Responding to regulation:
the future
Banks are generally moving from the evaluation of regulatory initiatives to
implementation, albeit at different speeds and from different starting points.
T
hat is why, in this year’s report, we focus on four key
areas where regulation, combined with other pressures,
is forcing banks to make changes. These are structure;
conduct and culture; data and reporting; and risk
governance.
The emerging regulatory requirements – including structural reform,
conduct, governance and the possible emergence of ‘Basel 4’ – are
game-changing. The banking industry’s existing business models will
in large part have to be discarded. There are likely to be losers. The
winners are likely to have been relentless in how they have faced up to
and implemented the change required.
The relentless march of the regulatory reform agenda continues. The
‘more (and more) of everything’ series of regulatory initiatives seems
unlikely to abate and will continue to radically reshape the banking
sector, in particular in Europe.
The waves of regulation are swirling around banks more rapidly
than many can manage. This raises the prospect that there will be more
casualties before the financial crisis is over. Successful banks will be
those who can keep ahead of the storm by meeting the demands of
customers, investors and regulators.
THE FINANCIAL STABILITY LANDSCAPE
The first set of challenges for banks, on which this report focuses, is to
meet the current and prospective regulatory requirements on capital,
liquidity and recovery and resolution planning. Banks caught in the
headlights of Basel III implementation may miss the wider picture
here, as Basel III transforms potentially into a ‘Basel IIII’ as a result of
tougher requirements on the leverage ratio, risk-weighted assets and
stress testing.
The European Central Bank will undertake its Comprehensive
Assessment of major banks in the European Banking Union, which
may identify further capital deficiencies. Resolution planning will
require banks to issue bail-enable long-term debt and increase their
funding costs. All of this implies further deleveraging or capital raising.
The report then considers four areas where a combination of
regulatory and other pressures is forcing banks to reform their strategy;
business and operating models; governance and culture. This will have
significant impacts on the customers of banks.
STRUCTURE
Regulatory requirements will force radical structural change, including
the split of global entities into a patchwork of smaller locally or
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separately regulated subsidiaries. Many banks have already begun
to revise their legal entity structures and to reduce and restructure
their balance sheets. This, combined with the impact of ‘Basel 4’, will
dramatically increase the cost of doing business.
Addressing the myriad regulatory and legal, compliance, capital,
liquidity, funding, tax and governance considerations is a complex,
multi-dimensional issue. But, in addition, banks must also consider the
operational complexities. These complexities are often not considered
until the implementation stage, but they can themselves preclude any
number of options, or can increase the cost or lapsed time such that
some options become unworkable.
CONDUCT, MARKETS AND CULTURE
Much banking practice historically has been ‘product push’ – focused
on the desire to sell rather than a more thoughtful view of what would
best suit the needs of the customer. This has led in retail banking to the
various mis-selling disasters of recent years, and in wholesale markets
to the significant and widespread market abuse issues.
From a reputation perspective, this has been a disaster for the banking
industry. Financially, H\