Sanjoy Sen - Lee Kuan Yew School of Public Policy - Talk on "How New Regulations Are Changing the Future of Banking - March 2013
1How New Regulations are shapingHow New Regulations are shapingHow New Regulations are shapingHow New Regulations are shapingthe Future of Bankingthe Future of Bankingthe Future of Bankingthe Future of BankingSanjoy SenManaging DirectorRetail Banking Asia PacificLunchtime TalkLee Kuan Yew School of Public Policy12 March 2013
2Taking it forwardEvolutions of regulations post GFCImplications to the BanksThe Global Financial Crisis (GFC)Agenda
3Grimness of the long term economic outlook ishurting the banks which has led to a changein the banking model• 5 years after the onset of the Global Financial Crisis, the globalbanking industry is still struggling to create sustainable value.• Europe’s sovereign-debt crisis, the sustainability of the US debtlevels, and global macroeconomic uncertainty continued to sendshock waves across the global economy.• With the cost of doing business continuing to increase dramaticallyand return on equity (ROE) expectations much lower than in thepast, many banks had initiated enterprise-wide & multi-dimensionalchange programs to develop new target operating models.• With the continued challenge of the regulatory and economicenvironment, banks must proactively seek out opportunities toimprove revenue growth & profitability.
4Taking it forwardImplications to the BanksThe Global Financial Crisis (GFC)Evolutions of regulations post GFCAgenda
5Shift in regulatory environment… the pendulumis swinging from self regulation to interventionand controlPossible consequences for Banks• Uncertainty: Operating conditions will be more challenging• Conformity: Banks face a heavier compliance burden• Autonomy: Retail banking will be valued as a business in his ownright and not as a poor relation to investment banking• Flexibility & Agility: Flexible & responsive working practices willbe key in securing competitive advantage
6Understanding the regulatory agendaThe regulatory response tothe financial crisis has takenthe form of a series ofinitiatives focusing on:1) Systematic risk andcapital buffers2) Customer and markets3) Governance andsupervisionSource: Evolving banking regulations 2013, KPMG
7Systematic risk and capital buffers• This focus on improving the safety and soundness of individualbanks and thus reduce the likelihood of banks failing.• Regulations under this scope include:• Capital: Increase both the quantity & quality of capital buffersin order to reduce the possibility of bank failures.• Liquidity: Ensure that banks have enough liquid assets to meeta potential run on funds.• Systematic change: Reduce risks to financial stability, fromthe structure of the financial services sector or the failure of asystematically important financial institution.
8Customer and Markets• This involves changing the structure and practice within both wholesale andretail financial markets to increase transparency and improve efficiency.• It also enhance the quality of customer outcomes by changing the incentivestructures and requiring a more diligent assessment of customer activitiesand needs.• Regulations under this scope include:• Customer Treatment: Protect the customer, help the customer makeinformed investment decisions & ensure that the products sold to thecustomer suit his/her investment profile.• Market Infrastructure: Reduce risk in the wholesale markets andregulate the Over the Counter (OTC) derivatives market.• Financial Crime & Tax: Prevent market abuse & financial crime;ensure that investors comply with the relevant tax authorities; use taxas a means of paying for some of the costs of the crisis.
9Governance and Supervision• Improve the people and infrastructure with which banks governtheir business.• This area covers regulations under:• Remuneration: Regulate excessive remuneration practices• Governance: Ensure that Boards have sufficient skills,experience & availability to assume full accountability for thedecisions taken by the organisation.• Supervision and Reporting: Ensure that banks are properlysupervised, proportionately to the nature, size and complexity oftheir business. Consider whether accounting principles need tobe revised & the additional disclosures that may be required.
10The evolution of regulations post GFC hassignificant impact on the banking industryCorporateStructureCustomersBusinessModelsLiquidityCapital
11• Banks are required to hold more capital against theirtrading books under Basel 2.5 rules, forcing them to cutthe size of their balance sheets.• Basel 3 requirements continue to be a considerablechallenge for all banks globally. Banks may need up to$1.3 trillion of extra capital (as against 2012) to fulfillthis regulation.• Holding more capital and lower yielding assets willdepress returns. ROE may drop from 20% in 2010 to7% levels.• This has forced banks to restructure through means ofretrenchment, disposing the non-core assets & focus oncore banking services, mainly on retail, wealthmanagement and corporate business.Combined impact of new banking regulations may trim GDP by 0.7% a year overthe next 5 years and could cost some 7.5mil jobs over the periodCombined impact of new banking regulations may trim GDP by 0.7% a year overthe next 5 years and could cost some 7.5mil jobs over the periodSource: “Measuring the price of regulation” – The EconomistIncreased capital requirements placed greatpressures on Banks’ profitability
12Liquidity – A bigger challenge than Capital• Basel 3 compliance introduces 2 liquidity requirements on banks – the LiquidityCoverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).• Under LCR requirement, banks are to hold sufficient high quality liquid assets to meeta severe cash outflow for at least 30 days. NSFR is intended to ensure that banks holdsufficient stable funding to match their medium & long term lending.• Banks faced significant challenges to fulfill the regulatory requirement. These include:• Making expensive changes to their balance sheets & the ongoing ability to meetthe LCR• Increased dependence on retail deposits which push up banks’ funding costs• Requirement on extensive external & internal reporting to monitor the banks’positions against these new liquidity ratios.
13Banks are being forced to consider radicalchanges to their corporate structureStructural change to corporate structure:Structural separation between retail & investment bankingRing-fencing of critical economic functions, limits on intra-grouptransactions and the use of shared support services“Localisation” of subsidiariesImpacts on Banks:Increase overall capital that a banking group needs to holdIncrease the cost of fundingIncrease cost of data and information collection in operating theindependence and separation of ring-fenced banks
14The regulatory challenges are also shapingthe overall strategic direction & businessmodels accordingly• From centralisation to decentralisation – moving core activities fromregional and global shared services to their respective domestic jurisdictions• Sustainable cost management – thinking out of the box to improveefficiency in current environment other than downsizing• Shifting geographies and international business models – rationalise andsimplify structures• Optimising business and control functions – building & operating aneffective risk and compliance framework• Rationalising the right technology investment to meet reporting &compliance requirementsRegulatory reform has the potential to deepen the divide betweenstronger and weaker banksRegulatory reform has the potential to deepen the divide betweenstronger and weaker banks
15Regulations pushes a greater need for banksto adopt a truly customer-centric culture• Restore customer focus and trust inbanks by tackling the deep-seatedissues of culture and behavior.• Banks’ financial advisors renewing theirefforts to improve their standing andreputation among the public.• Banks should stop marketingthemselves on a commodity basis, andinstead focus on building emotionalties.• Widen the focus of the advice banksprovide and employ a holistic approachto consumers’ financial needs.Use Customer Excellence as an antidote to regulationsUse Customer Excellence as an antidote to regulations
16Implications to the BanksTaking it forwardThe Global Financial Crisis (GFC)Evolutions of regulations post GFCAgenda
17The Journey from Regulation to TransformationSource: Evolving banking regulations-Europe, 2013, KPMG
18Banks need to move from reviewing the regulationsto designing the right transformation model tosucceedChallenge 1: Responding to individual regulatory initiatives• This is necessary as any one banking regulation is sufficient to change the business models.• However, it is not sufficient to view regulatory reforms in isolation.Challenge 2: Responding to the combined and cumulative impact of regulatory initiatives• Tackling new regulations one by one will pose a risk of missing key inter-relationships & co-dependencies• 4 key inter-relationships to look into: i) structural change; ii) re-pricing of products and services; iii)the capital & liquidity interface; iv) collateral management.Challenge 3: Combining regulatory reform challenges with other challenges• Develop business, structural and operating models in full compliance with the new and developingregulatory regime – while still attracting investors.• Continue to improve efficiency while complying with new regulations.Challenge 4: Restoring customer focus and trust• Change cultures and behaviours to meet customer expectations and regulatory requirements anddeliver sustainable growth.• Changing customer needs require innovation and investment – and new means of compliance.Adopt an “optimized” parallel approach by taking advantage of commonbusiness & processing traits across multiple regulations.Adopt an “optimized” parallel approach by taking advantage of commonbusiness & processing traits across multiple regulations.
19Regulators will force global banks to retreat… whileinternationally active banks live globally, they may welldie locally.• Different approaches by national regulators, with some jurisdictionsgoing beyond the global standards.• Additional local requirements are placing an additional and ongoingburden on already scarce resources. They also raised the potentialof conflicts between home and host regulators.• Further fragmentation of markets become more likely as politicscome into play and governments and regulators want todemonstrate that they are protecting local taxpayers.• Forcing lenders to dedicate capital to local subsidiaries in multiplecountries could undermine the business rationale for global banksoperating across all asset classes and national boundaries.
20A view from Singapore• Local incorporation will create more job opportunities for Singapore & allowMAS to have a better grip on the foreign banks operating here.• It strengthens Singapore’s banking sector to better compete with theinternational rival markets such as Hong Kong.• A decision for the foreign banks: 1) to commit & expand in this market &compete against the domestic players or 2) to limit the scope of operation.• With local incorporation, foreign banks will face significant set-up costs.Hence, many of them will take the opportunity to re-evaluate theirgeographical footprint in Asia.How will foreign banks’ localincorporation affect Singapore’sbanking industry?
21Taking it forwardImplications to the BanksThe Global Financial Crisis (GFC)Evolutions of regulations post GFCAgenda
22TheBankDeploy capital moredynamically & efficientlyDevelop strongbusiness rationales forexisting businessesDevelop new businessmodels: redesign servicedelivery, create strongbrands & set right pricingCapture growthopportunities inemerging marketsMake material changes tocompensation levelsRealistically reducecostsTaking it forward: A renewed focus on growthand profitability leversSource: Bank governance Leadership Network View points, 10 Nov 2011
23Banks must proactively seek out opportunitiesto create strategic competitive advantage outof today’s reality1) Embrace compliance, not as a costly burden but as a strategicimperative.2) Create a positive compliance culture within the bank.3) Consider compliance from a customer’s point of view.4) Let common sense guide interpretation.5) Seek compliance insight where available.6) Create efficient compliance process.7) Relationships matter.
Page 24When faced with an unalterableWhen faced with an unalterableobligation to spend much of your bankobligation to spend much of your bank’’sstime on compliance, approachtime on compliance, approachcompliance with an optimistic spirit andcompliance with an optimistic spirit andcompetitive intent.competitive intent.