The Next Wave of Bank and
Insurance Regulation
Financial Services Commission
April 27, 2015
The next wave of financial regulation?
“We are in many ways in the second phase of the financial
crisis. The first phase was a prudential one, while the
second phase has revealed past misconduct….. Standards of
governance, conduct, and the right incentive structures are
extremely important [to fix the financial system].”
– Andrew Bailey, CEO PRA
Courtesy Ernst & Young LLP
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Wave 1: Prudential re-regulation
In the immediate aftermath of the GFC, regulators
focussed on improving banks’ financial condition, and
reducing risk in the system:
a) Making banks less likely to fail
b) Making banks “safe to fail”
Courtesy Ernst & Young LLP
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1(a)Making banks less likely to fail
Tougher regulation has strengthened banks, making
them less vulnerable to shocks:
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Increased capital; improved quality of capital
Strengthened stress testing
Increased liquidity
Reduced leverage
Improved risk management and governance
Courtesy Ernst & Young LLP
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1(b)Making banks ‘safe to fail’
• UK, European and US regulators have moved to strengthen local bank
operations, thereby reducing the exposure from foreign operations.
– Vickers, Liikanen reports; Volker, BIHC rules
• Resolution planning
– leading to the ‘subsidiarization’ of global banks
•
Banks are reorganizing to satisfy local regulators
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Rationalization of group structures
Less foreign branch banking
Stronger local subsidiaries (capital, liquidity, local bail-in)
Stronger local oversight
Local BCPs, etc
• This risks trapping capital, liquidity, leverage in foreign subsidiaries
Courtesy Ernst & Young LLP
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Wave 1: Safer banks, less systemic risk
Good
Behaviour
Safety and Structural
Reform (2008 to date)
Bad
Strong
Weak
Resilience
Courtesy Ernst & Young LLP
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Wave 2: Culture and Conduct
• “The succession of scandals means it simply untenable
now to argue that the problem is one of a few bad
apples. The issue is with the barrels in which they are
stored.”
– Mark Carney, Governor Bank of England
Courtesy Ernst & Young LLP
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Risk culture and conduct
• Rules and supervision have not been effective in controlling
behavior
– Conduct regulators have become much more active ($270 bn)
– Political support for punishing banks is strong
• Many banks have implemented risk culture assessment programs
– Often driven by adverse experience
– Change takes time and a lot of organizational focus
• The stakes are high
– Confidence in the system is low
– Regulators are much less likely to give banks the benefit of the doubt, or
the time required to address cultural issues
Courtesy Ernst & Young LLP
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Wave 2: Better behaviour in banks
Good
Culture and
Conduct
Reform
Behaviour
Safety and Structural
Reform
Bad
Weak
Strong
Resilience
Courtesy Ernst & Young LLP
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The global banking model is
undergoing significant change (1)
Cause
• Weak ROE, slow
growth
Effect
• Business strategic review
– Focus on core business
– Exit marginal businesses, regions
• Cost efficiencies
– Cutback in staffing
• Risk and finance transformation
• Regulatory
structural agenda
• Global banking model shifting to
island states
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Subsidiarization
Branch bank model
Local capital, funding, liquidity
New booking models
Courtesy Ernst & Young LLP
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The global banking model is
undergoing significant change (2)
Cause
• Regulatory Risk
Culture and
Conduct agenda
Effect
• penalties now a prudential
concern
• putting customers and conduct
risk at the heart of decisionmaking, and risk and compliance
frameworks
• appetite for compliance risk is
very low
– Banks reducing correspondent
bank relationships
– Banks exiting jurisdictions with
high inherent compliance risk
Courtesy Ernst & Young LLP
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