The Beauty of BCBS 239

BCBS 239 is the commonly-referenced name of a publication released in January 2013 by the Basel Committee on Banking Supervision (a committee of the BIS, or Bank for International Settlements). Its full title is "Principles for effective risk data aggregation and risk reporting".

The publication, which is 28 pages long is available here:
http://www.bis.org/publ/bcbs239.pdf

If you work in a large bank and are not familiar with BCBS 239, it may behoove you to read it.  If you work in risk management, data warehousing or compliance, you're probably already familiar with it.   But if you work in the back office, middle office, or a business line and are struggling with the challenge of unavailable, incomplete, or undocumented data, BCBS 239 can be an important tool in getting your requests taken seriously by your institution's executive management, or data management and IT bureaucracy.

Who wrote BCBS 239?
BCBS 239 was written by a committee of representatives from the financial regulators in 13 countries.  That includes the FRB and OCC in the US, the FSA in UK, and the JFSA and BOJ in Japan.  If you work in a large financial institution, you probably already know the influence these groups have over the project portfolio and purse-strings of your bank.

What does BCBS 239 say?
BCBS 239 lays out 14 principles about risk data, summarized in 4 groups, and further subdivided into 89 paragraphs.  There is a summary of the principles in annex 2 of the document.  But I found that some of the most interesting and useful language is in the detail itself.

BCBS 239 is surprisingly direct in saying what many line-level practitioners have been saying and thinking for years: it shouldn't be so damned hard to get the information I need from my bank's systems on a daily basis.  And I should be able to depend on the accuracy and completeness of that information.  Unfortunately, in today's world of split-second searches over billions of websites and self-driving cars, that is not the reality in most large financial institutions.

BCBS spells out principles that should be no-brainers.  But they are often not followed today.  It's good that the authorities have spelled them out, so that they can be used as ammunition by business users who actually need good data to get a job done.

Here are some of my favorite "no-brainers" that I'm glad to see confirmed by the committee:

• "Controls surrounding risk data should be as robust as those applicable to accounting data."(Principle 3 Accuracy and Integrity, paragraph 36a).  
• "Risk data should be reconciled with bank's sources, including accounting data where appropriate, to ensure that the risk data is accurate." (Principle 3 Accuracy and Integrity, paragraph 36c).
• "Supervisors expect banks' data to be materially complete, with any exceptions identified and explained." (Principle 4 Completeness, paragraph 43).

To me this means a bank must allocate and hold accountable actual staff to make sure the data in the data warehouse is correct and reconciled.  Plenty of staff.  Think how many people are dedicated to making sure the accounting data is correct: Comptrollers, Sarbanes-Oxley compliance people, internal auditors, etc.  And the "risk data" is arguably more varied and complex than accounting data.

• "A bank should establish integrated data taxonomies and architecture across the banking group...."  (Principle 2 Data architecture and IT infrastructure, paragraph 33)
• "A bank should develop an inventory and classification of risk data items which includes a reference to the concepts used to elaborate the reports." (Principle 9 Clarity & Usefulness, paragraph 67)

In other words, the data in the warehouse needs to be well-organized and documented--not just a mish-mash of incompatible records from different source systems.

• Principle 6 Adaptability – A bank should be able to generate aggregate risk data to meet a broad range of on-demand, ad hoc risk management reporting requests, including requests during stress/crisis situations, requests due to changing internal needs and requests to meet supervisory queries.
• "A bank should routinely test its ability to produce accurate reports within established timeframes, particularly in a stress/crisis situation." (Principle 10, Frequency, paragraph 70)
• "Some position / exposure information may be needed immediately (intraday)...." (Principle 10, Frequency, paragraph 70)

In other words, it's not acceptable for IT to demand a project and special budget just to produce some reports for the business.  The data must be available and usable in advance.

Conclusion
For years, those of us who work on the ground in financial institutions have heard statements from data practitioners about the strategic importance of data, and read vague statements of policy and principle from our data and IT organizations.  But at the same time the actual data we see is often incomplete, poorly organized, or inaccurate, and the day to day tasks needed to clean up the mess are never prioritized.

BCBS 239 is a clear and straightforward document that tells G-SIBs and other financial institutions to actually use 21st century technology to deliver practical results.  While it may be a challenge to implement at most banks, it is a challenge whose time has come.

The Quandary of Air Conditioning

Article: New York Times, The Cost of Cool by Elisabeth Rosenthal

Here's another vicious circle for you: as the populations of tropical developing nations move into the middle class, they will demand air conditioned homes, offices and cars, just like Americans do.  This will  contribute to global warming, which will further increase the demand for air conditioning, until... What?

Elisabeth Rosenthal's article is informative and thought-provoking.  It does not simply bash our decadent comfort-seeking life-style, but notes that air conditioning brings benefits for our health and productivity, and seems to be a requirement for modern knowledge workers, especially in hot climates.  This is a quandary, for which there is no simple obvious solution.

One more thing to puzzle and worry about...

http://graphics8.nytimes.com/images/2012/08/19/opinion/19rosenthal_chart/19rosenthal_chart-custom1.png

World Jewish Population

Very interesting special special report in this week's Economist on Judaism and the Jews, including the graphic below.  The total Jewish world population of 13.6 million is similar to that of the country of Zambia, or the city of Karachi, Pakistan.

from The Economist magazine www.economist.com

OECD Announces Slower Growth in Second Quarter: 0.2%

OECD Press Release: http://www.oecd.org/dataoecd/42/9/48539187.pdf

Yesterday the Organisation for Economic Cooperation and Development, which represents 34 countries, announced that GDP growth among these more developed economies had slowed to 0.2% during the second quarter, down marginally from 0.3% during the first quarter -- a very anemic growth rate overall.

Although latest rates were not announced for all of the OECD countries, I made the following chart, with the countries sorted by GDP size, to get a picture of growth on a per-country basis.

data from www.oecd.org

According to this data, the following countries had negative economic growth:

• Japan
• Australia*
• Norway*
• Portugal*
• Denmark*

* Based on Q1 data

Fossil Fuel Production and Use: Lots of Fun With Charts

This chart is a combination of three that I posted previously which give an overview of which countries produce and consume the most coal, oil and natural gas.

To make the above chart, I had to convert the coal, oil and gas numbers--which were denominated in short tons, barrels per day, and cubic feet--into the common unit of BTUs (British Thermal Units).  Arriving at the conversion factors can be a fairly technical exercise, of which there is good discussion here: http://www.aps.org/policy/reports/popa-reports/energy/units.cfm

I used the following factors, which were suggested as averages:
Oil: 1 barrel = 5.8 MBtu
Coal: 1 short ton =  25.2 MBtu
Natural Gas: 1 cubic foot = 1000 Btu

Global Natural Gas Production and Consumption

Over the last couple of weeks I published charts based on data from the U.S. Energy Information Administration that showed various countries' production and consumption of coal and oil.  Today I turn to the third fossil fuel, one which is gradually growing in importance in the U.S.: Natural Gas.

Natural gas is a resource which is mainly used for heating homes, industrial uses, and electrical power generation.

The chart shows that the U.S. and Russia are the largest producers of natural gas.  Russia exports a great deal of natural gas, while the U.S. consumed slightly more than it produced in 2010, although this may change in coming years, as the U.S. taps its huge supply of unconventional shale-based natural gas.  China is a surprisingly modest consumer of natural gas, and instead has an over-sized reliance on coal.

Petroleum Consumption and Production: More Fun with Charts

Do we really consume that much oil?

Last Thursday's post Global Coal Consumption and Production: Fun with Charts made one conclusion unmistakably obvious: China uses several times more coal than any other country.

Today I used more data from the U.S. Energy Information Administration to make a chart representing global petroleum consumption and production, and the conclusion is different, but just as obvious.  The U.S. uses a lot of oil -- also several times more than any other country.

Just to sniff-test the numbers a bit: the data says the U.S consumes about 20 million barrels of oil a day.  At $80 per barrel, this comes to $1.6 billion per day, or over $500 billion per year.  Is this right?  Guesstimating a little more, we know that in the U.S., the primary use of oil is to make gasoline, which is mainly burned in cars.  Out of a population of 300 million Americans, if 100 million spend an average of $10 on gas each day, this comes to $1 billion every day, without even counting other uses of petroleum.   From another perspective, Exxon Mobil reported $384 billion in revenue in 2010.  Based on this, the figures in the chart look "reasonable".  And we do use an awful lot of oil.

Global Coal Consumption and Production: Fun with Charts

There is a lot of interesting data freely available on the web.  The data I used to produce the below chart comes from the U.S. Energy Information Administration, which is full of data, statistics and reports on the United State's and world's energy usage.

This time I have concentrated on coal, an old-fashioned and dirty energy source, which is still hugely important in the economic activities of much of the world, including the USA.

The sky-blue and burgundy bars on the chart represent total production and consumption of coal, in billions of tons, and match up to the left-hand scale.  The orange line represents the net over or under-production of each country (ie, production minus consumption), and matches up to the right-hand scale, which is in hundreds of millions of tons.  The graph does not include all of the countries that are in the EAI database; to make it legible  I only selected those that had some kind of significant production or consumption of coal.

So what can we glean from the above?

• China is by far the largest producer and consumer of coal in the world.  In fact, I had to scale back the size of China's bars in order to keep them from making the smaller countries' unreadably small. 
• China is relatively self-sufficient when it comes to coal, but for the last couple of years have had to import a small percentage of their demand.  Because of the huge size of this demand, it has led to economic opportunities for countries such as Australia and Indonesia.
• India appears to be a similar story to China, on a smaller scale, though with an even larger coal "deficit" than China's.
• USA, which gets about 50% of its electricity from coal, is the second largest producer and consumer, but still less than a third of China in both production and consumption.  In recent years it has gone from being a net consumer to being a net producer.
• Besides India and China, the largest net consumers of coal are the developed export-led economies of East Asia --Japan, South Korea and Taiwan-- which consume moderate amounts of coal but have virtually no production of the mineral.
• The developed countries of Western Europe -- including Germany, France, UK, Italy, Spain-- are all net importers of coal, with modest consumption but very little production, though  Germany, which produces and consumes more than the others is a bit of an exception.
• The largest net producers (exporters) of coal are: Australia, Indonesia, Russia, South Africa, Colombia, Vietnam, Kazakhstan, USA and Canada.
• I had some difficulty arriving at absolute dollar equivalents for the tons of coal represented here.  I read that coal prices are relatively stable, but can vary greatly depending on the type and grade of coal, and the location and method of shipment.  To get a ballpark figure, we can put a value of $20 on each ton of coal, which basically implies flows in the tens of billions of dollars for the largest markets.

Advances in Facial Recognition Technology

Articles:
The Economist, Face Recognition: Anonymous No More
The Wall Street Journal, Face-ID Tools Pose New Risk, Julia Angwin

from HuffingtonPost.com

Imagine if you could instantly find out the name and identity of a stranger on the street simply by taking a photo of his or her face.  Imagine if you could take a photo of a roomful of people, upload it to your computer, then run software which would give you a list of names, home towns, birth-dates, and possibly even Social Security numbers.  It appears that in the not-so-distant future, using Facebook and commercially available facial recognition software, this could be a reality.

The two above articles refer to a study done at Carnegie Mellon University by Alessandro Acquisti, Ralph Gross and Fred Stutzman, in which they were able to identify faces with 30% accuracy, using PittPatt facial recognition software to compare them to faces on Facebook profiles.  This modest success rate is sure to improve as facial recognition software and overall computing power improve, and as the use of social networks becomes more ubiquitous.  And this is just with freely available commercial software: who knows what police and security forces are capable of doing today?  Will we see the end of privacy and anonymity in our lifetime?  Is this something to be concerned about, or just one more feature of modern life?  Or is the sad reality that for most of us who are not wanted criminals, celebrities or great beauties, no one would bother trying to identify us anyway?