Many a blog or article piece on banking risk and regulation have started with the words ‘since the 2007/2008 financial crisis…’. This is as a result of the fundamental regulatory changes that have occurred since. The industry has seen a tsunami of regulations that have swept through and stretched banks resources, increased their overall capital requirements and profoundly effected how banks operate. Add on top of this the UK’s decision on 23 June, 2016 to vote to leave the EU and the uncertainty that a Brexit vote leaves the entire nation, it is by no surprise that the largest industry in London, the financial industry, is set for further uncertain times ahead.
We undertook extensive research to explore the key risk and regulatory challenges facing banking risk professionals over the coming year.
The findings of this research will be illustrated at our 6th Annual Risk EMEA: Banking Risk and Regulation Summit, which is taking place on 9-10 May, 2017 in London. The Summit brings together 50+ CROs, regulatory representatives and heads of departments from institutions across EMEA, discussing some of the broader risk and regulatory themes, as well as more refined topics. There are three workstreams dedicated to: The Fundamental Review of the Trading Book (FRTB), Capital Management and Credit Risk.
This first piece in the series will focus on the keynote plenary sessions, or the broader themes within the industry, including the pace and change of the regulatory landscape and Brexit. Upcoming pieces will be looking to discuss the main focus areas for risk professionals within FRTB, Capital Management and Credit Risk.
During the research one of the most predominant, over-arching themes that threads through was the pace and change of the ever evolving regulatory landscape in the banking industry. In the last 10 years the sheer pace of regulatory change has been a fundamental focus for the majority of risk and regulatory departments. Whether it is the FRTB, NSFR, LCR, IRB approach, IFRS 9 or SA-CCR, departments and institutions have had to prepare for an influx of regulatory implementation deadlines. A major challenge for banks that operate in this regulatory environment surrounds how they intend to navigate their way through this.
This is typified by what the industry has dubbed ‘Basel IV’ or what the regulators prefer to call the ‘finalisation of Basel III’. Basel IV is comprehensive with potentially far reaching consequences as it looks to address areas from FRTB to the new securitsation rules, the full scope is yet to be released. Essentially and from a broader perspective, Basel IV entails the move to a more standardised environment and more of a one-size fits all approach where banks are unable to measure their risks internally. This of course has various economic implications which is one of the many questions that the industry is asking with regards to Basel IV. Similarly, there seems to be a general consensus that despite the regulators claims, capital requirements will increase substantially as a result of Basel IV’s rules. Therefore, the key areas of focus are on how changes in the Basel framework will impact banks and their models. A more standardised approach will surely effect the banks capital trajectory and why have banks gone from spending large sums of money going to advanced models in the past few years, to only reverse back to standardised models? So the overall question in the industry is what is going to happen with Basel IV implementation and the overall calibration of Basel IV?
Although the meeting scheduled for the beginning of January to confirm Basel IV rules was postponed to be completed ‘in the near future’, much to the short-term relief of the industry, many of the same questions still remain. What kind of shape is Basel IV going to take and what are the implications of this on the industry?
As a whole the regulatory landscape within the banking industry over the past few years has changed dramatically, and with the upcoming finalisation of Basel IV rules, firms have to effectively manage the wave of regulations coming in, whilst still running the business efficiently.
On top of this, and perhaps unsurprisingly, one of the main areas that came out of the research centered very much around Britain’s willingness to leave the EU and its concurrent impact on the banking industry and the upcoming regulatory environment. In the months leading up to the EU referendum there was much debate as to the impact a potential Brexit would have on the country. Since the vote a new prime minister in Theresa May has been appointed and pledged to evoke Article 50 and she has indicated that Britain is on its way to a seemingly ‘hard Brexit’. However, no nation has ever left the EU and the relative impact that Brexit will have on the country’s financial industry is completely unknown.
During research much of the overall focus was on the broader implications of Brexit such as the imminent future of the banking industry in the context of the post-Brexit referendum. Many expressed their concern as to the effect that Britain leaving the EU would have on passporting rights and how companies would be able to operate both in the UK and the EU. What would the knock-on effect be on the UK financial industry if or when companies leave Britain and also what will Europe look like five years from now? It is not just Britain that will be effected as the EU looks set to lose a major nation for the first time, so there are question marks around how Europe and the EU will cope. Similarly, how will the regulatory regime change due to Brexit, will there be a ‘business as usual’ approach or will there be more fundamental changes ahead? Many are expecting increased uncertainty in the near future and how banks handle this uncertainty will be as much of a challenge as any. Unfortunately at this current moment there are many more questions than definitive answers. The knock-on effect of Brexit has been felt worldwide and the banking industry is no different to others in their concerns over what is to come.
These are only a snapshot of some of the challenges that the banking industry faces over the coming months from a risk and regulatory angle, as many regulations begin to take effect at the beginning of 2017 and 2018 and with Basel IV finalisation rules just around the corner. What became apparent from the research is the scale and pace of these regulatory changes, and businesses have to ensure they keep up with this whilst continuing to run the business efficiently
To hear industry discussion on the regulatory landscape and Brexit, join us and over 300 senior professionals from across EMEA at the Center for Financial Professionals’ 6th Annual risk management conference, taking place in London 9-10 May 2017. The keynote plenary sessions will focus on these areas and more.
For further information, please get in touch with a member of the team on +44 (0) 207 164 6582.