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8/6/2019 How Banks are Adapting to the Emerging Regulatory Landscape
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Change amidst uncertainty:how banks are adaptingto the emerging regulatorylandscapeThoughts
Written by the Economist Intelligence Unit
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Written by the Economist Intelligence Unit
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* For further discussion of these questions please see the CapcoThoughts white paper, Regulatory Reform: 7 Critical Questions forFinancial Services Firms, available on capco.com.
Change amidst uncertainty: how banks are adapting to the emergingregulatory landscape
Capco is pleased to present this
report, which explores how capital
markets rms are dealing with
the dramatic changes that are
underway in the nancial services
industry. Based on research
conducted by the Economist
Intelligence Unit in March 2011,
the report provides insight into seven critical questions
regarding banks readiness for regulatory reform, which
were the subject of a recent Capco white paper.*
Among the many insights the survey provides, two are
especially noteworthy, and potentially reasons for caution.
First, it is clear that the traders are driving change.
Trading operations are taking the lead in implementing
business models and processes to operate in the newly
regulated environment. In some cases, they are quickly
executing on geographic strategies, in jurisdictions
where regulations may be more favorable. In doing so,
trading operations appear to be outpacing their back-
ofce and compliance functions by a wide margin. In
fact, more than half of the trading operations surveyed
could be conducting business in an environment
without the necessary obligations support capabilities
that simply may not exist in the local back ofce yet, or
that regulators may not have even fully dened.
The second, related observation is that some bank
leaders may not fully understand the exposure created by
inadequate governance of trading operations within the
new environment. Laws in the United States and the UK
now impose stronger duciary and oversight requirements
on a rms board members and executives, requirements
that extend to maintaining robust compliance around all
trading operations and banking.
Whether or not their front-ofce moves are part of
broader corporate strategy, rms can become exposed
to signicant duciary and reputation risks by executing
new business strategies without adequate controls,
communications strategies and change management
in place. On the up-side, reorganizing quickly and
purposefully, and creating compliance programs that
meet the test of global regulators, can position banks
to increase market share and margin, both in existing
and emerging markets.
We hope the ndings of this report help you chart a
course to new opportunities, leveraging solid governance.
Please let me know if you would like to discuss the
results or have any questions.
Sean Culbert
Partner and Co-lead of Finance, Risk and Compliancesean.culbert@capco.com
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About this report
Change amidst uncertainty: how banks are adapting
to the emerging regulatory landscape is a Capco
report, written by the Economist Intelligence Unit.
It examines how, in light of continuing regulatory
uncertainty, nancial institutions are reshaping theircapital markets businesses to operate effectively in the
new environment, and focuses particularly on the likely
effect of regulation on overall structure as well as front,
middle and back ofce operations.
The research is based on three components:
A survey of 60 senior executives at nancial
institutions, half operating in the UK and half in
the US. All rms had annual global revenues of
more than US$5bn and all respondents work in
operations, risk, trading or regulation.
Interviews with a range of industry participants and
experts, as well as a follow-up qualitative questioning
of survey respondents. Because of the sensitivity of
the topic, interviewees spoke off-the-record.
Desk research, including a review of nancial
institutions regulatory lings.
The author of the report is Geraldine Lambe and the
editor is Monica Woodley.
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Executive summary
As the scale and intensity of the nancial crisis became
clear, industry participants knew that a tough regulatory
response would follow. Those expectations have now
been met. While the nal rules remain uncertain in many
areas, a raft of regulatory change is in process.
The regulations create new capital requirements, address
liquidity and counterparty risk, and push trading of more
products onto exchange and into central clearing. They
put in place new consumer protections and seek to
reduce systemic risk in order to avoid the need for future
government intervention. The cumulative effect is forcing
the nancial industry to fundamentally reassess business
models and operating practices.
This assessment is driving signicant change in nancial
institutions. Banks are already exiting some businesses
and are likely to shrink or exit others as new capital
rules make them less protable. The location of new or
expanding businesses will be rethought as rms assess
the relative impact of each jurisdictions regulatory
constraints. New systems and processes are being put in
place to meet demanding data capture, data management
and stress testing requirements. Communications with
clients and counterparties are being revamped, and new
reporting lines put in place. Connectivity will have to be
developed and new processes established to connect to
a swathe of new entities that will spring up in the clearing
and settlement space.
In this changing environment, the Economist Intelligence
Unit conducted research, on behalf of Capco, to nd
out where banks are in terms of preparation for new
regulations and what impact these are having on
operations. This research is based on a survey of senior
executives at 60 banks, half based in the US and half in
the UK, working in operations, risk, trading or regulation.
The survey results have been supplemented with in-
depth interviews with industry participants and experts.
Because of the sensitivity around this topic, intervieweespreferred to speak off-the-record.
Key ndings from the research include:
Banks see more opportunities than threats in
the new regulatory environment.Almost a third of
respondents believe that new regulations will provide
opportunities to take market share as other banks
retrench or rethink their business models. Almosttwo-thirds see regulatory change as an opportunity
to transform their business at a systems and process
level. Some see this as a way to gain competitive
edge. However, they are unsure whether the greater
transparency required by regulation will have a
positive or negative impact on competitiveness.
While preparations are well underway, the impact
o regulations on bank structures is unclear.
More than half of respondents say they are at
implementation stage. The US is further behind than
the UK, however, as the industry waits for many
elements of the Dodd-Frank Act to be translated into
regulations. Almost three-quarters have identied
where changes to systems need to be made in order
to handle the new, higher levels of data required. A
similar number say they have a strategy in place to
communicate the impact of regulatory changes to
clients and counterparties.
However, the industry remains uncertain about
how to adapt business entities and operations to
new regulations. More than half of respondents are
keen to retain existing organizational structures and
operating models. However, in 13 out of the 17 areas
of operation covered by the survey, the majority of
respondents do not know if their rms will relocate or
outsource business functions, or create a shared utility.
Boards and senior management believe they have
a good understanding o regulatory impact. The
crisis has been a wake-up call for board members
and senior management. With regulators and policy-
makers taking an increasingly tough line, boards and
executive management will be more accountablefor a rms decisions. According to the majority of
respondents, they have risen to this challenge and have
a good understanding of the implications increased
data transparency will have at their own businesses
as well as across the industry. Once changes to data
infrastructure are adopted, respondents are condent
that management will be able to prove they have better
control over information, as required by regulators.
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Introduction
In its 10-K regulatory ling to the Securities and
Exchange Commission (SEC) for the scal year ending
in March 2011, Goldman Sachs revealed the impact
that US regulations have already had on the banks
operations. In light of the Dodd-Frank Act, during2010, we liquidated substantially all of the positions that
had been held within Principal Strategies in our former
Equities operating segment, as this was a proprietary
trading business. In addition, during the rst quarter of
2011, we commenced the liquidation of the positions
that had been held by the global macro proprietary
trading desk in our former Fixed Income, Currency and
Commodities operating segment.
US regulations are shaping European institutions
strategy too. Deutsche Bank announced in March that
it would deregister its US subsidiary so that it would no
longer be a bank holding company. Deutsche hopes
that by changing the status of Taunus Corp a part of
which is highly leveraged and under new rules would
need recapitalizing it will take Taunus out of the scope
of the Dodd-Frank Act and avoid having to raise billions
of dollars in new capital.
Compliance is diverting management, IT and legal
resources from day-to-day operations as IT races to
keep pace with front ofce transformations. Some rms
have recruited additional expertise in specic areas.
The impact assessment itself is a major task. The
Dodd-Frank Act, for example, is long and complex at
2,307 pages, 16 titles and 540 sections. It is expected
that regulators will create 243 new rules, conduct 67
studies and issue 22 periodic reports. Hundreds of new
rules will require consultation with the industry before
they can be implemented. One banks response to
the Markets in Financial Instruments Directive (MiFID)
consultation alone takes up 66 pages. The bank says its
legal and compliance department has doubled in size in
the last two years.
So, while much of Dodd-Frank, the Financial Services
Act 2010 and other regulations still need to be
dened, it is clear that banks strategy and front
ofce operations are already moving forward, while
governance and compliance are lagging.
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Assessment, understanding andimplementation
The sales and trading functions of nancial services
rms seem to have moved quickly to determine which
regulations are relevant to their businesses, consider
what the regulatory impact will be and even to moveforward with implementing changes based on their
impact assessments. More than half of respondents to
the survey say they are at the implementation stage.
Looking at responses by geography, the UK is slightly
ahead of the US, with 58% compared with 53%,
respectively, already implementing changes. Industry
participants say that this is explained by the fact that
there is more still to be dened in US regulation than
there is in Europe, meaning that rms in Europe have
a head start. UK rms are also more likely than those
in the US to align the implementation of their countrys
main regulatory reforms with those of Basel III and
IFRS. (See Figures 1 and 2.)
The UK operations of a European bank are already
advanced in several areas, including those surrounding
internal transfer pricing models. These are central to
complying with the UKs liquidity buffers, which were
implemented in June 2010, as well as Basel IIIs liquidity
coverage ratios. The banks CEO says the banks
decentralized business model has given it a head start
in such areas.
We introduced transfer pricing for liquidity risk to all
our branches in June 2009, he says. Each branch
has to match-fund itself. The reason we have been able
to move so quickly is because we operate a devolved
model, where each branch is responsible for setting
the appropriate prices for its own market. For this kind
of decentralized pricing model to work, its critical for
branches to be charged the correct internal cost for
liquidity, so we already had the processes in place to
enable us to implement this regulation.
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We have identifiedthe regulatorychanges relevantto our business
We have assessedhow regulatorychanges will impactour business
We have begunimplementingchanges to ourbusiness basedon our impactassessments
U.K.U.S.
Figure 1. At what stage is your company in preparingor changes required by regulatory reorm?
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IFRS Basel III FACTA
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U.S.
Figure 2. Have you or do you plan to align theimplementation o your countrys main regulatoryreorm with that o any o the ollowing regulations?Select all that apply.
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Trading is running out in ront
According to the survey, by function, trading is way
out in front in terms of preparation, with almost
three-quarters (73%) saying they are already at
implementation stage. Interestingly, the regulatory
function, which may be expected to be most advanced,is the least prepared. Only 20% say they are at
implementation, although a signicant 60% have
completed the impact assessment. (See Figure 3.)
On reection, it is unsurprising that the trading space
is the most advanced in terms of preparation; they
are already positioning for the higher capital charges
for various products contained in Basel III and for the
proprietary trading ban in the Volker Rule.
If you look at the changes to the trading book
treatments, they are so substantial that people havehad to think through urgently what is the shape of the
business going forward, because the current business
wont be protable, says the head of prudential
advisory at a consulting rm. And those trading
book requirements hit much earlier [than some other
changes], so in the trading area it has become critical
to move quickly. The treatment of counterparty risks
in trading books and of bank-to-bank exposures has
gone up three to four times in total, and the treatment
of securitization books has gone up enormously, so
people have already taken action, moving things out of
trading books and into banking books.
There are concerns, however, that implementation may
be piecemeal. While many rms have created working
groups or task forces, these are typically organized at
a national level, and therefore do not address change
at a global, enterprise-wide level. In addition, some
have suggested that the amount of new regulations
ooding into the market may lead banks to focus on
the trees but lose sight of the forest a criticism which
has been leveled at banks, regulators, ratings agencies
and politicians, and held at least partly to blame for the
nancial crisis. If regulators are aware of this danger, the
feeling that the sense of urgency for change is already
dissipating means that they want to press on while
there is still a chance of getting new regulations passed.
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8%
Trading
Regulation
Risk
Operations
We have identifiedthe regulatorychanges relevantto our business
We have assessedhow regulatorychanges will impactour business
We have begunimplementingchanges to ourbusiness basedon our impactassessments
Figure 3. At what stage is your company in preparingor changes required by regulatory reorm?
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A nancial services partner at a consulting rm agrees
that the amount of new regulation is clearly an issue. The
message from our research is that the sheer volume of
change is proving very challenging for rms. And it gets
more difcult as you move down from global statements
of principal into regional rule-making, and then further
down into national interpretation. We dont see manyinstitutions that have an overarching view of the impact
on their rm. They may well be doing things on a local
or regional level but they do not have a consolidated
view of the overarching impact. Given the new uniform
duciary standard obligations for advisers and broker
dealers, that could prove problematic for US executives.
Threat or opportunity?
If banks see the challenges posed by regulation, they
also see the opportunity. This is particularly true in
the UK, where almost a third (32%) of respondents
strongly agree that the new regulatory environment is
an opportunity to gain market share. Bankers in the
US, however, are less optimistic, with only 20% clearly
positive about the potential for opportunity. (See Figure 4.)
At rst sight, this looks to be accounted for by the
banning of proprietary trading and constraints on
principal investment two of the most protable areasof investment banking in recent years that have been
imposed on US banks by way of the Volker rule. But
looking into the survey results by function reveals that
82% of traders agreed with the potential to gain market
share, and none of them disagreed. It is the operations
and risk functions which see more danger than promise
in the new regulatory environment. (See Figure 5.)
However, it will not be easy for banks to pick a winning
model or to make it successful in a crowded market.
The question is, what is the shape of the business
that will be protable? And I think the answer to that
is unknown, says the head of prudential advisory at
a consulting rm. Moreover, if multiple banks change
their business in the same way, how many banks can
be protable with the same type of business? How
many banks can be major ow players, for example?
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Strongly agree Strongly disagree
U.K.
U.S.
Figure 4. Do you agree or disagree with theollowing statements? We are looking at the newregulatory environment as an opportunity to gain
market share.
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Trading
Regulation
Risk
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1 2 3 4 5
Strongly agree Strongly disagree
Figure 5. Do you agree or disagree with theollowing statements? We are looking at the newregulatory environment as an opportunity to gainmarket share.
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There is also a worry that the changes in Basel III are
so big, if any provision unwittingly creates an unlevel
playing eld it could proffer huge advantages to certain
players. Unequal treatment in just a single area of Basel
III could have far-reaching effects.
For example, there has been a worry that the treatmentof deferred tax assets (DTAs) might be more benecial
for US banks than for European banks and, depending
on how its implemented, that would have a number of
consequences. Firstly, it would immediately make their
capital levels higher and their costs lower. Secondly,
it would make it easier for an American bank to buy a
bank in difculty than for a European bank; banks in
difculty have hitherto been bought on the basis of the
benets of the DTAs, because some of that tax can be
clawed back. Seemingly small inequalities could have
large ripple effects.
New regulations as an opportunity ortransormation
Part of the optimism surrounding the chance to
win market share or gain some form of competitive
advantage is tied to the potential of new regulations to
have a transformative effect on the business. This has
clearly been picked up by survey respondents, with
more than half (57%) agreeing with this proposal and
the UK, again, markedly more optimistic than the US.(See Figure 6.)
However, more than half (54%) of respondents were
keen to maintain their current operation models and
structures. But this is not as counterintuitive as it may
seem, as it relates to where bankers see the greatest
opportunity for transformation and this is in systems
and processes rather than at the organizational level.
Banks have grown as groups of discrete business
silos, with each silo capturing data, interrogating data
and leveraging that data, says the head of IT at a largeEuropean bank operating in London. The industry
may have gone a long way towards achieving overall
efciency, but we have never achieved information
efciency. New regulations while onerous and costly
offer us an opportunity to take a fresh look at how
we manage these and other processes, and to retool
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Strongly agree Strongly disagree
U.K.
U.S.
Figure 6. Do you agree or disagree with theollowing statements? Scale o 1 to 5.
We are looking at the new regulatory environment as anopportunity to transform our business model/structure.
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operations in a way that benets the group, rather than
how it suits the individual business. If we can break
down silos, there are clearly opportunities to generate
competitive advantage from that.
There is an element of pre-crisis, and post-crisis
thinking here, with new regulations as the catalyst forchange, he adds. Historically, the cost-benet of
streamlining systems and processes relative to the cost
of doing nothing meant it was not worth the hassle
or the tax cost. Going forward, that cost-benet may
change. Living Wills or other resolution mechanisms,
for example, will force banks to think through a more
streamlined structure, and this is helpful in the new
Basel III world.
Will transparency help or hurt bankcompetitiveness?
A common motif of the emerging regulatory
environment is the aim of shedding new light on every
area of banks and nancial markets. For example,
Dodd-Frank aims for greater transparency into risk
exposure across the nancial system, and several
key components of the law require nancial services
institutions to collect and report on risk exposure in
their business. The Financial Stability Oversight Council,
in its role as systemic risk monitor, will collect risk
data from various sources including federal and statenancial regulatory agencies and the newly created
Ofce of Financial Research (OFR); among other things,
the OFR will be responsible for collecting data from
nancial services companies.
Similarly, the UKs Financial Services Act and Basel
III both impose a high degree of transparency on key
metrics, including bank capital, liquidity, collateral and
counterparty risk, requiring such data to be reported
to bank boards and regulators. The European Market
Infrastructure Regulation, meanwhile, will try to bring
transparency to the over-the-counter markets andimpose data reporting requirements for transactions
to new trade repositories. A central plank of the review
into the Markets in Financial Instruments Directive,
currently underway, is to increase transparency in post-
trade reporting.
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Banks are uncertain about the effect of these
transparency requirements on their competitiveness,
although some have expressed concern that sensitive
data about capital, liquidity and exposures could easily
leak out into the marketplace. Although some of the
regulations specically aim to increase transparency
in the trading arena, the trading function is the leastconcerned about the impact. (See Figure 7.)
From data defcit to inormationadvantage?
All new regulations mandate signicant additional data
and reporting requirements. These present collection,
integration and management challenges for banks
information architecture.
Basel III, for example, aims to eliminate the kind of
regulatory arbitrage where a bank moves assets from
the banking book into the trading book in order to get
better capital treatment. It therefore requires banks to
consolidate positions from all of their trading desks
and to make their trading book compatible with their
banking book. This requires data to be both accurate
and clean, and will be a challenge for any US banks
which have not been applying Basel rules up to now.
To meet the UKs liquidity rules, banks will be required
to identify, measure, monitor and stress test liquidity
risk in a much more detailed way, and to process and
deliver the data to the Financial Services Authority (FSA)
on a regular basis.
Basel III also requires a unied view of counterparties
and counterparty credit risk, and the capacity to
measure and process the data. In addition, the move
to centralized collateral management, as well as the
introduction of the net stable funding ratio and the
liquidity coverage ratio, will require new data models.
To fulll many of the requirements, banks need to collect
more detailed information from the trading partners andtheir clients. Respondents to the survey highlighted
several areas where they needed additional data from
counterparties, led by collateral and transaction data.
By function, there were some noticeable spikes in data
requirements. (See Figures 8 and 9 on page 13.)
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Strongly agree Strongly disagree
Figure 7. Do you agree or disagree with theollowing statements? Rate 1 to 5.
We are concerned that the increased transparencyrequired by new regulations will be a threat to ourcompetitiveness.
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For some banks, data projects are about creating
value as well as compliance. We identied information
architecture as the lynchpin in meeting new regulations
early on, so we are quite a long way down the road in
terms of where we need to be in order to change our
information systems, says the head of IT at a large
US bank. Because we also identied that this is anarea where we could create value for the business, we
prioritized this over some other IT projects.
There is a high cost associated with meeting new
requirements, however. There is a huge impact on data
systems across multiple product and business lines, says
the head of compliance at a large European bank operating
in London. Estimates suggest that it will cost large banks
around $100m each to put the systems and processes in
place to comply with Basel III. We will have to nd ways of
calculating the newly introduced net stable funding ratio
and the liquidity coverage ratio, and have the capability to
stress test our calculations and report to our board and to
regulators. Because the Basel Senior Supervisors Group
favors a standardized centralized risk data set the so-
called single source of truth on the IT side, this means
banks will have to integrate data sources and adopt new
data modeling techniques.
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ctur
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allo
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Figure 8. In what areas do you need additional ormore detailed inormation rom counterparties,due to recent regulatory reorm?
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Clie
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Figure 9. In what areas do you need additional ormore detailed inormation rom counterparties,
due to recent regulatory reorm?
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Strongly agree Strongly disagree
Figure 10. Do you agree or disagree with theollowing statements? Scale 1-5.
We have a company-wide strategy for identifying thesystems that will require modication/upgrade to handlethe new, higher levels required by new regulation.
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Strongly agree Strongly disagree
Figure 11. Do you agree or disagree with the ollowingstatements? Scale 1-5.
We have a company-wide strategy for identifying thesystems that will require modication/upgrade to handlethe new, higher levels required by new regulation.
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Figure 12. Do you agree or disagree with theollowing statements? Scale 1-5.
We have already identied the systems that will requiremodication/upgrade to handle the new, higher levels ofdata required by new regulation.
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0%
Trading
Regulation
Risk
Operations
1 2 3 4 5
Strongly agree Strongly disagree
Figure 13. Do you agree or disagree with theollowing statements? Scale 1 to 5.
We have already identied the systems that will requiremodication/upgrade to handle the new, higher levels ofdata required by new regulation.
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15
Banks are acutely aware o new datarequirements
The survey revealed that almost three-quarters of
banks have a strategy in place in order to identify where
changes to systems need to be made, or have already
identied the systems which will need modication.Three of the four business functions surveyed are well
advanced in terms of preparation, led by operations, with
only the regulatory function lagging. (See Figures 10 through
13 on page 14.)
Banks have a strategy for communicating the impact of
regulatory changes to clients and counterparties. About
three-quarters (74%) agree or strongly agree that they
have a strategy to communicate changes to clients and
counterparties.
Most banks are condent that once they have adoptedplanned changes to their data infrastructure, their
management will be able to prove they have better
control of information, as required by regulators.
However, UK banks are much more condent than their
US counterparts. (See Figure 14 and 15.)
The shape o things to come
Some banks have already taken steps to rene the
shape of their organizations to minimize the impact of
regulations. In February, for example, the UKs Barclays
disclosed that in November 2010 it had deregistered
its US bank-holding company. The bank said this was
to better align the business with the appropriate capital
regimes; in doing so, the bank avoided having to inject as
much as $12bn to make up a capital shortfall in the US.
As a result of the change, Barclays folded a credit-card
operation into a new US entity that is a direct subsidiary
of the British parent company. The credit-card bank isregulated by the Federal Deposit Insurance Corporation
and needs no additional injection of capital. Before the
move, Barclays Capital, the groups investment bank,
was held within Barclays Group US Inc., which was
subject to federal capital requirements. It will now be
subject to SEC regulation instead.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
36%
30%
7%8%
20%
1 2 3 4 5
Strongly agree Strongly disagree
Figure 14. Do you agree or disagree with the ollowingstatements? Please rate on a scale o 1 to 5.
Once we have adopted changes to our datainfrastructure, management will be able to prove theyhave better control of information, as required by
regulators.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
39%
20%
10%
30%
3%
13%
3%
10%
45%
27%
1 2 3 4 5
Strongly agree Strongly disagree
U.K.
U.S.
Figure 15. Do you agree or disagree with the ollowingstatements? Please rate on a scale o 1 to 5.
Once we have adopted changes to our datainfrastructure, management will be able to prove they
have better control of information, as required byregulators.
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16
While the restructuring of Barclays and other banks
suggest that senior management is swiftly taking steps
to reshape business entities, survey respondents across
most areas of business were undecided about whether
new regulations would lead rms to relocate or outsource
any business functions, or create a shared utility. In 13
of the 17 areas of operation, the majority of respondentssaid they did not know what the impact of regulation
would be on organizational structure. (See Figure 16.)
However, over a third (36%) of UK and almost half
(47%) of US respondents agreed or strongly agreed
that they anticipate working with new back ofce
providers due to regulatory change, compared to about
a quarter of UK and over a third of US respondents who
anticipate working with a new middle ofce provider.
There are four areas (operations, risk management,
nancial control and IT) where new strategies are clearly
being contemplated. In operations, more than a quarter
(26%) of US respondents and a third of UK respondents
said they anticipated the creation of shared utilities.
Operations professionals were even more enthusiastic,
with almost 48% suggesting this was a possible route.
Similarly, the creation of a shared utility was seen as a likely
choice for risk management, with a third of all respondents
and 43% of risk professionals suggesting this option.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
60%61%61%63%
65%66%66%68%
50% 50% 48% 47%
43%
39%
53%
58%58%
GTS
Marke
t-m
akin
g
Clie
ntinve
stm
ent
man
agem
ent
Sal
es
Priv
ateba
nkin
g
Cor
pora
tetrea
sury
IR/m
arke
ting/
com
mun
icatio
ns
Cor
pora
te
finan
ce
Pro
prie
tary
trad
ing
Trad
ing
Com
plia
nce
Cle
arin
g
Fina
ncia
lcon
trol
Res
earc
h
Ris
km
anag
emen
tIT
Ope
ratio
ns
Figure 16. Due to regulatory change, which businessunctions do you anticipate having to relocate oroutsource, partly or completely?
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17
By function, traders see the greatest potential for
regulations to shape operations strategy: 40% of traders
thought new regulations would lead to trading operations
being relocated; 30% thought that market-making and
prop trading will be relocated; 40% thought that a shared
utility may be created for client investment management;
and a third thought that IT may be outsourced.
Shared services such as regional data centers are already
common practice at many global nancial institutions,
particularly at retail banks, which rely heavily on gathering,
processing and analyzing customer information in order
to tailor services. The CEO of the EMEA consumer
division of a major US bank says shared services offer
big advantages for bank and customer. But he notes that
there are already forces in play which may put pressure on
this business model.
Customers execute business with us through
applications hosted in our data centers. One example is
the fraud analysis we do on credit cards. Another is the
risk analysis we perform under the new requirements of
various jurisdictions. Using regional data centers is an
advantage for several reasons. The facilities are state of
the art, present a closed circuit and have no major single
points of failure within the core infrastructure. Our data
centers enhance the banks risk management, allowing
us to mitigate or accept risks based on a composite
impact analysis rather than through isolated and market-
specic analyses. Such centers allow us to maintain
consistent processes across regions. We have an end-
to-end view of the data, which improves the quality
and timeliness of services provided. It also allows us to
better comply with legal/regulatory requirements. Several
jurisdictions are looking to require local data processing,
however. The intentions are understandable, but as
outlined above, would undermine several of the same
public policy goals.
The impact o resolution regimes on
structures
The push towards bank resolution regimes, or Living
Wills, will also have a material impact on strategies
in this area because the patchwork nature of many
banking groups do not lend themselves to drawing
clean lines between businesses.
Global banks are complex entities that have typically
evolved to satisfy a variety of drivers from growth, to
cost cutting, to tax benets. Often, they do not develop
as standalone entities but share functions with other
parts of the group. Business done in one country
may be transferred somewhere else for management.
Likewise, income generated in one location may bepaid away somewhere else. The result is sprawling
global institutions, often comprising hundreds of
different entities, vehicles and participations, which
have been made more efcient through the use of
cross-agreements for the provision of services, people
and funding.
Up to now, banks have been indifferent to how these
structures looked. But in the world of Living Wills and
resolution regimes, if a crisis means a bank must ring-
fence a particular business, write it down or sell it, the
parent needs to know exactly how it interrelates with
all the other parts of the jigsaw. Regulators will want
reassurance that, if rms have transferred positions
from one jurisdiction to another, there is enough capital
and risk management capacity to contain the risks in
the transferred positions. If the business has paid away
income, regulators will ask how that affects protability
and risk management of the entity that is paying away.
Untangling this spaghetti to create an enterprise map will
prove extremely difcult for some. And the existence of
shared services may make it more difcult.
The detail is challenging, says the head of prudential
advisory at a consulting rm. Banks have to ask
themselves if a business could be broken up and sold
off, and what they would do about critical elements
that they would have to pass on to someone else?
Is it standalone or is it dependent on other parts of
the organization? If its not standalone, what needs
to be done to make it saleable as a standalone
operation? Could they provide the right information
to the authorities so that they can maintain critical
functions such as current accounts? All of this is
actually extremely difcult to achieve. In that sense,shared services could become an obstacle to a viable
resolution plan. If you wanted to sell a business that is
dependent on a shared service, how standalone is it?
Can someone else buy it, or does the shared service
affect the viability of the business?
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18
Conclusion
As nancial institutions operating in the US and UK
continue to ask themselves questions such as these,
attempting to determine how best to reshape their
businesses in light of new regulatory requirements, they
also await clarication from regulators on both sides of
the pond. The interim report of the Independent Banking
Commission in the UK was released mid-April, but the
nal report is not out until September. However, the
recommendations of the Commission, such as ring-
fencing retail operations and improving capital buffers,
are just that recommendations, which must be accepted
by the government and implemented before banks have
absolute clarity on the detail of new regulation. In the
US, the SEC and other regulators are working towards
a July deadline for implementation of Dodd-Frank but
already there is talk of a delay of up to 18 months for
some parts of the Act. These delays may give gives
banks more opportunity to work with regulators to nd
solutions that make the nancial system safer while
maintaining competitiveness or they may just drag out
the uncertainty.
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19
0% 20% 40% 60% 80% 100%
89%
59%
25%
Basel III
IFRS
FACTA
0% 20% 40% 60% 80% 100%
31%
13%
56%
We have identified the regulatorychanges relevant to our business
We have assessed how regulatorychanges will impact our business
We have begun implementingchanges to our business based
on our impact assessments
Figure 1. At what stage is your company in preparing or changes required by regulatory reorm?
Figure 2. Have you or do you plan to align the implementation o your countrys main regulatoryreorm with that o any o the ollowing regulations? Select all that apply.
Appendix
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20
0% 20% 40% 60% 80% 100%
25% 33% 11% 5%26%
23% 13% 7%33%25%
18% 23% 5%43%11%
20% 8% 7%36%30%
15% 7% 5%43%31%
We are looking at the new
regulatoryenvironmentas an opportunity
to gain market share
We are looking at the newregulatory environment as an
opportunity to transformour business model/structure
We aim to maintain our currentoperational model/structure as much
as possible, only making changeswhere explicitly required by new regulation
Once we have adopted changes to ourdata infrastructure, management will be
able to prove they have better controlof information, as required by regulators
We have a strategy for communicatingthe impact of regulatory changes to
our clients and counterparties
Strongly agree
1 2 3 4 5
Strongly disagree
Figure 3. Do you agree or disagree with the ollowing statements?Please rate on a scale o 1 to 5 where 1 is strongly agree and 5 is strongly disagree.
Figures do not add to 100% due to rounding.
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0% 20% 40% 60% 80% 100%
80%
39%
38%
23%
23%
Risk tolerance
Areas willing to invest in/areas to avoid
Willingness to lend securities
Demographic information
Household/individualbalance sheet
Figure 4. In what areas do you need additional or more detailed inormation romclients, due to recent regulatory reorm? Select all that apply.
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22
0% 20% 40% 60% 80% 100%
44%
53%
54%
43%
33%
26%
18%
Transactional data
Collateral
Corporate structure
Capital allocation
Client communications
Licensing
Competition issues
Figure 5. In what areas do you need additional or more detailed inormation romcounterparties, due to recent regulatory reorm? Select all that apply.
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0% 20% 40% 60% 80% 100%
30% 39%16%16%
19% 58%5%19%
17% 66%5%12%
17% 58%9%17%
18% 65%5%12%
22% 66%7%5%
19% 50%21%10%
14% 68%5%12%
18% 63%7%12%
21% 60%11%9%
33% 47%9%11%
26% 53%10%10%
31% 50%7%12%
23% 61%2%14%
17% 43%28%12%
21% 61%16%2%
22% 48%21%9%
Operations
Trading
Market-making
Proprietary trading
Sales
Client investment management
Clearing
GTS
Private banking
Corporate finance
Risk management
Compliance
Financial control
Corporate treasury
IT
IR/marketing/communications
Research
Relocate Outsource Create shared utility Dont know
Figure 6. Due to regulatory change, which business unctions do you anticipatehaving to relocate or outsource, partly or completely? Select all that apply.
Figures do not add to 100% due to rounding.
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0% 20% 40% 60% 80% 100%
33%
33%
34%
33%
31%
25%
18%
The ability to hire qualifiedstaff is a top criterion when
selecting where to relocatespecific business funtions
We are confident that ouroutsourcing arrangements
will help us retain staff
We are concerned thatwe are likely to lose staff
due to outsourcing
We are concerned thatwe are likely to lose staff
due to relocation
We are concerned that we willhave difficulty hiring qualified
staff in the areas we areconsidering for relocation
We are confident thatour relocation arrangements
will help us retain staff
We have a retention strategyto lock in key staff when
outsourcing, relocating orcreating a shared utility
Figure 7. What impact will relocation and/or outsourcing decisions have onattracting and retaining talent? Select all that apply.
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25
0% 20% 40% 60% 80% 100%
30% 44% 12% 7%8%
36% 18% 8%33%5%
41% 20% 8%23%8%
36% 18% 5%30%12%
51% 16% 8%16%8%
Moving utilities to other providerswill save us money in the long run
Our plans to outsource certainbusiness functions will create
significant complications forour liquidation plan
We anticipate working withnew middle office providers
due to regulatory change
We anticipate working withnew back office providersdue to regulatory change
The way in which we will have totransform our legal and financial
structure in order to comply with globalliquidation requirements will have a
significant negative effect on revenues
Strongly agree
1 2 3 4 5
Strongly disagree
Figure 8. Do you agree or disagree with the ollowing statements?Please rate on a scale o 1 to 5 where 1 is strongly agree and 5 is strongly disagree.
Figures do not add to 100% due to rounding.
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26
0% 20% 40% 60% 80% 100%
44% 16% 10% 2%28%
38% 16% 8% 2%36%
18% 10 % 3 %34%34%
29% 30% 7%23%8%
30% 5%5%43%20%
25% 7% 3%51%15%
We have already identified the systemsthat will require modification/upgrade
to handle the new, higher levels of datarequired by new regulation
We have a company-wide strategy foridentifying the systems that will require
modification/upgrade to handle the new, higherlevels of data required by new regulation
The board and senior management have a goodunderstanding of the changes to systemsneeded to handle the increased levels of
transparency required by new regulations
We are concerned that the increasedtransparency required by new regulations
will be a threat to our competitiveness
The board and senior management havea good understanding of the implications
increased data transparency will haveacross the business
The board and senior management havea good understanding of the implications
increased data transparency will haveacross the industry
Strongly agree
1 2 3 4 5
Strongly disagree
Figure 9. Do you agree or disagree with the ollowing statements?Please rate on a scale o 1 to 5 where 1 is strongly agree and 5 is strongly disagree.
Figures do not add to 100% due to rounding.
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About CapcoCapco, a global business and technology consultancy dedicated solely to the nancial services
industry. We work in this sector only. We recognize and understand the opportunities and the
challenges our clients face. We apply focus, insight and determination to consulting, technology
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their potential for increasing success. The value we create, the insights we contribute and
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