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 2Courtesy 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: a)Making banks less likely to fail b)Making banks “safe to fail” 3Courtesy 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 4Courtesy 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 5Courtesy Ernst & Young LLP

6. Wave 1: Safer banks, less systemic risk Courtesy Ernst & Young LLP6 Behav- iour Good Bad Weak Resilience Strong Safety and Structural Reform (2008 to date)

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 7Courtesy 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 8Courtesy Ernst & Young LLP

9. Wave 2: Better behaviour in banks Courtesy Ernst & Young LLP9 Behav- iour Good Bad Weak Resilience Strong Safety and Structural Reform Culture and Conduct Reform

10. The global banking model is undergoing significant change (1) Cause Weak ROE, slow growth Regulatory structural agenda Effect 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 LLP10

11. 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 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 Courtesy Ernst & Young LLP11