7 minute read 29 Jan 2021
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How COVID-19 has changed global banking’s vision for 2021 – and beyond

Authors
John Liver

EY Global Financial Services Regulatory Network Co-Lead and EY EMEIA Financial Services Compliance and Conduct Leader

Transformation of financial services regulatory capabilities, resilience and conduct. Facilitator of industry and regulator dialogue. Mental health charity trustee. Husband and father.

Eugene Goyne

EY Asia-Pacific Financial Services Regulatory Lead

Regulatory compliance advisor. Public policy advocate. Fitness and arts fanatic.

Marc Saidenberg

EY Americas Financial Services Regulatory Lead, Principal US Financial Services Consulting, Ernst & Young LLP

Financial services advisor. Facilitating active dialogue between industry and the public sector. Public speaker and thought leader. Husband and father.

7 minute read 29 Jan 2021

Our 2021 global bank regulatory outlook explores how lessons learned will shape the immediate and longer-term regulatory landscape.

In brief
  • The pandemic response will continue to dominate supervisory and policy actions for financial services firms in the immediate future and beyond.
  • Climate change and sustainability, data protection, conduct risk, and operational resilience will be center stage for banks in the foreseeable future.
  • As priorities in the regulatory process shift, banks and policymakers have an opportunity to deliver solutions in the spirit of a common cause.

The pandemic will continue to shape events in 2021, with a residual impact for years to come. Our annual global bank regulatory outlook explores the actions that governments and policymakers will take and how they will affect financial services firms in the current landscape (Now) and in the years ahead (Next and Beyond).

This article is part of the EY 2021 Global bank regulatory outlook (pdf).

Change management demands caused by the pandemic have tested risk management capabilities and regulatory responses. In the near-term, these have required significant changes in business processes, as well as modifications in regulatory and supervisory oversight.

Forbearance, compassionate collection, and business interruption were hardly top of mind topics at the start of 2020 but are now commonplace in regulatory discussions. Customer protection has taken on added meaning as conduct regulators focus on protecting the vulnerable and ensuring they gain access to COVID-19 payment relief. Collection and recovery activities need to be reappraised, and banks must now rely on borrower-specific debt restructuring and forbearance practices to identify viable customers.

Customer protection has taken on added meaning as conduct regulators focus on protecting the vulnerable and ensuring they gain access to COVID-19 payment relief.

Now: The pandemic’s immediate impact on several bank activities

1. Sustainability will return to center stage in 2021

An immediate boost is the new Biden administration’s decision to re-engage in global climate talks, with both Washington and Brussels talking about linking trade and climate agendas. This is accompanied by renewed worldwide regulatory pressure to adopt sustainable finance frameworks and put the foundation in place for future climate risk regulation.

2. Expanded use of technology and data 

Will enable regulators to renew efforts to transform supervisory capabilities. On both sides of the Atlantic a strong sense prevails that Big Tech firms need to be more comprehensively regulated, though the US and the EU have different approaches to privacy. Algorithmic accountability across artificial intelligence (AI) and machine learning (ML) applications will feature across post-pandemic supervisory reviews. AI and ML regulatory frameworks are developing fast in APAC and the EU, focusing on fairness and transparency.

3. Prudential risk will be on the minds of regulators 

As they focus on supervisory stress testing and banks’ internal stress testing in late 2020 and 2021 as a means of testing the asset quality of banks and understanding capital vulnerabilities. COVID-19 exposures and the environmental, social and governance (ESG) agenda are creating new data and stress-testing demands. Banks will need to match their evolving credit review processes and focus on borrowers that are more highly leveraged.

4. The importance of operational risk has magnified

Banks need to pay extra attention to: demonstrating their ability to maintain effective controls for employees working from home; focusing on the vulnerabilities and security risks of a digital operational resilience framework; and addressing concentration risk in the delegated supply chain.

What to expect in 2021 from global bank regulation

Global Regulatory Network panelists discuss what to expect and prepare for in the coming year and beyond.

Americas/EMEIA webcast    Asia-Pacific webcast

In the next and beyond

Banks have been building and enhancing their risk management capabilities for many years. However, the pandemic exposed certain vulnerabilities in governance processes, causing regulators to shift medium-and longer-term priorities.

For the second time in just over a decade, governments and regulatory authorities face the prospect of balancing a supervisory agenda with the need to ensure that the wider economy is given breathing space to recover from a crisis. Global policy agendas are being revised accordingly.

On top of the initial building blocks of taxonomy and disclosure, another milestone will be the integration of climate and sustainability considerations by financial institutions when investing on behalf of or advising clients. Supervisors hope to make progress with prudential treatments, stress testing and refinements to the supervisory process.

Financial inclusion and fighting crime

Post-pandemic priorities may mean that the inclusion agenda may take longer to progress. Ultimately, a key objective is likely to be, via policy development and collaboration between regulators and industry, that markets and institutions deliver financial wellbeing, inclusion, and better customer outcomes, rather than just a range of traditional financial services.

Broader expectations will be placed on institutions across the spectrum of their operations. We also expect to see a continuation of regulatory protection for vulnerable customers and the development and enforcement of standards that balance customer care, social responsibility, and the management of usual business decision imperatives.

The fight against financial crime must become more connected across jurisdictions. However, limited cross-border sharing of information, and divergent approaches to overseeing anti-money laundering, require a critical review of strategy. The pandemic environment has caused business and market upheaval and impacted the due diligence of borrowers. This has created new opportunities for internal and external bad actors to exploit business disruption, and has reduced oversight and untested cyber controls, especially in an atmosphere of financial pressure.

Ultimately, a key objective is likely to be that markets and institutions deliver financial wellbeing, inclusion, and better customer outcomes.

Managing digital finance and cryptocurrency

The acceleration of the digital agenda will require a timely response from regulators. In the next 24 to 36 months, we expect to see the emergence of a coordinated digital policy framework. Financial institutions will want to take advantage of the current leap in digital engagement and continue to develop transaction execution and service offering capabilities on the back of the momentum gained during the lockdown, including a significant switch to a non-cash environment. In this context, customer fair treatment and data privacy and protection must be among key policy considerations – and, we also expect to see requirements for greater transparency in how data analytics are used.

Regulators will seek to manage the risk posed by cryptocurrencies and payment systems that lie outside the supervisory framework. At the same time, central banks will accelerate efforts to deliver digital currencies that they hope will form the foundation of national payment systems. Both banks and regulators will have to address the risk factors that have so far proved to be obstacles to cryptocurrency development, especially financial crime, cybersecurity, and data protection.

Other issues for regulatory consideration

Regulators need to address the contagion effects in financial markets arising from non-regulated or significantly less-regulated entities. Some of these may be driving or amplifying market stress, benefiting from central bank market intervention activities, and/or causing stress on more significantly regulated elements of the core funding markets.

Overall, we see the emergence of a dual stress-testing framework: a macro-economic scenario-driven framework, similar to current models; and a broader and far-reaching event-driven framework, similar to what supervisors are discussing with respect to climate change testing, that can be adapted for a range of non-economic derived events. The much longer time-horizons, complexities, uncertainties, and unknowns associated with climate change not only require the development of new stress testing and modeling approaches, but also the constant review of the framework, scenarios, variables, transmission channels, and economic impacts. In other words, a more complex and more agile capability.

A recurring theme across the post-pandemic regulatory landscape will be the need for supervisors and standard setters to identify and collect new, standardized data sets that can inform policymaking that allows the new frontiers of technology, sustainability, and ESG to expand while maintaining appropriate levels of resilience and risk sensitivity.

Compared with previous post-crisis phases, added priority will now be given to diversity, inclusion, and wider corporate responsibility that will require a more holistic approach and broader representation in the regulatory process.

Summary

Most of 2021 will likely be dominated by supervisory and policy actions designed to address the impact of Covid-19. Regulators will focus on agendas already in motion: conduct risk, climate risk, digital, operational resilience, data protection, cybersecurity and financial crime. As priorities shift in the longer-term, banks will need to respond and demonstrate their resilience.

About this article

Authors
John Liver

EY Global Financial Services Regulatory Network Co-Lead and EY EMEIA Financial Services Compliance and Conduct Leader

Transformation of financial services regulatory capabilities, resilience and conduct. Facilitator of industry and regulator dialogue. Mental health charity trustee. Husband and father.

Eugene Goyne

EY Asia-Pacific Financial Services Regulatory Lead

Regulatory compliance advisor. Public policy advocate. Fitness and arts fanatic.

Marc Saidenberg

EY Americas Financial Services Regulatory Lead, Principal US Financial Services Consulting, Ernst & Young LLP

Financial services advisor. Facilitating active dialogue between industry and the public sector. Public speaker and thought leader. Husband and father.