1. The Next Wave of Bank and Insurance Regulation
Financial Services Commission
April 27, 2015

2. 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

3. 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:
Making banks less likely to fail
Making banks “safe to fail”
Courtesy Ernst & Young LLP

4. 1(a)Making banks less likely to fail
Tougher regulation has strengthened banks, making them less vulnerable to shocks:
Increased capital; improved quality of capital
Strengthened stress testing
Increased liquidity
Reduced leverage
Improved risk management and governance
Courtesy Ernst & Young LLP

5. 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
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

6. Wave 1: Safer banks, less systemic risk
Good
Behav-iour
Safety and Structural Reform (2008 to date)
Bad
Weak
Strong
Resilience
Courtesy Ernst & Young LLP

7. 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

8. 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

9. Wave 2: Better behaviour in banks
Good
Culture and Conduct Reform
Behav-iour
Safety and Structural Reform
Bad
Weak
Strong
Resilience
Courtesy Ernst & Young LLP

10. The global banking model is undergoing significant change (1)
Cause
Effect
Weak ROE, slow growth
Regulatory structural agenda
Business strategic review
Focus on core business
Exit marginal businesses, regions
Cost efficiencies
Cutback in staffing
Risk and finance transformation
Global banking model shifting to island states
Subsidiarization
Branch bank model
Local capital, funding, liquidity
New booking models
Courtesy Ernst & Young LLP

11. The global banking model is undergoing significant change (2)
Cause
Effect
penalties now a prudential concern
putting customers and conduct risk at the heart of decision-making, 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
Regulatory Risk Culture and Conduct agenda
Courtesy Ernst & Young LLP