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
2
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
*For further discussion of these questions please see the Capco
Thoughts white paper, Regulatory Reform: 7 Critical Questions
for Financial Services Firms, available on capco.com.
3
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.
4
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 do 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.
5
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.
6
Assessment, understanding and
implementation
Figure 1. 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 1 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 1. 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 2. Have you or do 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 2. Q2, geographic split. Have you or do 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.
7
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 3. 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 3. 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 do 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.
8
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 4. 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 do 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%
1
Strongly agree
is an opportunity to gain market share. Bankers in
30%
2
3
4
5
Strongly disagree
the US, however, are less optimistic, with only 20%
clearly positive about the potential for opportunity.
Figure 5. 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%
1
Strongly agree
the answer to that is unknown,” says the head of
prudential advisory at a consulting firm. “Moreover,
2
3
4
0%
0% 0%
5
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 5. 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?”
9
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 6. Do you agree or disagree with the
following statements? Scale of 1 to 5.
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%
1
Strongly agree
2
3
4
US. (See Figure 6.)
5
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 6. Q3b, geographic split
Do you agree or disagree with the following statements?
Scale of 1 to 5. 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
that benefits the group, rather than how it suits the
individual business. If we can break down silos, there
are clearly opportunities to generate competitive
advantage from that.
“There is an element of ‘pre-crisis’, and ‘post-crisis’
thinking here, with new regulations as the catalyst
for change,” he adds. “Historically, the cost-benefit
of streamlining systems and processes relative to
the cost of doing nothing meant it was not 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 and financial markets. For example,
Dodd-Frank aims for greater transparency into risk
exposure across the financial system, and several
key components of the law require financial services
institutions to collect and report on risk exposure
in their business. The Financial Stability Oversight
Council, in its role as systemic risk monitor, will
collect risk data from various sources including
federal and state financial regulatory agencies and
the newly created Office of Financial Research (OFR);
among other things, the OFR will be responsible for
collecting data from financial services companies.
Similarly, the UK’s Financial Services Act and Basel
III both impose a high degree of transparency on key
metrics, including bank capital, liquidity, collateral and
counterparty risk, requiring such data to be reported
to bank boards and regulators. The European Market
Infrastructure Regulation, 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,
although some have expressed concern that
sensitive data about capital, liquidity and exposures
could easily leak out 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 present
We are concerned that the increased transparency
required by new regulations will be a threat to our
competitiveness.
for banks’ information architecture.
collection, integration and management challenges
Basel III, for example, aims to eliminate the kind of
100%
regulatory arbitrage where a bank moves assets from
Operations
Risk
Trading
Regulation
90%
80%
the banking book into the trading book in 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 stress test liquidity
20%
risk in a much more detailed way, and to process and
9%
5%
4%
0%
2
which have not been applying Basel rules up to now.
38%
10%
10% 8%
0%
and clean, and will be a challenge for any US banks
46%
deliver the data to the Financial Services Authority
(FSA) on a regular basis.
3
4
5
Strongly disagree
Basel III also requires a unified view of counterparties
and counterparty credit risk, and the capacity to
measure and process the data. In addition, the move
Figure 7. Q10d, functional split
Do you agree or disagree with the following statements?
Rate 1 to 5. We are concerned that the increased transparency
required by new regulations will be a threat to our competitiveness
to centralized collateral management, as well as the
introduction of the net stable funding ratio and the
liquidity coverage ratio, will require new data models.
To fulfill many of the requirements, banks need to
collect more detailed information from the trading
partners and their clients. Respondents to the
survey highlighted several areas where they needed
additional data from counterparties, led by collateral
and transaction data. By function, there were some
noticeable spikes in data requirements. (See Figures 8
and 9 on page 13.)
12
For some banks, data projects are about creating
value as well as compliance. “We identified information
architecture as the lynchpin in meeting new regulations
early on, so we are quite a long way down the road in
terms of where we need to be in order to change our
information systems,” says the head of IT at a large
US bank. “Because we also identified that this is an
Figure 8. In what areas do you need additional or
more detailed information from counterparties,
due to recent regulatory reform?
area where we could create value for the business, we
prioritized this over some other IT projects.”
100%
There is a high cost associated with meeting new
90%
requirements, however. “There is a huge impact on
data systems across multiple product and business
80%
lines,” says the head of compliance at a large
70%
European bank operating in London. “Estimates
60%
suggest that it will cost large banks around $100m
each to put the systems and processes in place to
50%
comply with Basel III. We will have to find ways of
40%
calculating the newly introduced net stable funding
54%
53%
44%
43%
33%
26%
30%
ratio and the liquidity coverage ratio, and have the
capability to stress test our calculations and report
20%
to our board and to regulators. Because the Basel
10%
Senior Supervisors Group favors a standardized
18%
C
ica lient
tio
ns
Lic
en
sin
g
Co
mp
etit
iss ion
ue
s
mm
co
modeling techniques.”
un
Co
Tra
n
to integrate data sources and adopt new data
llat
tio
n
da al
ta
sac
of truth – on the IT side, this means banks will have
era
l
Co
rpo
str ra
uc te
tur
e
Ca
allo pit
ca al
tio
n
0%
centralized risk data set – the so-called single source
Figure 8. Q5, overall
In what areas do you need additional or more detailed
information from counterparties, due to recent regulatory reform?
Figure 9. In what areas do you need additional or
more detailed information from counterparties,
due to recent regulatory reform?
100%
100%
Operations
Risk
Trading
Regulation
90%
80%
64%
60%
70%
60%
62%
62%
60%
55%
54%
48%
50%
43%
42%
36%
33%
40%
30%
46%
36%
40%
42%
33%
33%
21%
20%
17%
20%
42%
20%
18%
10%
9%
10%
0%
Figure 16. Q6, “don’t know list”
Due to regulatory change, which business functions do you anticipate
13 or outsource, partly or completely?
having to relocate
un Cli
ica en
tio t
ns
co
mm
C
allo apit
ca al
tio
n
etit
iss ion
ue
s
mp
Co
tio
n
da al
ta
sac
Tra
n
Co
rp
str orat
uc e
tur
e
g
sin
en
Lic
Co
llat
e
ral
0%
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%
1
Strongly agree
2
3
4
5
Strongly disagree
1
Strongly agree
Figure 10. Q10a, overall
10%
8% 9%
5%
0%
2
0%
3
4
4%
0%
0% 0%
5
Strongly disagree
Figure 13. Do youFigure
agree
disagree
7. or
Q10d,
functionalwith
split the
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Scale
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to following
5.
Dostatements?
you agree or disagree
with
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Figure 12.
Do agree
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disagree
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the
Do you
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Scale
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Scale 1-5. We have
a company-wide
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that will require
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Ratealready
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We
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of data required by new regulation.
100%
100%
90%
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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%
1
Strongly agree
2
3
4
5
Strongly disagree
0%
1
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%
2
0%
3
4
4%
0%
0% 0%
5
Strongly disagree
Figure 13. Q10b, functional
Do you agree or disagree with the following statements?
Scale 1 to 5. 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 1 to 5.
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%
4
5
Strongly disagree
0%
1
Strongly agree
The shape of things to come
8%
2
3
Figure 14.Q3d, overall
Do you
agree or
disagree
withagree
the following
statements?
Please
on a scale of 1 to 5.
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 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 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
1
Strongly agree
capital requirements. It will now be subject to SEC
2
3
4
5
Strongly disagree
regulation instead.
15
Figure 15. Q3d, geographic
Do you agree or disagree with the following statements?
Please rate on a scale of 1 to 5. 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 do 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 do you anticipate
having to relocate or outsource, partly or completely?
16
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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 do 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 do 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 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
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 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 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 1. 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 2. Have you or do 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 do 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 3. Do you agree or disagree with the following statements?
Please rate on a scale of 1 to 5 where 1 is strongly agree and 5 is strongly disagree.
1
2
3
4
5
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 1 to 5
where 1 is strongly agree and 5 is strongly disagree.
*Figures do not add to 100% due to rounding.
Figures do not add to 100% due to rounding.
20
7%
5%
8%
7%
15%
7% 5%
80%
100%
Figure 4. In what areas do 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 do you need additional or more detailed information from clients, due to
recent regulatory reform? Select all that apply.
21
80%
100%
Figure 5. In what areas do 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 do you need additional or more detailed information from clients, due to
recent regulatory reform? Select all that apply.
22
80%
100%
Figure 6. Due to regulatory change, which business functions do 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 do you anticipate having to relocate or outsource,
partly or completely? Select all that apply.
Figures do not add to 100% due to rounding.
*Figures do not add to 100% due to rounding.
23
Figure 7. 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 8. Do you agree or disagree with the following statements?
Please rate on a scale of 1 to 5 where 1 is strongly agree and 5 is strongly disagree.
1
2
3
4
5
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 1 to 5
where 1 is strongly agree and 5 is strongly disagree.
Figures do not add to 100% due to rounding.
25