Banks are continually confronting a tidal wave of regulatory changes, including Basel II, International Financial Reporting Standards (IFRS), the Sarbanes-Oxley Act, and anti-money laundering legislation. And, more regulations are on the horizon, such as the new Prudential Sourcebook (PS) in the United Kingdom and the Financial Services Action Plan (FSAP) for the European market.
How can a bank hope to comply with this deluge of regulation?
The answer: a holistic approach that assesses the common issues and identifies the information that can satisfy multiple regulations.
Most banks tend to manage in a sliced fashion, focused on meeting the requirements of individual regulations as they emerge. This approach carries significant risk of duplication of efforts.
A more integrated viewpoint provides enhanced oversight, greater transparency, and better insights on how regulations might impact a bank's business model.
For example, in calculating return on equity for a line of business, IFRS changes the numerator-the profit basis. In addition, both IFRS and Basel change the denominator-the capital allocation, since Basel regulation is derived from accounting measurements, and IFRS will strongly affect the shareholder's equity. This may cast a different light on strategic questions, such as guiding banks to focus more on retail than wholesale lines of business.
Strategies for Success
The evolving nature of many regulations makes investing in people, technology, and processes extremely difficult. Thus, senior executives must look for areas of commonality, conflict and potential synergy. An integrated approach reduces cost by going beyond the direct impact on data and systems to focus on how the totality of the regulatory change will impact all areas of the business.
Banks can enable this shift to an integrated regulatory view through the following:
- Gap Assessment: Determine the gap between the current approach and future requirements across a number of mandatory drivers.
- Program Management: Identify synergies to coordinate and streamline the approach, maximizing knowledge sharing to reduce costs.
- Change Management: Demonstrate the need for sustainable change and provide sufficient training.
- Resources: Ensure resources and skill sets can meet project deadlines, while balancing availability across the operations.
- Executive Reporting: Provide senior management with a clear view of the integrated change program to determine issues and priorities.
- External Communications: Explain the impact of changes on capital requirements and earnings to stakeholders, and manage the relationship with regulators.
For banks that fail to meet these challenges, the prospect of increased capital requirements, regulatory censure and declining profitability could drive mergers. Ineffectively managing compliance could also derail other major projects.
Banks that chart their course through the regulations will grow in stature as they link strategy to an integrated analysis of the implications of these changes. The result will be: increased transparency, reduced costs and more efficient use of risk-adjusted capital. An integrated, holistic approach to regulation is essential to sail through these seas of constant change.
The views expressed in this article are those of the author and do not necessarily represent the views of Deloitte & Touche.