Pressure for Some, Opportunities for Others
-by Kuljit Singh and Mayur Bansal
Even though the crisis first started in 2007, the aftereffect is being felt even now. The major player or anti-player (as some banks feel it to be), which has emerged from all this is an entity called the regulators, which seems to be the keystone holding the entire edifice of financial services together.
In a broad sense, what the regulators have been trying to achieve is to decrease the areas of disingenuous liberties of the banks, and increase the resilience of the sector as a whole. To achieve the former, limit on how far banks can use internal models to manipulate calculation of capital for credit and market risk is being sought by regulators. Such less-than-honest use of internal models by banks have drawn a lot of flak from both regulators, and investors. To achieve the aim of resilience, regulators are pushing banks for macro-prudential measures such as higher capital, leverage, and liquidity requirements to enhance resilience of banking sector.
The case in point is the European Commission (EC), with around 39 different regulatory reforms and policies, which has been at the forefront in devising policies to stabilize, and make the markets more transparent. Some of the major areas covered are: Capital Markets Union, Banking Union, Prudential Requirements for Banks, Retail Financial Services, MiFID, and Accounting.
The US brought changes in its regulatory structure to make up for deficiencies identified in the 2008 financial crisis through Dodd-frank, and Consumer Protection Act 2010.
Then there are those regulations whose jurisdiction is global - BASEL for example.
Apart from the regulatory pressures, banks also have to deal with variety of economic and commercial factors, including the weak economic environment, low interest rates, market over-capacity, strong competition, technological change, low margins, and high cost bases.
The bank's model is based on building strong synergies between the commercial and operational side of the business. However, these regulatory pressures are disturbing the synergies, especially among universal or cross-border banks, rendering their strategic assumptions obsolescent, thus requiring change in the business model. The main aims that are being sought by these models are just the right mix of return, capital and liquid resources along with acceptable degree of resolvability.
One of the major underlying component of all these aims put forth by the new model is cost reduction. This is why investments in IT by banks in the long run, could help in improving income through increasing services to the customers, by containing risk and providing security in the cyber space which would make the entire system robust and would encourage confidence in all stakeholders. Banks should also be able to benefit from centralized and streamlined infrastructure platforms which are able to support myriad and complex business and customer propositions, through in-house solutions or by help from vendors/service providers.
To achieve their goals, banks are pursuing different paths or strategies, but in each one of them, the role of technology is indisputable. Going forward, as banks try to steer their way through the maze of regulations, and other pressures, technology service providers would find many opportunities. Hence, for the technology providers there is plenty of hay to be made, and the sun is going to shine for a long while.