Global banking outlook 2014-15

Regulation: global and local

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Regulation has been the primary driver of structural change since the full implications of the global financial crisis became clear. This primacy is likely to continue for some time.

Structural reform

Structural reform, in the shape of ring-fencing and product restrictions, will require many banks to either cease certain activities or ring-fence them to protect a deposit-taking entity. In many emerging markets, regulators are also implementing more stringent regimes for foreign banks.

Taken together, these changes will demand a structural redesign of a bank’s organization and its approach to capital management, liquidity management and governance.

Issues identified as most important when considering structural changes

EY – Issues identified as most important when considering structural changes

Source: EY/Financial Times survey on structural reform of European banks, 2013.

Recovery and resolution plans (RRP), once finalized, will also require major restructuring. However, it is not yet clear how much regulators will expect from banks and whether there will be cross-border acceptance of national resolution regimes.

Balkanization

Many regulatory initiatives illustrate the seemingly unstoppable march toward balkanization, in which global standards give way to national rules. Banks will need to rethink their global strategies as the playing field becomes much less level.

The benefits of a global banking system are also being threatened by the arguable overreach of some governments and regulators. The US Foreign Accounts Tax Compliance Act (FATCA) and the Eurozone’s attempt to introduce a financial transaction tax (FTT) are two examples.

Conduct risk

Beyond prudential regulation, the broader issue of business conduct is becoming a driver of change. We expect to see a further wave of regulation dealing with conduct risk.

Remediation will be time-consuming and expensive. Banks will have to examine their processes, procedures and broader behavioral issues in their organizations.