The videos below from PWC provide an interesting insight into the current status and future direction of banking
Learn more at PwC.com – http://pwc.to/1eBeif7
“Powerful forces are reshaping the banking industry, creating an imperative for change. Banks need to chose what posture they want to adopt – to lead the change, to follow fast, or to manage for the present. Whatever their chosen strategy, leading banks will need to balance execution against 6 critical priorities and have a clear sense of the posture they wish to adopt. However, each of them is important, and success will come from a balanced execution across these priorities — and a balance of tactical initiatives and longer-term programs, all coming together as an integrated whole.”
Banking Banana Skins 2014 Overview
“Regulators want to ensure that banks, implement effective corporate governance. The scope of corporate governance to address has increased exponentially The separation between ownership and control in firms could result in managers exploiting corporate assets for their own individual interests.”
In the mid-1900s Legislators introduced a wave of corporate governance regulations to mitigate risk with new requirements for the role of the board overseeing the firm’s business strategy and financial soundness, key personnel decisions, internal organisation, governance structures and risk management practices. So long as boards did their job, it then seemed that investors would be protected.
Now a bank’s corporate governance has to protect against all the risks that bank’s business may experience. and there is zero tolerance of a bank’s failure to manage its risks. Not to mention adverse negative media attention and steep regulatory fines. The fallout of the 2007 financial crisis, perhaps overlooks the risks inherent in a bank’s business model – with governments, regulators, investors and customers all demanding change.
New laws impose more stringent requirements and intensified scrutiny and pressure from regulators. Significant problems remain. The Financial Stability Board (FSB) has asserted that much more work is needed to “establish effective risk governance frameworks” (2013).
The Basel Committee on Banking Supervision (BCBS) recently revised its Guidelines Corporate governance principles for banks on 10 October 2014. This further raises the standards in corporate governance at banks and emphasizes the critical role of the board and its risk committees in ensuring a bank’s risk governance.
The BCBS suggests that boards should be more involved in “evaluating and promoting a strong risk culture in the bank” by setting the banks” risk appetite and overseeing the implementation of this. The increased focus on risk and the supporting governance framework includes identifying the responsibilities of different parts of the bank for addressing and managing risk. These areas are often referred to as the “three lines of defence”:
- business units
- risk management function
- internal audit.
Regardless of the structure, responsibilities for each line of defence should be well defined and communicated and supported by the board.
Managing risks includes identifying, assessing and reporting such exposures, taking into account the bank’s risk appetite and its policies, procedures and controls. The manner in which the front line a business unit executes its responsibilities should reflect the bank’s existing risk culture—in a top-down fashion directly aligned to the approach set by the board.
An effective risk management function complements the business unit’s risk activities by monitoring and reporting against responsibilities. Among it is responsible for overseeing the bank’s risk-taking activities and assessing risks and issues independently from the business line. This requires an independent and effective compliance function responsible for routinely monitoring compliance with laws, corporate governance rules, regulations, codes and policies to which the bank is subject. The function must have sufficient authority, stature, independence, resources and access to the board.
An independent and effective internal audit function . should “provide independent review and assurance on the quality and effectiveness of the bank’s risk governance framework including links to organisational culture, as well as strategic and business planning, compensation and decision-making processes”. The board should ensure that the risk management, compliance and audit functions are properly positioned, staffed and resourced and carry out their responsibilities independently and effectively.
Effective internal corporate governance provisions doesn’t just benefit small stakeholders. Ensuring effective oversight of managerial actions should result in lower equity and debt capital cost for the bank, a reduction of labour costs and higher value in products and services from clients but it also poses many challenges for the banks and their regulators. . Complexity can take many forms such as the evaluating the quality of a bank’s loan portfolio or ascertaining the importance of off-balance sheet operations. The BCBS’s revised principles provide a framework within which banks and supervisors should operate to achieve robust and transparent risk management and decision-making and, in doing so, promote public confidence and uphold the safety and soundness of the banking system.
EU banks s(bar Italy) stood-up pretty well to the EBA’s stress test. Only 25 failed (CET> 5.5%) from the 130 banks tested. About half of those had already taken actions to remedy their alleged failings, .
So outside of Italy, EU banks should be more confident to lend again and rebuild their damaged balance sheets.. Banks will eventually have to open their cheque books and start lending again. Moreover, the Banking Union will further break-down barriers to cross-border lending within the Eurozone. Banks will no longer have any endogenous constraints to lending in any Eurozone country.
External constraints still need to be considered. The Eurozone economy is on the verge of tipping into its third recession in only six years. The Eurozone is “marching towards stagnation and deflation” according to the Economist (25 October 2014). A large portion of its private sector is actually minimising debt instead of maximising profits following the housing collapse in the 1990s, to repair their balance sheets. This deleveraging reduces aggregate demand and throws the economy into a very special type of recession. There are signs that the EU may be suffering from a similar fate to Japan.. Governments and central banks don’t have any easy solutions to put things right again.
Other financial institutions are considering taking a larger slice of the credit market. Insurance firms provide one option – they take in more than €1 trillion in premiums each year. As with the banks, new rules will force insurers to hold more capital than before against corporate loans. Equity investment or debt finance from asset managers and other shadow bank players are also increasingly another option for obtaining credit. Regulatory action to facilitate some types of credit is also being considered. For example, the EBA is seeking views on what is required to simulate a “prudentially sound securitisation market” with a view to “widening long-term funding opportunities for the European economy”. It
The EBA published its Work Programme 2015 on 10 October 2014 (dated 30 September 2015). Drafting regulatory and technical standards on CRD IV, BRRD and the revision of the Deposit-Guarantee Schemes Directive will take-up the majority of the EBA’s workload in 2015. The EBA also expects to contribute to the various legislative processes (e.g. shadow banking), monitor implementation (e.g. CRD IV), calibrate rules (liquidity and leverage ratios) and develop various ad-hoc reports (e.g. Bitcoin).
The FSB revised its Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes) on 15 October 2014,to incorporate recently published guidance on the resolution of FMIs and insurers, client asset protection and information sharing. The FSB also published Guidance on Cooperation and Information Sharing with Host Authorities of Jurisdictions Not Represented on CMGs where a G-SIFI has a Systemic Presence on 17 October 2014.
The ECB will take over responsibility for prudential supervision of Eurozone banks from 4 November 2014. This change represents a significant milestone in the evolution of EU banking regulation.
Also, on 20 October 2014, it published a Decision of the European Central Bank of 17 September 2014 on the implementation of separation between the monetary policy and supervision functions of the European Central Bank (ECB/2014/39). The decision sets out the ECB’s arrangements for complying with the separation of the monetary policy function from the new supervisory function under SSM. It outlines arrangements related to professional secrecy and the exchange of information between the two functions. The decision will enter into force on the day of its publication in the Official Journal.
Further to our recent meetings with many banks at Gitex. We will be hosting BRSAnalytics principals and software authors, Computime and holding a series of meetings and proof of concepts with local banks in mid November. Meet with our expert team and understand how the purpose designed data model and regulatory processes built into BRSAnalytics proven in many bank over over the last 8years, can help you comply with current and future regulatory compliance with a rapid implementation. Slash reporting time, and cost and risk of error and relax in the knowledge of expert local support that will keep reports current with Central Bank requirements.
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