The new regulatory environment:
a global retail bank view
Santiago Fernández de Lis
FIBI Conference, Dublin,14 May 2014
Section 1
Regulatory trends
Section 2
Global view: BBVA’s MPE strategy
Section 3
European view: BBVA’s SPE strategy
Sectio...
Section 1
Profound regulatory reform as a response to the crisis
Financial instruments
Structural reforms
Basel III
OTC De...
Return on Equity, RoE
Source: BBVA Research based on IMF
Profitability of the banking business:
challenging in developed c...
Section 1
Global regulatory trend
Section 2
Global view: BBVA’s MPE strategy
Section 3
European view: BBVA’s SPE strategy
...
Page 6
Section 2
BBVA is a global multinational group with strong
presence in emerging markets
North America
• USA
• Mexic...
Page 7
Section 2
The Decentralised Subsidiary Model
Stand-alone entities with their own capital and liquidity management
L...
Page 8
Section 2
Pros & Cons of Decentralised Subsidiary Model
Lower economies of scaleLower economies of scale
Lower capi...
Page 9
Section 2
Decentralised Model: consistent with MPE resolution
Resolution
MPE resolution strategy
Resolution
SPE res...
Page 10
Section 2
Strong resilience and less contagion
Firewalls
between
different parts of
the group work
in both
directi...
Section 1
Global regulatory trend
Section 2
Global view: BBVA’s MPE strategy
Section 3
European view: BBVA’s SPE strategy
...
Section 3
Fragmentation is incompatible with the Euro
Composite measure of EZ financial fragmentation*
Source: BBVA Resear...
Section 3
Banking union at a glance
• ECB as the ultimate
responsible for all
Eurozone banks
• ECB to direct supervise
top...
Page 14
The agreement on a Single Resolution Fund is an
important step forward…
Section 3
Banking union
Banking union is d...
Section 1
Global regulatory trend
Section 2
Thinking global: BBVA’s MPE strategy
Section 3
Thinking Europe: BBVA’s SPE str...
Page 16
Section 4
Structural reforms
New barriers to
universal
banking
New barriers to
universal
banking
Activities separa...
Section 4
Banking future, digital banking
There are already new competitors and not only in payments but
also in the core ...
Final remarks
Page 18
1. Banks are under the burden of increasingly heavy regulation. Ring fencing trend is worrying, espe...
Thanks!
Santiago Fernández de Lis
sfernandezdelis@bbva.com
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The new regulatory environment: a global retail bank view

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Regulatory trends.
Global view: BBVA’s MPE strategy.
European view: BBVA’s SPE strategy.
Upcoming challenges.

Published in: Economy & Finance, Business
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The new regulatory environment: a global retail bank view

  1. 1. The new regulatory environment: a global retail bank view Santiago Fernández de Lis FIBI Conference, Dublin,14 May 2014
  2. 2. Section 1 Regulatory trends Section 2 Global view: BBVA’s MPE strategy Section 3 European view: BBVA’s SPE strategy Section 4 Upcoming challenges Index Page 2
  3. 3. Section 1 Profound regulatory reform as a response to the crisis Financial instruments Structural reforms Basel III OTC Derivatives MiFID II /MIFIR CRD IV EMIR GLOBAL EU Crisis management BRRD Macroprudential policy Shadow Banking Systemic risk (SIFIs) Strengthen banking solvencyStrengthen banking solvency Mitigate systemic riskMitigate systemic risk Minimize taxpayer costMinimize taxpayer cost Numerous lines of reform with 4 main objectives • It is difficult to assess the overall impact of all these measures • Important to ensure the consistency of reforms in different jurisdictions • Ring fencing trend challenging for global banks, less so for decentralized models Improve resolvabilityImprove resolvability Page 3 Objectives Credit rating agencies’ regulation
  4. 4. Return on Equity, RoE Source: BBVA Research based on IMF Profitability of the banking business: challenging in developed countries; diversification to EMEs a strength Profitability of the banking business: challenging in developed countries; diversification to EMEs a strength Greater dispersion between entities (end of public implicit subsidy) Greater dispersion between entities (end of public implicit subsidy) Anticipate changes in the industry will be key to a successful business model: technology is crucial Anticipate changes in the industry will be key to a successful business model: technology is crucial It will be difficult to regain pre-crisis levels of profitability, especially in terms of ROE (ROA maybe more) It will be difficult to regain pre-crisis levels of profitability, especially in terms of ROE (ROA maybe more) Section 1 The new environment of lower profitability Page 4 20 18 17 16 16 14 12 12 10 36 33 30 27 22 22 7 -20 -10 0 10 20 30 40 50 60 70 Ireland USA Spain Portugal Greece* Germany** UnitedKingdom** France Italy Colombia Venezuela Brazil Mexico Peru Chile Argentina Developed Emerging 2005 2013 *n.a. data **2012 data
  5. 5. Section 1 Global regulatory trend Section 2 Global view: BBVA’s MPE strategy Section 3 European view: BBVA’s SPE strategy Section 4 Upcoming challenges Index Page 5
  6. 6. Page 6 Section 2 BBVA is a global multinational group with strong presence in emerging markets North America • USA • Mexico South America • Argentina • Bolivia • Brazil • Chile • Colombia • Ecuador • Paraguay • Peru • Uruguay • Venezuela Europe • Spain • France • Germany • Italy • Portugal • UK • Belgium • Russia • Switzerland • Turkey Asia - Pacific • Abu Dhabi • Australia • South Korea • Hong Kong • China • India • Japan • Singapore • Taiwan Branches and representative offices
  7. 7. Page 7 Section 2 The Decentralised Subsidiary Model Stand-alone entities with their own capital and liquidity management Locally incorporated subsidiaries in EME Definition of protocols, oversight activity, group’s strategy of liquidity growth, funding policy guidelines Parent sets Credit risk managed independently Self sufficient in funding Supervised by host, covered by local DGS Retail model, reliant on local currency deposits. Subsidiaries raise funds locally No systematic intragroup support. It is an option if needed, but at market prices Subject to limits and tailored to specific host regulatory requirements Consistent with Group common risk culture Independent governanceMultiple Point of Entry resolution
  8. 8. Page 8 Section 2 Pros & Cons of Decentralised Subsidiary Model Lower economies of scaleLower economies of scale Lower capital and funding management optimization Lower capital and funding management optimization Better risk assessmentBetter risk assessment Natural firewallsNatural firewalls Accountability & transparency Accountability & transparency Straight forward resolutionStraight forward resolution Development of local financial system Cyclical diversification Better risk assessmentBetter risk assessment Natural firewallsNatural firewalls Accountability & transparency Accountability & transparency Straightforward resolutionStraightforward resolution Development of local financial system Cyclical diversification
  9. 9. Page 9 Section 2 Decentralised Model: consistent with MPE resolution Resolution MPE resolution strategy Resolution SPE resolution strategy
  10. 10. Page 10 Section 2 Strong resilience and less contagion Firewalls between different parts of the group work in both directions Spanish banks stayed in Argentina, but had the option to leave without much contagion to parent or other subs Spanish banks stayed in Argentina, but had the option to leave without much contagion to parent or other subs Crisis in host country: Argentina 2001 Crisis in host country: Argentina 2001 No evidence of contagion of liquidity problems in home to hostsNo evidence of contagion of liquidity problems in home to hosts Crisis in home country: Eurozone crisis 2012-13 Crisis in home country: Eurozone crisis 2012-13 Changes in external loans of BIS-reporting banks to the bank sector Source: BBVA Research based on BIS International Banking Statistics (Table 7) *Latam: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Venezuela **Emerging Europe: Bulgaria, Croatia, Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania Experiences with crisis in host and home countries Latam: smaller bubble and bust than Emerging Europe. Stronger recovery Latam: smaller bubble and bust than Emerging Europe. Stronger recovery 273% 144% -24% -9%1% 49% -50% 0% 50% 100% 150% 200% 250% 300% Emerging Europe Latin America/Caribbean Jun05/Jun08 Jun08/Jun10 Jun10/Sep12
  11. 11. Section 1 Global regulatory trend Section 2 Global view: BBVA’s MPE strategy Section 3 European view: BBVA’s SPE strategy Section 4 Upcoming challenges Index Page 11
  12. 12. Section 3 Fragmentation is incompatible with the Euro Composite measure of EZ financial fragmentation* Source: BBVA Research and Bloomberg -2,0 -1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 ! A banking union is needed to: Break the loop between sovereigns and banks Break the loop between sovereigns and banks Strengthen the Monetary Union by reinforcing the institutional architecture Strengthen the Monetary Union by reinforcing the institutional architecture Restore the monetary policy transmission channel Restore the monetary policy transmission channel Page 12
  13. 13. Section 3 Banking union at a glance • ECB as the ultimate responsible for all Eurozone banks • ECB to direct supervise top 130 banks. • National authorities to directly supervise the less significant entities • Start: 04/11/2014 • CRDIV/CRR • BRRD • DGSD • Start: 2014 - 2016 • Start: unknown • New Single Resolution Authority in cooperation with national resolution authorities, • Single Resolution Fund funded with bank contributions • Pending issue: Intergovernmental Agreement (IGA) • Start: 2015 - 2016 Common Rules Single Supervision Single Resolution Single Depo Guarantee Scheme Pillar I Pillar II Pillar III Pillar IV Setting up a robust supranational framework ? Page 13
  14. 14. Page 14 The agreement on a Single Resolution Fund is an important step forward… Section 3 Banking union Banking union is designed to solve the problems of the future… Banking union is designed to solve the problems of the future… Banking union has contained the fragmentation process… Banking union has contained the fragmentation process… …but further progress towards deeper economic, fiscal and political union is needed …but further progress towards deeper economic, fiscal and political union is needed … but finding a definitive solution to the legacy problems is a key prerequisite: AQR, ST … but finding a definitive solution to the legacy problems is a key prerequisite: AQR, ST The SSM is a game changer for supervisory culture and practice in Europe… The SSM is a game changer for supervisory culture and practice in Europe… … that needs to take into consideration the different business models of European banks … that needs to take into consideration the different business models of European banks …but the uncertainty on the common public backstop must be dispelled It will take time to break the vicious circle
  15. 15. Section 1 Global regulatory trend Section 2 Thinking global: BBVA’s MPE strategy Section 3 Thinking Europe: BBVA’s SPE strategy Section 4 Upcoming challenges Index Page 15
  16. 16. Page 16 Section 4 Structural reforms New barriers to universal banking New barriers to universal banking Activities separation is not a good idea Regulatory inconsistencies Regulatory inconsistencies Cross-border impacts Cross-border impacts Not the best solution. Little additional value in terms of financial stability but additional burdens on the financial industry with dampening effects on the real sector Design issuesDesign issues • Risk of higher concentration of risky activities in fewer entities • Affects activities that are essential for well functioning of markets • Risk of higher concentration of risky activities in fewer entities • Affects activities that are essential for well functioning of markets • Increased costs for banks. Higher cost of capital and funding, reduced economies of scale • More difficult access and increased costs of financial services for clients • Exacerbate regulatory arbitrage (Shadow Banking) • Increased costs for banks. Higher cost of capital and funding, reduced economies of scale • More difficult access and increased costs of financial services for clients • Exacerbate regulatory arbitrage (Shadow Banking) • Extraterritorial effects • Alters competition • Extraterritorial effects • Alters competition • Fragmentation of the financial markets. • Business models more difficult to supervise and resolve by authorities • Cross-border activities more complicated for banks • Fragmentation of the financial markets. • Business models more difficult to supervise and resolve by authorities • Cross-border activities more complicated for banks
  17. 17. Section 4 Banking future, digital banking There are already new competitors and not only in payments but also in the core banking business There are already new competitors and not only in payments but also in the core banking business Important to maintain a level playing field between banks and new entrants Important to maintain a level playing field between banks and new entrants Customer should benefit from disruptive, low cost technologyCustomer should benefit from disruptive, low cost technology Facilitates financial inclusion in emerging countriesFacilitates financial inclusion in emerging countries Bank must to learn to use the information to improve their profitability A lever for the necessary efficiency gains in banksA lever for the necessary efficiency gains in banks Regulation should avoid fostering "shadow banking"Regulation should avoid fostering "shadow banking" Page 17 New playersNew players Technology: the key to the future financial system Technology: the key to the future financial system
  18. 18. Final remarks Page 18 1. Banks are under the burden of increasingly heavy regulation. Ring fencing trend is worrying, especially for global banks 1. Banks are under the burden of increasingly heavy regulation. Ring fencing trend is worrying, especially for global banks 2. Profitability prospects are poor, especially in developed countries2. Profitability prospects are poor, especially in developed countries 3. Decentralized global banks are better adapted to a world of ring fencing3. Decentralized global banks are better adapted to a world of ring fencing 4. BBVA: decentralized globally, centralized in Europe 5. Banking Union: great progress has been made, further work is needed 6. Technology is key for the efficiency gains necessary to offset regulatory pressure
  19. 19. Thanks! Santiago Fernández de Lis sfernandezdelis@bbva.com
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