The global financial crisis ushered in an unprecedented wave of global regulatory changes in response to failures in financial markets and at institutions to identify and respond to the asset bubble in U.S. housing. Prominent among these reforms are the Dodd-Frank Act, Solvency II, FATCA and Basel III, as well as a host of regulatory changes underway in a number of countries. This environment poses several challenges to banks with global retail operations that few are positioned well to meet. Risk exposure transparency, stress testing and consumer protections are of keen regulatory interest these days and require a different approach to managing global retail systems.
Banks facing these issues need to develop systems that better capture and integrate essential transaction and risk position information on their retail customers across geographic boundaries. Further, the ability to aggregate exposures, run sensitivity and stress scenarios, and report findings to regulatory bodies requires a degree of integration between data warehouses and business and analytic systems that has not yet been achieved. Banks that develop these capabilities put themselves at an advantage compared to other institutions in terms of improved compliance cost burdens, systems scale economies, more transparent P/L and risk management, and improved responsiveness to changing business conditions.
Historically, global retail operations developed as a patchwork of businesses in individual countries, resulting in multiple origination, processing and risk management systems. This approach, while not optimal, was manageable within the regulatory structure of the time. Now, however, banks face the need to submit detailed transaction data and performance data from across the enterprise. This includes all facets of the business and associated risks, including loan exposures across lending products and counterparty exposures, as well as liquidity, operational, market and interest rate risk exposures.
For retail banking operations, such requirements add to the complexity of managing cross-border retail exposures that may require hedging strategies with a variety of counterparties. Regulatory agencies also are placing greater focus on developing more timely and disaggregated views of risk, which will require firms to submit more detail on their businesses. The Office of Financial Research (OFR), a new agency formed out of Dodd-Frank to measure systemic risk, also is likely to elevate the need for better data to be provided to regulators. And the latest incarnation of Basel regulatory capital requirements will push the frontiers of data collection and analysis even further, placing still greater pressure on far-flung systems that have little ability to interact across business lines effectively.
The Power of a Global Platform
This highlights the need for global retail banking operations to redouble their efforts to integrate data, analytics and reporting capabilities across geography. The benefits from harnessing the power of a global retail platform can be transformative to the firm. First, the ability to leverage insights from other markets and experiences where no such products or services yet exist can inform finance, risk management and the business of potential dangers or opportunities. Second, as market conditions change, the ability to reassess and redeploy capital to better-performing segments is critical to remain competitive under the new regulatory paradigm.
Third, firms can reap big cost efficiencies by consolidating multiple platforms with different operating systems. Finally, in an era of rising regulatory compliance costs, firms will be able to offset the need to add personnel to nurse and stitch together results from unwieldy and disparate global operating systems.
Efforts to build a truly global retail banking platform are daunting and capital- and people-intensive. The current regulatory environment, however, calls for a new approach that should be the catalyst for change. Institutions that embrace rather than resist this new environment place themselves at a competitive advantage that transcends the ability to meet heightened regulatory requirements. The by-products from developing an integrated global retail banking system will allow banks to operate with greater agility and better financial performance than those that make do with existing capabilities.
Dr. Clifford Rossi is an executive-in-residence and Tyser Teaching Fellow at the Robert H. Smith School of Business, University of Maryland. Previously, he was chief risk officer for Citigroup's consumer lending group.