The push to adopt a system to ensure that the legal entities involved in financial transactions are properly identified is an important move, but the benefits will take time to realize, says Fitch Solutions in a new report.
Fitch says that the introduction of global legal entity identifiers (LEIs) in March, is “a critically important step,” that will make it easier to assess risk, and oversee firms and markets.
“LEIs will provide many benefits, such as improved data aggregation and analysis, making it easier to combine and verify data within individual firms to support micro- and macro-prudential risk assessment,” it says. “They will also facilitate enhanced regulatory supervision through improved information-sharing about legal entities between regulators and across borders. This is key for cross-border firms, whose business lines are overseen by multiple regulators.”
In turn, this should lead to lower operating costs for banks, it says, which will be able to save costs currently incurred due to the processing of non-standard, faulty, or duplicated data. However, it cautions that it may take some time to actually realize these benefits, and that firms will incur transition costs.
“We expect the transition to be slow and potentially difficult where benefits may not be felt for a considerable time,” it says. “Ultimately, the full extent of these benefits will only be realised when the LEI has been shown to be functional and effective and regulators, with a combined critical mass of entities within their jurisdictions, mandate their use.”
Fitch also notes that financial firms will need time to conduct the mapping exercises and system upgrades. “The ability to quickly and efficiently map LEIs to a proprietary universe of entities will vary by institution. Quality of existing entity reference data will be critical,” it says. “This process is likely to represent a manually intensive and/or costly process and there are likely to be coverage gaps and inconsistencies across market participants for at least the short term.”