Threats & Challenges Facing Financial Institutions

Mohammad Fheili ⌂⌂⌂ fheilim@jtbbank.com
Threats & Challenges to
Economic Growth: The Banking
Sector
By: Mohammad Fheili
April 25th, 2017 . . . Hilton Metropolitan
Session 02: Private & Public Sectors Challenges & Opportunities

Information
Technology
Customer
Expectations
Law &
Regulations Equipped To
Compete
Knowledge &
Skill Gap
Shadow
Banking
6

Information TechnologyThe Mother of All Challenges!
 The Introduction of any form of technology in a given production process
or the mere modification of an existing IT environment necessitates a
number of changes:
Staff Skills,
Workflows,
Policies & Procedures, and
a host of other changes.
Which reflects on Performance…
IT RiskModel Risk Cyber Risk
Risk Inter‐
dependency
Data
Collection,
Processing,
& Storage

Between
Humanizing “The Technology’ & Digitizing “The Human-Client!”
IT Altered Our Existence
Digitizing the Client-Bank Relationship
Remains Out-Of-Synch With The Existing
Culture!

We Did Not Spare A Single Opportunity to Exploit Available
Technology!
Virtual!
Real

Increased Usage
of Impersonal
Electronic
Services
Low Cost
Electronic
Services
Lower Customer
Intimacy
Reduced
Switching Costs
Between Banks
Customers are
constantly
shopping for
better deals Increased
Demand for
Transparency
Need to
Leverage all
Customer ‘Touch
Points’Customer
Interest peaks &
falls rapidly
Less Time to
Know and
Influence
CustomersProliferation of
Channels to
Service The
Client
TechnologyTechnology
We Did Not Spare A Single Opportunity to Exploit Available Technology!

People
Come
First
Data‐
Dependent

Fairly complex lending
products like
mortgages are being
done online with more
frequency.
Consumers have been
slowly migrating to
digital channels for
more than just simple
transactions.
The need to visit a
physical branch will only
occur for the most
complex sales and
service issues.
Branch networks will
be consolidated with
little need for
transaction centers.
Innovation is forcing
branch models to
evolve with the
market.
Have We
Gone Digital?!

Most consumers
rely on brick &
mortar for
commerce and
will continue to
do so …
Just because a
consumer might need
to talk to a person, it
doesn’t mean they
have to be in the
same physical space
to do so ...
Nearly 60% of
traditional banking
products still being sold
in the branch …
Most banks don’t
offer a decent digital
customer acquisition
mechanism ...
Most retail
deposits still
take place at
the branch …
Most Customers Remain
Skeptical About Going Digital!

Customer Expectationsand the Power to Punish
 If you don’t Duly respond, some other Banks will!
 The Cost of ‘Switching’ is negligent.
 Harnessing big data analytics, social media monitoring and other new
forms of insight to anticipate and respond proactively to changing
customer demands..
 How to gain clearer line of sight to customers, speed up decision
making and overcome institutional resistance to change.
 Shift from Product‐Push to Customer Solutions.
 Accent on Product Specialization (‘depth’) gives way to broader
engagement, analytical and change management skills (‘Breadth’).

Legal Obligation
• The Public at Large has the Right
to Know! Where its impact on
the Financial Institution’s
Reputation and Performance is
often severe. Profitability
suffers, and it triggers
immediate additional expenses
for Damage Control.
Regulator Obligation
Issues of non‐compliance
are handled inside closed
doors Regulators.
The Changing Face of Regulation

Increased Chances of Fraud and Credit Risk
 Law 318 – AML and ….
 Law 42 – Cash Across Borders and Declaration
 Law 43 – Exchange of Tax Information
 Law 44 – AML and Counter Financing of Terrorism
 Law 53 – International Convention for the Suppression of the Financing
of Terrorism
 BDL Basic Circulars 83 – Regulator’s Version of Law 318, and
 BDL Intermediate Circular 371 – Compliance Officer at P.O.S.
 BDL Basic Circular 81 on Credit Risk – Compared to BDL Basic Circular 58)
Increased the Demand for Transparency
 BDL Basic Circular 134; and
 BCCL Circular 281)
Etc…. Reporting (FATCA, CRS, IFRS 9, ….)

Basel I
Basel II
Credit Risk
Credit Risk
Market Risk
Operational Risk
1986 proposed
1999 proposed
1988 effective
2007 effective
Basel III
Credit Risk
Market Risk
Operational Risk
Capital Quality
Additional Buffers
Liquidity: LCR, NSFR
2009 proposed
Kick Off in 2011
Amendments
Amendments
Basel 2 ½
Basel 1 ½
Amendments
Basel 3 ½
Basel IV
2015 Anticipated
Kick Off in 20??
• Capital Requirements
• Liquidity Requirements
• Disclosure Requirements
• National Divergences
• Risk Sensitivity
• Use of Internal Models in
Decision Making
• Total Risks = Credit Plus
Market Risks
• Internal Models Emerged
• Later on, Tier 3 Capital
• Enhanced Pillar 2, 3
• Complex Securitization
obtained higher Risk
Weights.
• Trading Books
Tequila
Crisis
Asian Market
Crisis
Shadow Banking
Crisis

Risk Management and Compliance MUST NOT
Be Competing Tasks Inside the Hallowed Halls of Banking Institutions
Compliance
With AML Rules & Sanctions & Laws
Compliance is a Task intended for Risk Control
You are suited to follow a well
defined track!
RiskManagement is a Decision & a Choice.
You are geared
up and equipped
to travel through
unchartered
territories and
be creative in
avoiding danger
(not Risk)

By putting greater restrictions on banks, regulators have pushed the riskiest activities to
unregulated entities – Shadow Banking – that the Financial Stability Board has also indicated it
wants to bring under its capitalization regime … A New and More Complex Breed of Opaque
Banking is, then, likely to emerge.

Lenders
Surplus Spending
Units ‐SSUs
• Individuals (Current
Income is GREATER than
Current Expenditures)
• Firms (Earnings in excess of
what the firm needs currently)
• Government (Current
Revenues are in excess of
planned Expenditures)
• Financial
Intermediaries (Funding
is currently GREATER than
investment)
Where to Warehouse
the Surplus of Fund?
Where to Warehouse
the Surplus of Fund?
Borrowers
Deficit Spending
Units ‐DSUs
Income is LESS than Current
Expenditures)
• Firms (Earnings falls short of
Revenues fall short of planned
Expenditures)
• Financial
is currently LESS than
investment)
Where to Go
to Fund My
Ideas?
Where to Go
to Fund My
Ideas?
Tapping into International Market for Loanable
Funds
Local Pool of
Loanable
Funds
Decision is a
function of:
• Motive
• Risk Aversion
Firms,
Governments,
Fin. Institutions,
Households

Borrowers
Deficit Spending
Units ‐DSUs
Expenditures)
Expenditures)
• Financial
investment)
Regulated
but not like
Banks
Heavily
Regulated
Not
Regulated
Regulation in this context indicate to: Presence of Lender of Last Resort; Legal Reserve; Deposit
Insurance; Capital Adequacy; etc.
Debt, Equity,
etc. Instruments
Deposit &
Loans
MMMF, CP, ABCP,
Repos, etc.
Very Inter‐Connected
Lenders
Surplus Spending
Units ‐SSUs
• Financial
investment)

Borrowers
Deficit Spending
Units ‐DSUs
Expenditures)
Expenditures)
• Financial
investment)
With intermediation in Both
Without
Intermediation
Shadow Banking
Replicates
“Intermediation” in
the Banking Model
But . . .
Lenders
Surplus Spending
Units ‐SSUs
• Financial
investment)

 The most successful businesses are going much
further by re‐engineering their organizations
towards new ways of meeting customer demands
and opening up new market opportunities. So, is
your business up to speed?
 Does your mission embrace the values of the post‐
crisis world?
 Do your organizational capabilities reflect the new
economics of your business?
Equipped to Compete
There is a Need To Change The Rules of Engagement

Client is Engaged
Compliance Cycle
Service Cycle
st1Client
Interface
Start
Interface
Client
Engaged
CIP, KYC
AML Compliance (Regulator Decides)
Client Engagement is Constrained by: The Bank is
Deemed AML‐Compliance Responsible & Accountable
Customer Satisfaction (Customer Decides)
Client Engagement is Driven by: The Potential for
Revenue: Interest Income, Commissions & Charges;
and a Word‐of‐Mouth Free Marketing
Branch
The Most Critical Customer
Interface; Manage With Care:
You Either Collect all the
needed information (CIP &
KYC), or you have planted the
seeds of Troubles to Come . . .
De-Risking Means The Bank “Expects” To
Receive A Greater Value From
Disengaging With The Client than from
Maintaining The Engagement.
How To Engage With The External Customer
Both Cycles Must
Converge to Serve The
Institution

Participative
Risk Management
Full and Consistent
Communication & Coordination
with all Business Units
Autocratic
Risk Management
I Know what to
do, and I will do
it all alone. My
way or the
highway!
How To Engage With The Internal Customer

The Knowledge
& Skill Gap
Success in
Business
College Curriculums Are
Not Up To Par …
College
Education
Growth
Close the Gap

Mohammad Fheili
“Over 30 years of Experience in Banking.
mifheili@gmail.com (961) 3 337175
 Risk & Capacity Building Specialist.
 Trainer in Risk & Compliance
 University Lecturer: Economics, Risk, and
Banking Operations
 Currently serves in the capacity of an Executive
(AGM) at JTB Bank in Lebanon.
Served as:
 Senior Manager & Chief Risk Officer at
Group Fransabank
 Senior Manager at BankMed
 An Economist at the Association of Banks
in Lebanon
 Mohammad received his college education
(undergraduate & graduate) at Louisiana State
University (LSU), and has been teaching
Economics and Finance for over 25 continuous
years at reputable universities in the USA (LSU)
and Lebanon (LAU).
 Finally, Mohammad published over 25 articles, of
those many are in refereed Journals (e.g.,
Journal of Money Laundering & Control; Journal
of Operational Risk; Journal of Law &
Economics; etc.) and Bulletins.”

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