December 16, 2015 - Next year will see banks increasingly explore ways to use insights from regulatory trends to inform boardroom decision making on risk management and strategic business topics. That's according to Europe, Middle East & Africa (EMEA) experts at Wolters Kluwer Financial Services who predict closer integration between risk and finance functions and that banks will focus on formulating strategic, financial and operational responses to regulatory trends and market dynamics.
Banks who wish to remain competitive will work to break down traditional siloes, adopting a forward-looking approach, agile enough to decipher new threats. And this is where governance, finance, risk and compliance (GFRC) are converging, Wolters Kluwer Financial Services’ experts note.
Arguably, 2016 will also be a year in which firms and regulators will be continuing to get to grips with a world no longer governed solely by capital, but increasingly by liquidity and leverage. And as bank boards face the need to establish strong risk governance the year ahead could well become the year that risk governance silos are finally dismantled.
Full analysis from the firm’s EMEA experts appears below.
Nancy Masschelein, vice president, Risk and Finance, EMEA
Regulatory pressure was high in 2015 and this trend will continue in 2016. The agendas of the Chief Risk Officer (CRO) and Chief Financial Officer (CFO) will surely continue to be impacted by a myriad of regulations. They will not only calculate capital and liquidity buffers, they will also increasingly analyze how regulatory rules and market dynamics affect margins and earnings.
The Fundamental Review of the Trading Book (FRTB), for example, is a major overhaul of market risk capital requirements. The rules clearly require banks to rethink their risk architecture and will lead to an increase in capital requirements. It is therefore important for banks to make sure to have the right hedging and diversification strategies in place. The rules are expected to be implemented by early 2018, so implementation deadlines are rapidly approaching.
Stress testing, meanwhile, is certainly here to stay in 2016 and this has become the central means of setting capital for banks. Regulators’ stress testing exercises in 2015 required banks to raise billions of additional capital and will continue to drive capital and liquidity strategies. Banks responded by focusing on methodologies and techniques. However, more progress is needed on infrastructure and processes. More integration of stress testing in strategic planning and capital allocation processes is needed to ensure sufficient time is being allocated to interpretation and analysis.
Meanwhile, the International Accounting Standards Board (IASB) has published the final version of IFRS 9, bringing together the classification and measurement, impairment and hedge accounting phases of the IASB's project to replace IAS 39. Banks need to be ready for the parallel run on January 1st 2017 and need to ready for implementation by January 1st 2018. Banks’ pricing and banks’ provisions will be impacted by the accounting change and the move from an incurrent loss model to a forward-looking model is boosting alignment between risk and finance functions. It is not a surprise to see that banks are allocating bigger budgets for IFRS9 implementation as deadlines loom.
International supervisory committees, mainly the Basel Committee and IASB, will, of course, continue to be an important driver of risk management and finance practices. The agenda of the CRO and CFO will be impacted by IFRS 9, stress testing and the new market risk rules as mentioned above. The agenda will also be impacted by others like BCBS 239, requirements for model risk, capital requirements for interest rate risk management, conduct risk, data management requirements and cyber risk.
Banks will increasingly be looking for ways to use insights from regulatory trends to inform boardroom decision making on risk management and strategic business topics.
Jeroen Van Doorsselaere, director, Business Development, Finance, IFRS and Performance
In general, 2015 has been a year of refocus on some deliverables after the Capital Requirements Directive (CDR) IV wave that came to Europe ended last year.
One of the main focuses for the financial sector in 2016 will no doubt be around the financial instruments, leasing, hedging and insurance standard which will reshape the financial sector from an IFRS perspective. This is not the only regulation which will affect the financial sector, however. Most impactful are the documents released by The Bank for International Settlements, in particular BCBS 239, 248, 265 and 311.
These papers together with IFRS 9 are all great examples on how financial institutions should think in an aligned way when it comes GFRC.
Banks who are ready to accommodate such a change, both from a technical as well as a cultural aspect, will be the firms who make the deadline and benefit as a result.
Richard Bennett, vice president, Regulatory Reporting, EMEA
All banks who use interest rate, foreign exchange, credit, equity and commodity derivatives (both exchange traded and over-the-counter) will be impacted by the mandatory move to the Standardized Approach for measuring exposure at default (EAD) for Counterparty Credit Risk (SA-CCR) in 2017.
And it will be the first movers who will have the potential competitive advantage in 2016. Banks will need to analyze how the new regulation is likely to affect their capital requirements, deciding whether they need to change their trading strategy or business model in order to minimize the impact. This needs to be completed before the SA-CCR takes effect otherwise the bank will be trading into a market which is aware of what their intentions are.
Other regulatory changes on the agenda include the European Banking Authority (EBA) dissenting to the EU Commission’s proposed amendment to remove the maturity ladder from the EBA final draft Implementing Technical Standard on additional liquidity monitoring metrics.
Wolters Kluwer Financial Services clients who use the Regulatory Update Service (RUS) can be assured that whatever the final decision, they will be able to correctly report to their national regulator.
Brian Gregory, vice president, Non-Financial Risk/GRC, EMEA
2015 will arguably be remembered as the year regulators increased their focus on challenging boards to demonstrate their strong governance over their risk management. In July 2015, for example, the Basel Committee, revised its “Corporate governance principles for banks.”
In the U.K. the Financial Conduct Authority (FCA)/Prudential Regulation Authority (PRA) also replaced the Approved Persons Regime with Senior Managers and Certification (SM&CR) requirements. And in October 2015 the “presumption of responsibility” (said by many commentators as “guilty until you can prove you are innocent”) was replaced with a “duty of responsibility.” As a result, it remains clear that the FCA and PRA are making it clear individuals could personally be held to account.
The challenge for many financial organizations therefore becomes to understand the full extent of the rules and regulations that apply to their business and to be able to map these to their risk management solution. Globally Wolters Kluwer Financial Services believes there are 176 jurisdictions, with 832 Regulatory Bodies and more than 3,400 document types. Additionally, the rules and regulations are not static. New and revised rules and updates to guidance mean now, more than ever before, that banks are spending increasingly significant time and money trying to keep abreast of the changes.
The focus on personal responsibility, which will be a continuing theme in 2016, is reminiscent of the Sarbanes–Oxley Act of 2002. The need for strong governance and internal controls had been embodied in company law and stock exchanges requirements. Yet it took the requirement for annual “attestation” together with the possibility of personal fines and even imprisonment for false attestation for many companies to undertake a true enterprise assessment of their governance.
The increasing focus on the responsibility of the board and senior management to establish strong risk governance could well see 2016 become the year that risk governance silos are finally dismantled.
Selwyn Blair-Ford, head of global Regulatory Policy
This year has also seen the rise of what has been labelled Basel IV. This has included the Fundamental Review of the Trading Book, Interest Rate Risk in the Banking Book, Standardized Credit Risk, Standardized Counterparty Credit Risk and Margin Requirements for Non-Centrally Cleared derivatives. We can add to this the prospect of the Basel Committee reviewing the modelled approaches for operational risk. Although these measures are due to be implemented from 2017 forward, they each represent a significant change, impacting materially on the economic business models of many financial activities.
As we enter 2016 the focus of financial firms on these measures are intensifying and will continue to do so. For most firms the questions at the moment are what does this mean for our business? Will our current business models be viable? Who can we go to for help in understanding and influencing these proposals? 2016 will, as a consequence, be an intense year.
The financial sector in Europe will also need to contend with other trends. The European Central Bank (ECB) is increasing its hold over the Euro zone. We can expect firms to see new supervisory measures and stronger imposition of the ECB regulatory ethos on all regulated firms.
Firms and regulators will be continue to get to grips with a world no longer governed solely by capital, but increasingly by liquidity and leverage too. The pressure for firms to realign their activities to this new world will grow greater over time. As a result, 2016 will be another busy and transformative year.