Press release

Structural change tops bank boards’ agenda but universal model here to stay

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  • Wide-scale change is underway, especially at GSIBs
  • Regulatory uncertainty stalling progress and creating inertia on ring-fencing
  • Aggregate impact of regulation-fuelled change is swamping boards

LONDON, 25 November 2013. Structural reform is the top board priority for a third of banks and ranks in the top three priorities of 90% of the boards of Globally Systemically Important Banks (GSIBs). Substantial changes to product lines, geographical footprint and joint venture (JVs) are all in the pipeline, according to EY’s survey Structural change in European Banking. However, banks remain wedded to the universal bank model and are confident that they can find ways to implement this at group level while complying with various regulations, including ring-fencing.

Senior bank executives from 38 banks in 13 countries across Europe were surveyed.  The sample represents more than US$24t in assets and covers a range of larger and smaller institutions, including 10 globally systemically important banks.

John Liver, Co-Lead for Regulatory and Risk Transformation in Europe, Middle East, India and Africa at EY, says:

“Reforms to regulation and resolution are putting pressure on the global model that banks currently employ. Banks are adamant that they still want to operate as a single institution, but to do so banks will have to restructure themselves fairly significantly.”

Wide-scale change is underway but banks will retain the universal model
Banks expect to make significant changes to their structure in the next three years. More than 40% expect to have withdrawn from some products, made disposals in non-core markets and shaken up their outsourcing and offshoring arrangements by 2017.

GSIBs are expecting to make more dramatic changes, with 70% expecting to make disposals in non-core markets, 50% expanding in markets outside of Europe and 50% withdrawing from some products. 30% of GSIBS also expect to increase their number of joint ventures.

However, despite this level of change and regulatory pressure to ring fence, the majority of banks surveyed (68%) currently operate a universal model and all of those want to retain this model.

Tom Huertas, partner in EY Financial Services Risk practice, comments:

“Banks are committed to maintaining a universal model, but we expect it will not be the universal banking model as we know it. Reforms to resolution and the introduction of ring-fencing are likely to drive banking groups to a holding company structure with operating subsidiaries that are specialized in certain activities and/or geographies and funded separately from each other.”

GSIBs furthest ahead but material change stalled by regulatory uncertainty
Sixty percent of the non-GSIBs surveyed have not yet started work in earnest on changes to their business models – they are either not considering material changes to the business model or are only just evaluating possible changes. In contrast, 63% of GSIBshave taken decisions on changes to the business model and are either in discussions with the regulator or starting to implement them.  However, of those 63%, half are awaiting clarification or final guidance from the regulators before they can make any further progress.

John says: “There are still some pretty significant pieces of the puzzle missing, which is holding banks back from fully implementing their structural change programs. Banks need a globally consistent view of the resolution regime, and the rules on liquidity and OTC derivatives among others. They also need a clearer idea of how these are to be implemented at a national and regional level before they can really progress their reforms.”

However, some tactical restructuring to start to come through this year
Despite the regulatory uncertainty, shareholder pressure will drive tactical restructuring and exits from certain markets or product lines in the short-term.

Steven Lewis, lead global banking analyst at EY, says:

“The combination of regulatory pressures, compounded by the Asset Quality Review and ongoing market volatility, will result in more banks facing pressure from shareholders to review certain aspects of their business models. This will be particularly true where banks are struggling to match industry averages on profitability in particular business lines, and may happen as early as this quarter.”

Aggregate impact of regulation-fuelled change is swamping boards
Banks ranked regulatory reform as is the primary external driver of work on structural change. Seventy percent of respondents ranked it as a top concern for the board, followed by capital and liquidity restraints (42%) and changing customer expectations (37%).

However, banks are focusing on the individual regulations where the rules have been finally agreed and there are more immediate deadlines and potentially missing the bigger picture. This is demonstrated by attitudes to ring-fencing. Banks in France and the UK, where regulations are defined, are fairly concerned about ring-fencing, but in other countries banks are not prioritizing it at board level. As a result just 10% of those surveyed ranked ring-fencing as a top concern, and just 10% are concerned about the viability of their current legal entity structure.

The capacity of banks to operationalize this level of structural change is also not clear. Banks know they have to address their systems and operations, in fact 60% expect to have resolved the legacy issues in systems and operations in the next three years. But they cannot clear the space to make systems and operations a priority; only 21% of those surveyed indicated systems and operations as an internal concern and fewer still rated skills to design and deliver change as a concern.

John says: “Dealt with individually, many of the structural changes are seen as manageable, but in aggregate they are swamping the board agenda. It is clear from the survey that boards and executives do not have the bandwidth to spend enough time/focus on all the issues they face. And as a result, it remains very difficult to align the regulatory change agenda with strategic business goals.

“A key element in this ‘fog’ is the ring-fencing proposals which are now having an effect in the US and certain EU countries. Here again, regulatory clarity, or lack of it, is driving the level of engagement. The markets in which ring-fencing legislation is defined are paying more attention, but there is a lack of engagement in many other countries. If Liikanen is introduced in its current form, boards across Europe will have to reassess their priorities.  So will boards of banks with US operations, if the US introduces rules to require foreign banking organizations to introduce intermediate holding companies for their US operations.” 

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