17 Jun Evolving banking regulation 2015
The 2015 edition of Europe, Middle East and Africa’s (EMA’s) Evolving Banking Regulation will be published as a series of papers, beginning with Part One: From Design to Implementation. This report looks at recent and forthcoming banking regulation to set the stage for further chapters focusing on specific issues. The Part Two: The Search for a Viable Strategy. Other subject-specific chapters will follow during the year, and are likely to focus on conduct and culture, governance, data, market infrastructure and resolution.
Part One: From design to implementation
The detail of regulatory reforms is beginning to become clearer, as is the direction of travel of the remaining reforms. The volume of unfinished business is diminishing as more regulations are moving through the design and calibration stages to implementation, and fewer regulatory reform initiatives remain at an earlier development stage. However, some uncertainty inevitably remains about the prospective appearance of new initiatives.
Meanwhile, banks continue to grapple with the complexity of keeping track of and adjusting to the sheer volume of measures and the multiple interactions between them. This chapter focuses on five emerging areas where banks will need to respond to the uncertain evolution of regulatory and supervisory developments.
- Macro-prudential policy
- Risk weighted assets
- Comprehensive Assessment
- Supervision
- MREL and TLAC
Weak economic activity and regulatory pressures have left many banks in the EMA region struggling to generate adequate profits, and to demonstrate that they have a viable and sustainable business model. Deleveraging and de-risking the balance sheet may have enabled most banks to meet current regulatory demands for capital and liquidity, but it will not rebuild banks’ profitability. The headwinds of the costs of past misconduct in both retail and wholesale markets, and the myriad pressures to increase IT expenditure, do not make it any easier for banks to secure a viable and sustainable future.
Access the Part One: From design to implementation complete report here
Part Two: The search for a viable strategy
This report focuses on bank structure, and the search by many banks for a viable and sustainable future amidst increasing regulatory and commercial pressures. What bank models work in this new environment and how can banks factor in the higher costs of doing business, constraints on balance sheet composition, business activities, legal and operational structure; and supervisory intervention all at the same time. Banks face a variety of economic and commercial pressures, including the weak economic environment, low interest rates, market over-capacity, strong competition, technological change, low margins and high cost bases.
Some of the commercial and operational synergies on which many bank business models were based are being undermined by these pressures, especially at universal and cross-border banks. Many of their strategic assumptions are therefore out of date – the rules of the game have changed and the business model now needs to change accordingly.
Changes in bank structure have taken many forms, however, balance sheet restructuring has not affected the very low returns on assets and returns on equity of many European banks. Many banks are struggling to cover their cost of capital, even as regulation increases the required quantum and quality of capital. Many banks therefore need to develop and implement viable and sustainable business strategies. This is a massive challenge for these banks, particularly if they cannot rely on an eventual economic recovery to bring their RoE up to at least their cost of equity.
Get the Part Two: The search for a viable strategy complete report in PDF Files here
