Change amidst uncertainty: how banks are adapting to the emerging regulatory landscape Thoughts Written by the Economist Intelligence Unit Written by the Economist Intelligence Unit Change amidst uncertainty: how banks are adapting to the emerging regulatory landscape Capco is pleased to present this The second, related observation is that some bank report, which explores how capital leaders may not fully understand the exposure created markets firms are dealing with by inadequate governance of trading operations within the dramatic changes that are the new environment Laws in the United States and underway in the financial services the UK now impose stronger fiduciary and oversight industry Based on research requirements on a firm’s board members and executives, conducted by the Economist requirements that extend to maintaining robust Intelligence Unit in March 2011, compliance around all trading operations and banking the report provides insight into seven critical questions regarding banks’ readiness for regulatory reform, which Whether or not their front-office moves are part were the subject of a recent Capco white paper.* of broader corporate strategy, firms can become exposed to significant fiduciary and reputation risks by Among the many insights the survey provides, two executing new business strategies without adequate are especially noteworthy, and potentially reasons controls, communications strategies and change for caution management in place On the up-side, reorganizing quickly and purposefully, and creating compliance First, it is clear that the traders are driving change programs that meet the test of global regulators, can Trading operations are taking the lead in implementing position banks to increase market share and margin, business models and processes to operate in the both in existing and emerging markets newly regulated environment In some cases, they are quickly executing on geographic strategies, in We hope the findings of this report help you chart jurisdictions where regulations may be more favorable a course to new opportunities, leveraging solid In doing so, trading operations appear to be outpacing governance Please let me know if you would like to their back-office and compliance functions by a discuss the results or have any questions wide margin In fact, more than half of the trading operations surveyed could be conducting business in an environment without the necessary obligations support – capabilities that simply may not exist in the local back office yet, or that regulators may not have even fully defined Sean Culbert Partner and Co-lead of Finance, Risk and Compliance sean.culbert@capco.com *For further discussion of these questions please see the Capco Thoughts white paper, Regulatory Reform: Critical Questions for Financial Services Firms, available on capco.com About this report Change amidst uncertainty: how banks are adapting to the emerging regulatory landscape is a Capco report, written by the Economist Intelligence Unit It examines how, in light of continuing regulatory uncertainty, financial institutions are reshaping their capital markets businesses to operate effectively in the new environment, and focuses particularly on the likely effect of regulation on overall structure as well as front, middle and back office operations The research is based on three components: • A survey of 60 senior executives at financial institutions, half operating in the UK and half in the US All firms had annual global revenues of more than US$5bn and all respondents work in operations, risk, trading or regulation • Interviews with a range of industry participants and experts, as well as a follow-up qualitative questioning of survey respondents Because of the sensitivity of the topic, interviewees spoke offthe-record • Desk research, including a review of financial institutions’ regulatory filings The author of the report is Geraldine Lambe and the editor is Monica Woodley Executive summary Key findings from the research include: As the scale and intensity of the financial crisis Banks see more opportunities than threats in became clear, industry participants knew that a tough the new regulatory environment Almost a third of regulatory response would follow Those expectations respondents believe that new regulations will provide have now been met While the final rules remain opportunities to take market share as other banks uncertain in many areas, a raft of regulatory change is retrench or rethink their business models Almost in process two-thirds see regulatory change as an opportunity to transform their business at a systems and process The regulations create new capital requirements, level Some see this as a way to gain competitive address liquidity and counterparty risk, and push trading edge However, they are unsure whether the greater of more products onto exchange and into central transparency required by regulation will have a clearing They put in place new consumer protections positive or negative impact on competitiveness and seek to reduce systemic risk in order to avoid the need for future government intervention The cumulative While preparations are well underway, the impact effect is forcing the financial industry to fundamentally of regulations on bank structures is unclear reassess business models and operating practices More than half of respondents say they are at implementation stage The US is further behind than This assessment is driving significant change in the UK, however, as the industry waits for many financial institutions Banks are already exiting some elements of the Dodd-Frank Act to be translated into businesses and are likely to shrink or exit others as regulations Almost three-quarters have identified new capital rules make them less profitable The where changes to systems need to be made in order location of new or expanding businesses will be to handle the new, higher levels of data required A rethought as firms assess the relative impact of each similar number say they have a strategy in place to jurisdiction’s regulatory constraints New systems and communicate the impact of regulatory changes to processes are being put in place to meet demanding clients and counterparties data capture, data management and stress testing requirements Communications with clients and However, the industry remains uncertain about counterparties are being revamped, and new how to adapt business entities and operations to reporting lines put in place Connectivity will have new regulations More than half of respondents are to be developed and new processes established to keen to retain existing organizational structures and connect to a swathe of new entities that will spring up operating models However, in 13 out of the 17 areas in the clearing and settlement space of operation covered by the survey, the majority of respondents not know if their firms will relocate or In this changing environment, the Economist outsource business functions, or create a shared utility Intelligence Unit conducted research, on behalf of Capco, to find out where banks are in terms of Boards and senior management believe they preparation for new regulations and what impact have a good understanding of regulatory impact these are having on operations This research The crisis has been a wake-up call for board is based on a survey of senior executives at 60 members and senior management With regulators banks, half based in the US and half in the UK, and policy-makers taking an increasingly tough line, working in operations, risk, trading or regulation boards and executive management will be more The survey results have been supplemented with accountable for a firm’s decisions According to in-depth interviews with industry participants and the majority of respondents, they have risen to this experts Because of the sensitivity around this topic, challenge and have a good understanding of the interviewees preferred to speak off-the-record implications increased data transparency will have at their own businesses as well as across the industry Once changes to data infrastructure are adopted, respondents are confident that management will be able to prove they have better control over information, as required by regulators Introduction In its 10-K regulatory filing to the Securities and Exchange Commission (SEC) for the fiscal year ending in March 2011, Goldman Sachs revealed the impact that US regulations have already had on the bank’s operations “In light of the Dodd-Frank Act, during 2010, we liquidated substantially all of the positions that had been held within Principal Strategies in our former Equities operating segment, as this was a proprietary trading business In addition, during the first quarter of 2011, we commenced the liquidation of the positions that had been held by the global macro proprietary trading desk in our former Fixed Income, Currency and Commodities operating segment.” US regulations are shaping European institutions’ strategy too Deutsche Bank announced in March that it would deregister its US subsidiary so that it would no longer be a bank holding company Deutsche hopes that by changing the status of Taunus Corp – a part of which is highly leveraged and under new rules would need recapitalizing – it will take Taunus out of the scope of the Dodd-Frank Act and avoid having to raise billions of dollars in new capital Compliance is diverting management, IT and legal resources from day-to-day operations as IT races to keep pace with front office transformations Some firms have recruited additional expertise in specific areas The impact assessment itself is a major task The Dodd-Frank Act, for example, is long and complex at 2,307 pages, 16 titles and 540 sections It is expected that regulators will create 243 new rules, conduct 67 studies and issue 22 periodic reports Hundreds of new rules will require consultation with the industry before they can be implemented One bank’s response to the Markets in Financial Instruments Directive (MiFID) consultation alone takes up 66 pages The bank says its legal and compliance department has doubled in size in the last two years So, while much of Dodd-Frank, the Financial Services Act 2010 and other regulations still need to be defined, it is clear that banks’ strategy and front office operations are already moving forward, while governance and compliance are lagging Assessment, understanding and implementation Figure At what stage is your company in preparing for changes required by regulatory reform? The sales and trading functions of financial services firms seem to have moved quickly to determine which regulations are relevant to their businesses, consider 100% what the regulatory impact will be and even to move forward with implementing changes based on their 90% impact assessments More than half of respondents 80% to the survey say they are at the implementation U.S U.K 70% stage Looking at responses by geography, the UK is slightly ahead of the US, with 58% compared with 60% 53%, respectively, already implementing changes 50% Industry participants say that this is explained by 58% 53% 40% the fact that there is more still to be defined in US 30% regulation than there is in Europe, meaning that firms 30% in Europe have a head start UK firms are also more 20% 32% 17% 10% likely than those in the US to align the implementation 10% of their country’s main regulatory reforms with those 0% of Basel III and IFRS (See Figures and 2.) We have identified the regulatory changes relevant to our business The UK operations of a European bank are We have assessed how regulatory changes will impact our business already advanced in several areas, including those surrounding internal transfer pricing models These We have begun implementing changes to our business based on our impact assessments Figure Q1, geographic split At what stage is your company in preparing for changes required by regulatory reform? are central to complying with the UK’s liquidity buffers, which were implemented in June 2010, as Figure Have you or you plan to align the implementation of your country’s main regulatory reform with that of any of the following regulations? Select all that apply well as Basel III’s liquidity coverage ratios The bank’s CEO says the bank’s decentralized business model has given it a head start in such areas 97% 100% “We introduced transfer pricing for liquidity risk to all U.S U.K 90% our branches in June 2009,” he says “Each branch 80% 80% has to match-fund itself The reason we have been able to move so quickly is because we operate a 70% devolved model, where each branch is responsible for 60% setting the appropriate prices for its own market For 68% 50% 50% this kind of decentralized pricing model to work, it’s critical for branches to be charged the correct internal 40% cost for liquidity, so we already had the processes in 30% place to enable us to implement this regulation.” 27% 23% 20% 10% 0% IFRS Basel III FACTA Figure Q2, geographic split Have you or you plan to align the implementation of your country’s main regulatory reform with that of any of the following regulations? Select all that apply Trading is running out in front According to the survey, by function, trading is way out in front in terms of preparation, with almost three-quarters (73%) saying they are already at implementation stage Interestingly, the regulatory function, which may be expected to be most advanced, is the least prepared Only 20% say they are at implementation, although a significant 60% have completed the impact assessment (See Figure 3.) On reflection, it is unsurprising that the trading space is the most advanced in terms of preparation; they are already positioning for the higher capital charges Figure At what stage is your company in preparing for changes required by regulatory reform? 100% proprietary trading ban in the Volker Rule Operations Risk Trading Regulation 90% 80% “If you look at the changes to the trading book treatments, they are so substantial that people have had to think through urgently what is the shape of 73% 67% 70% the business going forward, because the current business won’t be profitable,” says the head of 60% 60% 50% for various products contained in Basel III and for the prudential advisory at a consulting firm “And those 46% 46% trading book requirements hit much earlier [than some other changes], so in the trading area it has 40% 30% 20% become critical to move quickly The treatment of 27% 19% counterparty risks in trading books and of bank-to- 20% 20% bank exposures has gone up three to four times in 14% 8% 10% total, and the treatment of securitization books has gone up enormously, so people have already taken 0% 0% We have identified the regulatory changes relevant to our business We have assessed how regulatory changes will impact our business action, moving things out of trading books and into We have begun implementing changes to our business based on our impact assessments banking books.” There are concerns, however, that implementation may be piecemeal While many firms have created working groups or task forces, these are typically Figure Q1, job function split At what stage is your company in preparing for changes required by regulatory reform? organized at a national level, and therefore not address change at a global, enterprise-wide level In addition, some have suggested that the amount of new regulations flooding into the market may lead banks to focus on the trees but lose sight of the forest – a criticism which has been leveled at banks, regulators, ratings agencies and politicians, and held at least partly to blame for the financial crisis If regulators are aware of this danger, the feeling that the sense of urgency for change is already dissipating means that they want to press on while there is still a chance of getting new regulations passed A financial services partner at a consulting firm agrees that the amount of new regulation is clearly an issue “The message from our research is that the sheer volume of change is proving very challenging for firms And it gets more difficult as you move down from global statements of principal into regional Figure Do you agree or disagree with the following statements? We are looking at the new regulatory environment as an opportunity to gain market share rule-making, and then further down into national interpretation We don’t see many institutions that have an overarching view of the impact on their firm They may well be doing things on a local or regional 100% level – but they not have a consolidated view of the overarching impact.” Given the new uniform fiduciary 90% standard obligations for advisers and broker dealers, 80% that could prove problematic for US executives U.S U.K 70% 60% 50% 40% Threat or opportunity? 26% 23% 30% If banks see the challenges posed by regulation, they 20% also see the opportunity This is particularly true in 10% the UK, where almost a third (32%) of respondents 0% strongly agree that the new regulatory environment 36% 32% 20% 17% 10% 7% 0% Strongly agree is an opportunity to gain market share Bankers in 30% Strongly disagree the US, however, are less optimistic, with only 20% clearly positive about the potential for opportunity Figure Do you4.agree with the Figure Q3a, Door youdisagree agree or disagree with the following statements? are looking the new following statements? We We are looking at theat new regulatory regulatory environment as an opportunity toshare gain environment as an opportunity to gain market market share (See Figure 4.) At first sight, this looks to be accounted for by the banning of proprietary trading and constraints on principal investment – two of the most profitable 100% areas of investment banking in recent years – that Operations Risk Trading Regulation 90% have been imposed on US banks by way of the 80% Volker rule But looking into the survey results by function reveals that 82% of traders agreed with the 70% potential to gain market share, and none of them 60% disagreed It is the operations and risk functions 64% 50% which see more danger than promise in the new 40% regulatory environment (See Figure 5.) 40% 40% 42% 33% 33% 30% However, it will not be easy for banks to pick a 20% winning model – or to make it successful in a 21% 18% of the business that will be profitable? And I think 24% 13% 10% 10% crowded market “The question is, what is the shape 20% 18% 17% 8% 0%0% 0% Strongly agree the answer to that is unknown,” says the head of prudential advisory at a consulting firm “Moreover, 0% 0% 0% Strongly disagree if multiple banks change their business in the same way, how many banks can be profitable with the same type of business? How many banks can be Figure Q3a, functional split Do you agree or disagree with the following statements? We are looking at the new regulatory environment as an opportunity to gain market share major flow players, for example?” There is also a worry that the changes in Basel III are so big, if any provision unwittingly creates an unlevel playing field it could proffer huge advantages to certain players Unequal treatment in just a single area of Basel III could have far-reaching effects “For example, there has been a worry that the treatment of deferred tax assets (DTAs) might be more beneficial for US banks than for European banks and, depending on how it’s implemented, that would have a number of consequences Firstly, it would immediately make their capital levels higher and their costs lower Secondly, it would make it easier for an American Figure Do you agree or disagree with the following statements? Scale of to bank to buy a bank in difficulty than for a European We are looking at the new regulatory environment as an opportunity to transform our business model/structure the basis of the benefits of the DTAs, because some 100% of that tax can be clawed back Seemingly small inequalities could have large ripple effects.” U.S U.K 90% bank; banks in difficulty have hitherto been bought on 80% New regulations as an opportunity for transformation 70% 60% Part of the optimism surrounding the chance to 50% 30% win market share or gain some form of competitive 39% 40% 26% 23% 27% advantage is tied to the potential of new regulations 29% 17% 20% to have a transformative effect on the business This has clearly been picked up by survey respondents, 20% with more than half (57%) agreeing with this proposal 13% 7% 10% and the UK, again, markedly more optimistic than the 0% 0% Strongly agree US (See Figure 6.) Strongly disagree However, more than half (54%) of respondents were keen to maintain their current operation models and structures But this is not as counterintuitive as it may Figure Q3b, geographic split Do you agree or disagree with the following statements? Scale of to We are looking at the new regulatory environment as an opportunity to transform our business model/structure seem, as it relates to where bankers see the greatest opportunity for transformation – and this is in systems and processes rather than at the organizational level “Banks have grown as groups of discrete business silos, with each silo capturing data, interrogating data and leveraging that data,” says the head of IT at a large European bank operating in London “The industry may have gone a long way towards achieving overall efficiency, but we have never achieved information efficiency New regulations – while onerous and costly – offer us an opportunity to take a fresh look at how we manage these and other processes, and to retool operations in a way 10 Figure 10 Do you agree or disagree with the following statements? Scale 1-5 Figure 11 Do you agree or disagree with the following statements? Scale 1-5 We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the new, higher levels required by new regulation We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the new, higher levels required by new regulation 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 40% Operations Risk Trading Regulation 60% 52% 50% 36% 38% 40% 30% 46% 30% 16% 20% 10% 25% 25% 20% 20% 20% 8% 46% 38% 33% 10% 2% 0% 0% Strongly agree Strongly disagree Strongly agree Figure 10 Q10a, overall 10% 8% 9% 5% 0% 0% 4% 0% 0% 0% Strongly disagree Figure 13 Do youFigure agree disagree or Q10d, functionalwith split the following Scale the to following Dostatements? you agree or disagree with statements? Figure 12 Do agree you or agree orwith disagree withstatements? the Do you disagree the following following statements? Scale 1-5 Scale 1-5 We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the Ratealready to We are concerned the increased transparency We have identified the that systems that will require We have already identified the systems that will require new, higher to levels required new regulation required by new regulations will bethe a threat our competitiveness modification/upgrade to handle new,tohigher levels modification/upgrade handle thebynew, higher levels of data required by new regulation of data required by new regulation 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 60% 54% 50% 44% 40% 30% Operations Risk Trading Regulation 40% 28% 36% 33% 38% 40% 36% 30% 25% 16% 20% 19% 18% 20% 13% 10% 9% 10% 10% 10% 2% 0% 0% Strongly agree Strongly disagree 0% Strongly agree Figure 12 Q10b, overall Do you agree or disagree with the following statements? Scale 1-5 We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the new, higher levels required by new regulation 14 4% 0% 4% 0% 0% 0% Strongly disagree Figure 13 Q10b, functional Do you agree or disagree with the following statements? Scale to We have already identified the systems that will require modification/upgrade to handle the new, higher levels of data required by new regulation Banks are acutely aware of new data requirements The survey revealed that almost three-quarters of banks have a strategy in place in order to identify Figure 14 Do you agree or disagree with the following statements? Please rate on a scale of to where changes to systems need to be made, or have already identified the systems which will need Once we have adopted changes to our data infrastructure, management will be able to prove they have better control of information, as required by regulators modification Three of the four business functions surveyed are well advanced in terms of preparation, led by operations, with only the regulatory function lagging (See Figures 10 through 13 on page 14.) 100% 90% Banks have a strategy for communicating the impact of regulatory changes to clients and counterparties 80% About three-quarters (74%) agree or strongly agree 70% that they have a strategy to communicate changes to 60% clients and counterparties 50% Most banks are confident that once they have adopted 36% 40% 30% planned changes to their data infrastructure, their 30% management will be able to prove they have better 20% control of information, as required by regulators 20% However, UK banks are much more confident than 10% their US counterparts (See Figure 14 and 15.) 7% Strongly disagree 0% Strongly agree The shape of things to come 8% Figure 14.Q3d, overall Do you agree or disagree withagree the following statements? Please on a scale of to Figure 15 Do you or disagree with the rate following Oncestatements? we have adoptedPlease changes rate to ouron data will be able to a infrastructure, scale of tomanagement prove they have better control of information, as required by regulators Once we have adopted changes to our data infrastructure, management will be able to prove they have better control of information, as required by regulators Some banks have already taken steps to refine the shape of their organizations to minimize the impact of regulations In February, for example, the UK’s Barclays disclosed that in November 2010 it had 100% deregistered its US bank-holding company The bank U.S U.K 90% said this was to better align the business with the appropriate capital regimes; in doing so, the bank 80% avoided having to inject as much as $12bn to make 70% up a capital shortfall in the US 60% As a result of the change, Barclays folded a credit- 50% card operation into a new US entity that is a direct 40% subsidiary of the British parent company The 45% 39% 27% 30% credit-card bank is regulated by the Federal Deposit Insurance Corporation and needs no additional 20% injection of capital Before the move, Barclays 10% Capital, the group’s investment bank, was held within 30% 20% 10% 13% 10% 3% 3% 0% Barclays Group US Inc., which was subject to federal Strongly agree capital requirements It will now be subject to SEC Strongly disagree regulation instead 15 Figure 15 Q3d, geographic Do you agree or disagree with the following statements? Please rate on a scale of to Once we have adopted changes to our data infrastructure, management will be able to prove they have better control of information, as required by regulators While the restructuring of Barclays and other banks suggest that senior management is swiftly taking steps to reshape business entities, survey respondents across most areas of business were undecided about whether new regulations would lead firms to relocate or outsource any business functions, or create a shared utility In 13 of the 17 areas of operation, the majority of respondents said they did not know what the impact of regulation would be on organizational structure (See Figure 16.) However, over a third (36%) of UK and almost half (47%) of US respondents agreed or strongly agreed that they anticipate working with new back office providers due to regulatory change, compared to about a quarter of UK and over a third of US respondents who anticipate working with a new middle office provider There are four areas (operations, risk management, financial control and IT) where new strategies are clearly being contemplated In operations, more than a quarter (26%) of US respondents and a third of UK respondents said they anticipated the creation of shared utilities Operations professionals were even more enthusiastic, with almost 48% suggesting this was a possible route Similarly, the creation of a shared utility was seen as a likely choice for risk management, with a third of all respondents and 43% of risk professionals suggesting this option Figure 16 Due to regulatory change, which business functions you anticipate having to relocate or outsource, partly or completely? 100% 90% 80% 70% 68% 66% 66% 65% 63% 61% 60% 61% 60% 58% 58% 53% 50% 50% 48% 50% 47% 43% 39% 40% 30% 20% 10% Figure 16 Q6, “don’t know list” Due to regulatory change, which business functions you anticipate having to relocate or outsource, partly or completely? 16 s tio n era Op IT t em en rch ag se a Re an Ris km ntr ol ng cia l co an Cle ari Fin ce ing lian mp Co rat rpo Tra d an eb Co vat et rea su ry I R co /m mm ar un keti ica ng tio / ns Co rpo r a fina te Pro nc pri e eta ry tra din g g kin les Sa Pri ak ing en ti ma nves na tme ge nt me nt Cli Ma rke t-m GT S 0% By function, traders see the greatest potential for Global banks are complex entities that have typically regulations to shape operations strategy: 40% of evolved to satisfy a variety of drivers from growth, traders thought new regulations would lead to trading to cost cutting, to tax benefits Often, they not operations being relocated; 30% thought that market- develop as standalone entities but share functions making and prop trading will be relocated; 40% with other parts of the group Business done in thought that a shared utility may be created for client one country may be transferred somewhere else investment management; and a third thought that IT for management Likewise, income generated in may be outsourced one location may be paid away somewhere else The result is sprawling global institutions, often Shared services such as regional data centers are comprising hundreds of different entities, vehicles already common practice at many global financial and participations, which have been made more institutions, particularly at retail banks, which rely heavily efficient through the use of cross-agreements for the on gathering, processing and analyzing customer provision of services, people and funding information in order to tailor services The CEO of the EMEA consumer division of a major US bank says Up to now, banks have been indifferent to how these shared services offer big advantages for bank and structures looked But in the world of Living Wills and customer But he notes that there are already forces in resolution regimes, if a crisis means a bank must ring- play which may put pressure on this business model fence a particular business, write it down or sell it, the parent needs to know exactly how it interrelates with “Customers execute business with us through all the other parts of the jigsaw Regulators will want applications hosted in our data centers One reassurance that, if firms have transferred positions example is the fraud analysis we on credit cards from one jurisdiction to another, there is enough capital Another is the risk analysis we perform under the and risk management capacity to contain the risks in new requirements of various jurisdictions Using the transferred positions If the business has paid away regional data centers is an advantage for several income, regulators will ask how that affects profitability reasons The facilities are state of the art, present and risk management of the entity that is paying a closed circuit and have no major single points of away Untangling this spaghetti to create an enterprise failure within the core infrastructure Our data centers map will prove extremely difficult for some And the enhance the bank’s risk management, allowing us existence of shared services may make it more difficult to mitigate or accept risks based on a composite impact analysis rather than through isolated and “The detail is challenging,” says the head of prudential market-specific analyses Such centers allow us to advisory at a consulting firm “Banks have to ask maintain consistent processes across regions We themselves if a business could be broken up and sold have an ‘end-to-end’ view of the data, which improves off, and what they would about critical elements the quality and timeliness of services provided It that they would have to pass on to someone else? also allows us to better comply with legal/regulatory Is it standalone or is it dependent on other parts of requirements Several jurisdictions are looking to the organization? If it’s not standalone, what needs require local data processing, however The intentions to be done to make it saleable as a standalone are understandable, but as outlined above, would operation? Could they provide the right information undermine several of the same public policy goals.” to the authorities so that they can maintain critical functions such as current accounts? All of this is actually extremely difficult to achieve In that sense, shared services could become an obstacle to a viable The impact of resolution regimes on structures resolution plan If you wanted to sell a business that is dependent on a shared service, how standalone is it? The push towards bank resolution regimes, or Living Can someone else buy it, or does the shared service Wills, will also have a material impact on strategies affect the viability of the business?” in this area because the patchwork nature of many banking groups not lend themselves to drawing clean lines between businesses 17 Conclusion As financial institutions operating in the US and UK continue to ask themselves questions such as these, attempting to determine how best to reshape their businesses in light of new regulatory requirements, they also await clarification from regulators on both sides of the pond The interim report of the Independent Banking Commission in the UK was released midApril, but the final report is not out until September However, the recommendations of the Commission, such as ring-fencing retail operations and improving capital buffers, are just that – recommendations, which must be accepted by the government and implemented before banks have absolute clarity on the detail of new regulation In the US, the SEC and other regulators are working towards a July deadline for implementation of Dodd-Frank but already there is talk of a delay of up to 18 months for some parts of the Act These delays may give gives banks more opportunity to work with regulators to find solutions that make the financial system safer while maintaining competitiveness – or they may just drag out the uncertainty 18 Appendix Figure At what stage is your company in preparing for changes required by regulatory reform? We have identified the regulatory changes relevant to our business 31% We have assessed how regulatory changes will impact our business 13% We have begun implementing changes to our business based on our impact assessments 56% 0% 20% 40% 60% 80% 100% Figure A-1 At what stage is your company in preparing for changes required by regulatory reform? Figure Have you or you plan to align the implementation of your country’s main regulatory reform with that of any of the following regulations? Select all that apply Basel III 89% 59% IFRS 25% FACTA 0% 20% 40% 60% 80% Figure Q2 Have you or you plan to align the implementation of your country’s main regulatory reform with that of any of the following regulations? Select all that apply 19 100% Figure Do you agree or disagree with the following statements? Please rate on a scale of to where is strongly agree and is strongly disagree Strongly agree We are looking at the new regulatoryenvironment as an opportunity to gain market share 26% We are looking at the new regulatory environment as an opportunity to transform our business model/structure We aim to maintain our current operational model/structure as much as possible, only making changes where explicitly required by new regulation Strongly disagree 25% 25% 33% 33% 11% 23% 43% Once we have adopted changes to our data infrastructure, management will be able to prove they have better control of information, as required by regulators 30% We have a strategy for communicating the impact of regulatory changes to our clients and counterparties 31% 0% 11% 5% 13% 18% 36% 23% 20% 43% 20% 40% 60% Figure Q3 Do you agree or disagree with the following statements? Please rate on a scale of to where is strongly agree and is strongly disagree *Figures not add to 100% due to rounding Figures not add to 100% due to rounding 20 7% 5% 8% 7% 15% 7% 5% 80% 100% Figure In what areas you need additional or more detailed information from clients, due to recent regulatory reform? Select all that apply Risk tolerance 80% Areas willing to invest in/ areas to avoid 39% Willingness to lend securities 38% Demographic information 23% Household/individual balance sheet 23% 0% 20% 40% 60% Figure Q4 In what areas you need additional or more detailed information from clients, due to recent regulatory reform? Select all that apply 21 80% 100% Figure In what areas you need additional or more detailed information from counterparties, due to recent regulatory reform? Select all that apply Transactional data 54% 53% Collateral 44% Corporate structure 43% Capital allocation Client communications 33% 26% Licensing Competition issues 18% 0% 20% 40% 60% Figure Q5 In what areas you need additional or more detailed information from clients, due to recent regulatory reform? Select all that apply 22 80% 100% Figure Due to regulatory change, which business functions you anticipate having to relocate or outsource, partly or completely? Select all that apply Relocate 16% Operations Trading Market-making 16% 19% 12% Proprietary trading Sales Outsource 12% 5% 12% Private banking 12% 5% 11% 9% Compliance 10% 10% Financial control 12% 7% Research 58% 65% 66% 0% 63% 60% 33% 47% 26% 53% 31% 50% 23% 61% 28% 16% 9% 68% 21% 2% 12% 50% 18% 11% 14% 19% 14% 7% Risk management IR/marketing/communications 2% 17% 21% 9% IT 66% 22% Corporate finance Corporate treasury 58% 18% 10% GTS 19% 9% Client investment management 5% 7% Clearing 39% 17% 17% 17% 43% 21% 61% 21% 20% Don’t know 30% 5% 5% Create shared utility 22% 40% 48% 60% 80% 100% Figure Q6 Due to regulatory change, which business functions you anticipate having to relocate or outsource, partly or completely? Select all that apply Figures not add to 100% due to rounding *Figures not add to 100% due to rounding 23 Figure What impact will relocation and/or outsourcing decisions have on attracting and retaining talent? Select all that apply The ability to hire qualified staff is a top criterion when selecting where to relocate specific business funtions 34% We are confident that our outsourcing arrangements will help us retain staff 33% We are concerned that we are likely to lose staff due to outsourcing 33% We are concerned that we will have difficulty hiring qualified staff in the areas we are considering for relocation 33% We are concerned that we are likely to lose staff due to relocation 31% We have a retention strategy to lock in key staff when outsourcing, relocating or creating a shared utility 25% We are confident that our relocation arrangements will help us retain staff 18% 0% 20% 40% 60% Figure Q7 What impact will relocation and/or outsourcing decisions have on attracting and retaining talent? Select all that apply 24 80% 100% Figure Do you agree or disagree with the following statements? Please rate on a scale of to where is strongly agree and is strongly disagree Strongly agree Moving utilities to other providers will save us money in the long run Our plans to outsource certain business functions will create significant complications for our liquidation plan 8% 5% We anticipate working with new middle office providers due to regulatory change 8% We anticipate working with new back office providers due to regulatory change 12% The way in which we will have to transform our legal and financial structure in order to comply with global liquidation requirements will have a significant negative effect on revenues Strongly disagree 8% 0% 30% 44% 33% 36% 23% 41% 30% 51% 40% 8% 20% 8% 18% 16% 60% 7% 18% 36% 16% 20% 12% 80% 5% 8% 100% Figure Q8 Do you agree or disagree with the following statements? Please rate on a scale of to where is strongly agree and is strongly disagree Figures not add to 100% due to rounding 25 Figure Do you agree or disagree with the following statements? Please rate on a scale of to where is strongly agree and is strongly disagree Strongly agree We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the new, higher levels of data required by new regulation 36% We have already identified the systems that will require modification/upgrade to handle the new, higher levels of data required by new regulation 38% 28% The board and senior management have a good understanding of the changes to systems needed to handle the increased levels of transparency required by new regulations We are concerned that the increased transparency required by new regulations will be a threat to our competitiveness Strongly disagree 44% 34% 8% The board and senior management have a good understanding of the implications increased data transparency will have across the business 18% 29% 43% 15% 0% 16% 34% 23% 20% The board and senior management have a good understanding of the implications increased data transparency will have across the industry 16% 51% 20% 40% Figures not add to 100% due to rounding 26 10% 2% 10% 3% 30% 7% 30% 5% 5% 25% 7% 3% 60% Figure Q9 Do you agree or disagree with the following statements? Please rate on a scale of to where is strongly agree and is strongly disagree *Figures not add to 100% due to rounding 8% 2% 80% 100% About Capco Capco, a global business and technology consultancy dedicated solely to the financial services industry We work in this sector only We recognize and understand the opportunities and the challenges our clients face We apply focus, insight and determination to consulting, technology and transformation We overcome complexity We remove obstacles We help our clients realize their potential for increasing success The value we create, the insights we contribute and the skills of our people mean we are more than consultants We are a true participant in the industry Together with our clients we are forming the future of finance We serve our clients from offices in leading financial centers across North America and Europe Worldwide offices Amsterdam • Antwerp • Bangalore • Chicago • Frankfurt • Geneva • Johannesburg London • New York • Paris • San Francisco • Toronto • Washington DC • Zürich To learn more, contact us at +1 212 284 8600 (+44 20 7426 1500 from outside the United States or Canada), or visit our website at CAPCO.COM © 2011 The Capital Market Company NV All rights reserved T1054A-01-GL/A4 [...]... meanwhile, will try to bring transparency to the over -the- counter markets and impose data reporting requirements for transactions to new trade repositories A central plank of the review into the Markets in Financial Instruments Directive, currently underway, is to increase transparency in post-trade reporting 11 Banks are uncertain about the effect of these transparency requirements on their competitiveness,... communicating the impact of regulatory changes to clients and counterparties 80% About three-quarters (74%) agree or strongly agree 70% that they have a strategy to communicate changes to 60% clients and counterparties 50% Most banks are confident that once they have adopted 36% 40% 30% planned changes to their data infrastructure, their 30% management will be able to prove they have better 20% control... groups do not lend themselves to drawing clean lines between businesses 17 Conclusion As financial institutions operating in the US and UK continue to ask themselves questions such as these, attempting to determine how best to reshape their businesses in light of new regulatory requirements, they also await clarification from regulators on both sides of the pond The interim report of the Independent Banking... preparing for changes required by regulatory reform? We have identified the regulatory changes relevant to our business 31% We have assessed how regulatory changes will impact our business 13% We have begun implementing changes to our business based on our impact assessments 56% 0% 20% 40% 60% 80% 100% Figure A-1 At what stage is your company in preparing for changes required by regulatory reform? Figure... rate to ouron data will be able to a infrastructure, scale of 1 tomanagement 5 prove they have better control of information, as required by regulators Once we have adopted changes to our data infrastructure, management will be able to prove they have better control of information, as required by regulators Some banks have already taken steps to refine the shape of their organizations to minimize the. .. worth the hassle or the tax cost Going forward, that costbenefit may change Living Wills or other resolution mechanisms, for example, will force banks to think through a more streamlined structure, and this is helpful in the new Basel III world.” Will transparency help or hurt bank competitiveness? A common motif of the emerging regulatory environment is the aim of shedding new light on every area of banks. .. retail banks, which rely heavily efficient through the use of cross-agreements for the on gathering, processing and analyzing customer provision of services, people and funding information in order to tailor services The CEO of the EMEA consumer division of a major US bank says Up to now, banks have been indifferent to how these shared services offer big advantages for bank and structures looked But in the. .. into the marketplace Although some of the regulations specifically aim to increase transparency in the trading arena, the trading function is the least concerned about the impact (See Figure 7.) From data deficit to information advantage? All new regulations mandate significant additional Figure 7 Do you agree or disagree with the following statements? Rate 1 to 5 data and reporting requirements These... order to get better capital treatment It therefore requires banks to consolidate positions from all of their trading desks 70% and to make their trading book compatible with their 60% banking book This requires data to be both accurate 50% 40% 38% 40% 25% 27% 24% 30% 20% 20% 24% To meet the UK’s liquidity rules, banks will be required 25% 20% 18% 0% 1 Strongly agree to identify, measure, monitor and... and what they would do about critical elements the quality and timeliness of services provided It that they would have to pass on to someone else? also allows us to better comply with legal /regulatory Is it standalone or is it dependent on other parts of requirements Several jurisdictions are looking to the organization? If it’s not standalone, what needs require local data processing, however The intentions ...Written by the Economist Intelligence Unit Change amidst uncertainty: how banks are adapting to the emerging regulatory landscape Capco is pleased to present this The second, related... uncertainty: how banks are adapting to the emerging regulatory landscape is a Capco report, written by the Economist Intelligence Unit It examines how, in light of continuing regulatory uncertainty, ... opportunities to take market share as other banks uncertain in many areas, a raft of regulatory change is retrench or rethink their business models Almost in process two-thirds see regulatory change