Since the financial crisis, governments and regulators have focused on ways of dealing with financial institutions being too big to fail. There are the Vickers reforms in the UK, the Volcker Rule in the US, and, in Europe, the EC’s Liikanen Report and the Capital Requirements Directive (CRD IV). Not to mention the French and German banking reforms. In response to all this, the organisational structures of financial institutions including business and legal entity structures are changing. That will mean a lot of hard work.
Pinpointing potential issues
Designing new structures for financial institutions is complex because they have to take account of so many factors, all competing for attention and interacting with one another. First there are the overlapping regulatory requirements for all the different jurisdictions the business operates in. Then there are financial and accounting considerations, including tax and rules on capital, liquidity and leverage.
There’s also the question of how to make everything work day-to-day, with data management, technology, shared services, and processes for things like customer migration. Finally – and perhaps most importantly – there are the strategic considerations, the bank’s long-term vision of itself, and how it creates value and serves its customers.
Imposing order on this complex web of interdependent factors involves a huge amount of work. You need to analyse the rules (current and impending) in every jurisdiction and by every regulator, and you need to map them to your businesses and products. Plus you need to do some sophisticated modelling.
Initially, high-level models help you test and evaluate the options. Then you can move on to more detailed modelling of your balance sheet, including capital, liquidity, leverage, funding, margins and ratings. Finally, there’s scenario-modelling and stress-testing to look at the effects of the behaviour of markets, competitors and regulators.
Your new structure will also be informed by analysis of customers, which you can use to plan how you’ll tell them about the changes, anticipate how they’ll respond, and design your methods of moving them over to new systems.
Changes are coming that will fundamentally affect banks’ profitability and the way they deal with their customers. Banks will transform their structures in response. And, although many of the regulatory reforms aren’t finalised, leading institutions are already changing their five-year strategic plans to take account of them.
A global financial institution that needed a strategic response to changing regulations had started reviewing their legal entity structure and booking model. When the project lost momentum, they asked us for help.
We led a strategic review and a feasibility study and found some options for our client. We also did some in-depth analysis of different scenarios, looking at capital and ratings, liquidity and funding, and also risks from regulation, law, tax, clients, credit and markets. Then we considered the effect of different booking models and legal entities and product desks. Finally, we set up an project-management office (PMO) to manage the complex web of workstreams and stakeholders.
Changing regulation was the catalyst for transforming this business. They quickly discovered that their complex structure was holding them back from being responsive. But by looking at this as an opportunity – not just a compliance issue – they were able to create a simpler structure that saved money and increased their competitive edge.
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