expertise.
3.5 The Political/Legal Driver Historically, this driver reflects the shifting power relationship between business and government, and reaches far beyond any particular piece of proposed legislation. Essentially, it asks "who calls the shots?" Presently, the pendulum has swung toward increased governmental control over business activities, in most Western countries, though this varies by jurisdiction. For banks, Gartner expects this to be seen most vividly as increased demand from governments and their supporters worldwide for stronger oversight and scrutiny of banking operations (see "The Challenges of Managing Bank IT Under Government Control").
3.5.1 Key Trend: Global Banking Re-regulation In the U.S., the administration of President Barack Obama maintains that regulation has not kept pace with financial innovation, rendering regulators unable to track or prevent the massive buildup of risk in financial markets, leading to unseen pockets of systemic risk. Obama has proposed establishing a new Financial Services Oversight Council with broad authority to collect information about activities in financial markets that may pose a threat to financial stability. All would require increased, if not improved, regulatory reporting. The European Union is reportedly expected to propose extensive re-regulation of the banking industry in 4Q09, perhaps rolling out in 2012. While not mandatory, the common reporting and financial reporting guidelines jointly driven by the Bank for International Settlements (BIS), the European Central Bank, the Committee of European Banking Supervisors (CEBS) and the International Accounting Standards Board (IASB) are planned to reduce the cost of cross-border supervision by adopting member states, as well as reducing the compliance reporting costs for banks themselves by establishing uniform minimum data-reporting standards.
3.5.2 Key Trend: The End of "Shopping for Regulators" As part of its New Foundations banking proposals, the Obama administration has called for increased intergovernmental cooperation and consistent regulatory standards across national boundaries, and has raised the specter of a new, third Basel accord. Recent efforts by the G-20 have ensured that the major economic powers are at least "pointed in the same direction," on the journey toward coordinated regulation, but the starting times, planned speed of advance, route details and sense of urgency vary widely. It is unrealistic, at best, to expect a regulator to place a higher regard on the needs of outsiders than on those of its own national leadership and constituencies.
3.5.3 The Impact of This Driver on the Selection Decision Banks must be prepared to face increased reporting requirements at deeper levels of granularity (and potentially at higher taxation) in each jurisdiction where they have any presence at all, and they must integrate output from multiple data sources, general ledgers and transaction systems. Demands for data will change over time, placing a premium on suppliers with staying power in jurisdictions worldwide and the ability to generate acceptable reports with limited notice. Look for systems with flexibility, extensibility, and the ability to be rapidly and simply upgraded or modified.
Excellence in regulatory reporting adds neither to profits nor to stakeholder value. Gartner recommends that banks reach beyond fulfilling their immediate, but constantly changing, needs to expedite multijurisdictional statutory reporting, and look for tools that will enable the strategic usage of economic self-knowledge. The improved transparency, speed, analytics and ad hoc reporting provided by adopting and mandating the internal use of dedicated regulatory reporting tools will improve organizational agility and speed decision making by reducing the time it takes for management to access accurate, timely data and act in their stakeholders' interests.
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