By Frank Morisano, Chief Risk Officer at Industrial & Commercial Bank of China.
Frank, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?
I am Chief Risk Officer with Industrial and Commercial Bank of China Limited (ICBC) overseeing the numerous branches, operations and legal entities through which the bank operates in the USA.
My financial services experience includes measuring and managing capital at risk, managing liquidity, and developing structured products for financial institutions in the USA, UK, EU and Asia.
At ICBC, I am supported by a team of risk and liquidity professionals that ensure the operations in the USA are prepared to respond to any stress related or regulatory situation.
Can you explain how the potential deregulation under the new administration can possibly have an impact on the industry, and more specifically, how this could impact liquidity regulation?
The proposed deregulation of capital and liquidity guidance are aimed to lessen the complexity of the existing regulatory requirements, permitting financial institutions to more efficiently deploy their capital and liquidity. This will hopefully result in financial institution having a greater capacity to increase the supply of credit to the US economy and promote market liquidity while maintaining capital markets safety and soundness.
With so much work having been undertaken to comply with certain regulations, what in your opinion are the pros & cons of either scaling back or continuing standards for best practice?
Strong capital and liquidity requirements are critical in mitigating the harmful economic effects that result from an undercapitalized banking system while maintaining financial institution safety and soundness. However, the continual ratcheting up of capital and liquidity regulation is a very inefficient approach.
Moreover, the existing regulations are onerous on Foreign Banking Organizations (FBOs) and require re-evaluation, so that FBOs are not unduly constrained on being able to operate in the US. For example, FBOs should be allowed to meet certain US regulatory requirements through compliance with home country regimes as long as they are in line with leading or best practices.
How could the deregulation potentially impact foreign banking organizations?
The proposed changes to enhanced prudential standards (EPS) and living will requirements may permit FBOs compliance to be based on their US risk profile rather than on a global consolidated risk profile. This proposal makes a lot of sense as US regulatory requirements should be proportional to the risks presented by such firms to the US financial system. Properly structuring these regulations for FBOs is critical to sustain and continue economic growth, develop a strong global financial system and create opportunities for American banks, in areas where they fail to endeavor.
How do you see the industry evolving over the next 6-12 months, particularly with the political trends evolving?
While the current administration cannot roll back laws or regulations, the legal precedence does give the US President broad authority on how to interpret the regulatory rules as well as how to execute.
The proposed changes to the regulatory environment could push financial institution to increase their balance sheets; potentially expanding lending into product and market areas that were previously hampered by capital and liquidity regulations.