Regulatory compliance is top of mind these days among bankers. While final details of the bank reform legislation are still being ironed out, it's clear that the impact will be significant.
The leading financial institutions, however, will not simply approach the new rules -- in whatever form they take -- with a "compliance-only" mind-set. Rather, as part of their substantial efforts to adhere to the regulations, they are identifying and working to capitalize on many cost-savings opportunities -- for instance, by streamlining their analytical capabilities and lowering their cost of capital due to better risk profiles. These savings can be a major benefit at a time when reducing operating expenses is still a significant concern for financial services companies facing increased liquidity demands.
With many observers agreeing that the worst of the recession is now behind us, banks are also cautiously planning ways to reignite growth -- for example, through measured risk taking and focusing on products that will be most profitable in the new regulatory environment.
There is no doubt that the new regulations will challenge financial institutions and even threaten the viability of some. Increased requirements for operational transparency and more detailed information will require banks to access audit-quality company data quickly to meet greater reporting and analytic demands. At the same time, stricter capital, accounting, liquidity and risk standards will compel many firms to carry substantially more capital.
DEFINING A VISION
The new regulatory landscape, however, offers up a rare chance to be the first to improve key business processes and identify new growth opportunities. That is why forward-thinking institutions are getting a head start by defining a vision for how reform will affect all aspects of their business. To jump-start that process, banks should focus on four key areas:
Corporate strategy. Conduct a targeted, top-down assessment to identify the affected areas of the bank's business model. Changes in the business model, capital requirements and product portfolios may be needed. To develop a comprehensive vision that glues together the regulatory changes with the capability to seize marketplace opportunities, a group of corporate strategists, architects and risk professionals should be assembled to define the strategic implications while at the same time ensuring regulatory compliance.
Corporate data. Develop more robust data capture, storage and reporting systems. These will be essential to meet increased demand for more detailed exposure information and enable execution of complex analytics such as stress testing at increased levels of granularity across multiple portfolios and risk types. Carefully designed enterprise systems can ensure that high-quality data on finances and operations is quickly accessed to capitalize on emerging marketplace opportunities.
Risk management. Broaden and deepen risk management practices to increase the scope of risks monitored, measured and managed. According to an Accenture survey last year of chief risk officers, 85 percent confirmed the need to overhaul their approach to risk management. Modernizing risk practices will only work, however, if risk management is positioned as an equally important practice alongside sales and marketing. Without significant cultural change, risk management will remain a compliance exercise, not a competitive differentiator.
Financial management. Strengthen financial, capital and liquidity management practices, specifically around asset valuation, capital and liquidity forecasting, and the use of risk management data.
Banks that approach the new regulatory environment with a strategy beyond compliance will find themselves well positioned for post-recession growth.
Chris Thompson is the head of Accenture's global banking risk management practice.