Photo: Beat Monnerat
While the financial crisis spurred widespread restructuring in an effort to maintain profits, it also gave a green light for regulators to step into the fray. What is clear nearly a decade later is that the persistent wave of regulation shows no signs of abating. Banks can no longer rely on traditional ways of working and are being forced to make hard choices about their post-crisis business models.
Indeed, regulatory authorities are now considering new measures to increase financial market stability, including requiring each bank to provide a consolidated view across all businesses and types of risk (e.g., market, credit and liquidity risk). For example, the fundamental review of the trading book (FRTB) restricts banks' capital, limits positions and curtails principal trading. As such, banks are faced with a new approach to market risk management.
Accenture sees seven issues forcing change across each jurisdiction in which financial institutions operate:
- Scrutiny from domestic regulations: Investment banks have less jurisdictional flexibility and need to solve for each set of requirements in the countries where they operate.
- Governance of legal entities: Banks need to consider how legal entities will be governed in the jurisdictions where they operate and their clients operate.
- Stricter stress testing: Banks must demonstrate comprehensive and effective risk management, with comprehensive risk reporting by legal entity.
- Capital and liquidity adequacy: Local and global regulations are forcing financial services institutions to operate in a more capital-restrained environment.
- Recovery and resolution planning: Regulators are taking steps to ensure the stability of banking operations, including establishing provisions for state takeover in the event an institution becomes insolvent.
- Separation or cessation of activities: These rules help prevent the failure of one legal entity or business line from causing systemic failure across the enterprise.
- Geography-focused finance: Banks need to consider reorienting their financial ledgers, performance management and reporting to support financial operations at the jurisdictional level.
As a result, banks must incorporate regulatory concerns into their strategic plans. Most banks have already looked at their product and client mix to allocate capital to business lines that generate appropriate returns on equity and potentially discontinue other products. But they also need to examine business lines at a regional level, choosing which ones to maintain locally, which ones to move elsewhere and which ones to gradually phase out. Key factors to consider include regulatory maturity in each market or asset class, the level of inter-regional homogenisation and opportunities for delocalisation.
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