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Regulation, Risk Management and Change Management

The Banking Industry has been consumed by regulation and discussion with regulatory supervisors, in the last few years. It's unlikely that this trend will reverse, so banks should adapt to become "excellent" at discussing and implementing regulation. In this manner, stakeholder interests can be best supported, because this implies that banks can obviously derive a competitive advantage out of regulation, through market discipline. This is one of the key actions to undertake to stabilize the Financial Sector as a whole. Implementing regulation like Basel-II and Basel-III implies massive changes, primarily for Risk Management, but also for all other parts of the organization. Therefore, this takes both a short term- and a long term focus, to ensure the implementation efforts align with the strategic direction. This blog is about the challenges that banks face when dealing with the implementation of regulation and the changes that are "unleashed".

May 19, 2011

Sovereign Debt Crisis in the EU zone

It's clear that the next few weeks could be quite decisive for the Euro, the EU zone and the troubled EU countries in particular. The pressure to effectively drive political discussion has now been maximized and this has without a doubt put the EU is it its finest hour. This was all to be expected and it's simply a logical consequence of the ambition to grow towards an EU that's capable to play its role on the global stage. The time has come to take courage and implement the ambition, through a joint political effort. The problems in the EU zone are related to both fiscal- and monetary issues . The economic downturn has revealed the simple truth that the individual EU countries can and should not individually deal with those issues anymore, but need to work together to resolve them.

Insolvency and bankruptcy
The EU need define legislation to deal with insolvency and bankruptcy of individual member states. The EU as whole is neither insolvent nor at risk to move into default, so there's no need to call on the IMF. However, there are some serious issues in three individual EU countries, namely Greece, Portugal and Ireland. These issues should however be considered as issues which are more comparable to problems within the context of individual countries. There are, for example, several "weaker" cities and provinces in the Netherlands, but it does not make any sense to state that the Netherland as whole is insolvent, neither that these individual provinces should individually call on the IMF or on the European Financial Stability Facility (EFSF). This "credit protection" legislation is required to protect the EU as whole and the individual creditors, within and outside of the EU. It is also required to protect the EU against large scale hedging, such as the one launched against the British Pound in 1992. This is the bottom line: if solvency issues can not be properly addressed, then such speculations could happen again, e.g. to force Greece out of the EU.

The European Monetary Fund
The issues in the EU are also very much linked to global issues and the global institutions that deal with them. There's currently much speculation on how the IMF should be run and by whom, after the dramatic fall of mr Strauss-Kahn. The IMF has always been traditionally run by a European. Both the EU and the rest of the world should prepare for the fact that this rule will be discarded as a relic from the past. Next to the EU, there are emerging economic powers that naturally face similar issues, so they will claim their stake. The EU should prepare for the fact that it needs to resolve its problems by itself. The EFSF should be transformed into a structural, long term solution, and become a European Monetary Fund, next to the IMF.

Posted by Marcel at 02:59 PM | Comments (0)

May 09, 2011

Basel-III and Shareholder Value

Typically, rules are perceived to be useful, if they serve the common good. Rules are perceived to be less useful if they do not serve individual interests. The discussion on the impact of implementing Basel-III is now well underway, but it seems it needs to deal with this simple issue first, before dealing with all the technicalities. Banks are now seeking the media to broadcast their concern about the fact that additional regulation, additional capital requirements and changed accounting standards imply an operational risk that is maybe too hard to handle. One of those banks is ING, headed by Jan Hommen, chairman of the Board of ING. The key concern that Mr Hommen has raised is the fact that this all implies structural changes for the mortgage products, if all real estate collateral should be valued against market value. This could mean that even more limitations will be applied to mortgages, in the Netherlands and in the other countries in which ING operates. This could have a significant impact on the housing market and on the GDP. This is a strong message with clear implications. The lead regulator for ING is DNB, the Dutch National Regulator. Not coincidentally, DNB has recently stated that Dutch banks are basically ready for Basel-III, if they are willing to raise the retention on profits and change the funding process. Obviously, the banking industry will need to respond, because this is a paradigm shift for the bigger banks, if they would like to be driven by shareholder value. The bottom line is that Basel-II may be a good thing for the banking sector as a whole, but it is perceived to be bad for individual banks. Hopefully, this can now finally bring us to one of the key questions, which has been on the table for some time now. How could banks and regulation diversify, to make a distinction between "risk free banks" and "risk reward banks" ?

Posted by Marcel at 02:56 PM | Comments (0)

February 22, 2011

Vision and Supervision

The primary goal of supervision is to facilitate market discipline, create a 'level playing field' and therefore support long term financial stability. Basically, banks should manage and supervise their business, in alignment with the interests of all stakeholders. Good performance can be rewarded by stakeholders and bad performance can be adjusted, through market discipline. In the worst case, this approach would make sure that even a bankruptcy could be properly managed. Banks that are 'too big to fail' are clearly not doing a good job of supervising themselves. Obviously, this type of bank is hard to handle by any regulatory supervisor. Next to that, there is also the risk of a special kind of moral hazard, when the supervisor is tempted to step in, grab the wheel and start running the bank himself. Regulation that leads to a loss of competitive strength, because of unclear mandates, governance and responsibilities is very much the opposite of what is expected of regulation.

Basel will have more sequels than Star Trek and the banking industry should simply accept this as a fact of life and try to derive a competitive edge out of it. Basel-III has been received with some criticism, but that is nothing to worry about, because that will foster a healthy discussion about Basel-IV and the other upcoming sequels. The banks and its stakeholders should step up their involvement in the discussion about regulation and about banking business models. Google already holds banking licenses in many countries. It seems it will not be too long before Google steps in. Google will probably demonstrate in its own fashion that it is quite easy to set up and run a fully compliant and profitable bank, with capital buffers to can easily meet the Basel-III criteria, which is also 'low maintenance' regarding supervision.Hopefully, this will imply an ultimate push toward market discipline.

Posted by Marcel at 11:02 AM | Comments (0)

February 17, 2011

About Marcel

Marcel is an independent international Projectmanager/Business Analyst in Financial Institutions, with a focus on Change Management activities related to Basel-II/III and Solvency-II. Marcel has published about 20 columns on Basel-II, e.g. in the Dutch Banking Magazine called 'Banking Review' . Marcel holds a Master degree in Computer Science and Business Administration ('Bestuurlijke Informatica'), obtained at the Erasmus University in the Netherlands. Marcel is also a 'Registered Informatician' ('Register Informaticus'), with a track record in IT, especially regarding Data Warehousing and Business Intelligence. Marcel is a member of the Steering Committee of PRMIA Belgium and a member of the Centre of European Policy Studies.

Posted by Marcel at 06:59 AM | Comments (0)

Gustavo Gomez


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