Change amidst uncertainty: how banks are adapting to the

Change amidst uncertainty: how banks are adapting to the emerging regulatory landscapeThoughts

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 Capco Thoughts white paper, Regulatory Reform: 7 Critical Questions for Financial Services Firms, available on capco.com.

Change amidst uncertainty: how banks are adapting to the emerging regulatory landscape

Capco is pleased to present this

report, which explores how capital

markets firms are dealing with

the dramatic changes that are

underway in the financial 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-

office 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 office yet, or

that regulators may not have even fully defined.

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 fiduciary and oversight requirements

on a firm’s board members and executives, requirements

that extend to maintaining robust compliance around all

trading operations and banking.

Whether or not their front-office moves are part of

broader corporate strategy, firms can become exposed

to significant fiduciary 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 findings 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 Compliance

[email protected]

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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, financial institutions are reshaping their

capital 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 office operations.

The research is based on three components:

• A survey of 60 senior executives at financial

institutions, half operating in the UK and half in

the US. All firms 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 financial

institutions’ regulatory filings.

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 financial crisis became

clear, industry participants knew that a tough regulatory

response would follow. Those expectations have now

been met. While the final 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 financial industry to fundamentally reassess business

models and operating practices.

This assessment is driving significant change in financial

institutions. Banks are already exiting some businesses

and are likely to shrink or exit others as new capital

rules make them less profitable. The location of new or

expanding businesses will be rethought as firms assess

the relative impact of each jurisdiction’s 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 find

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, interviewees

preferred to speak off-the-record.

Key findings 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. Almost

two-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

of 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 identified

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 firms will relocate or

outsource business functions, or create a shared utility.

Boards and senior management believe they have

a good understanding of 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 accountable

for a firm’s 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 confident

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 filing to the Securities and

Exchange Commission (SEC) for the fiscal year ending

in March 2011, Goldman Sachs revealed the impact

that US regulations have already had on the bank’s

operations. “In light of the Dodd-Frank Act, during

2010, 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 first 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 office transformations. Some firms

have recruited additional expertise in specific 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 bank’s 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

defined, it is clear that banks’ strategy and front

office operations are already moving forward, while

governance and compliance are lagging.

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Assessment, understanding and implementation

The sales and trading functions of financial services

firms seem to have moved quickly to determine which

regulations are relevant to their businesses, consider

what the regulatory impact will be and even to move

forward 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 defined in US regulation than

there is in Europe, meaning that firms in Europe have

a head start. UK firms are also more likely than those

in the US to align the implementation of their country’s

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 UK’s liquidity buffers, which were

implemented in June 2010, as well as Basel III’s liquidity

coverage ratios. The bank’s CEO says the bank’s

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, it’s 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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Figure 1. Q1, geographic split. At what stage is your company in preparing for changes required by regulatory reform?

We have identified the regulatory changes relevant to our business

We have assessed how regulatorychanges will impact our business

We have begun implementing changes to our business based on our impact assessments

U.K.U.S.

Figure 1. At what stage is your company in preparing for changes required by regulatory reform?

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Figure 2. Q2, geographic split. Have you or do you plan to align the implementation of your country’s main regulatory reform with that

of any of the following regulations? Select all that apply.

IFRS Basel III FACTA

U.K.U.S.

Figure 2. Have you or do you plan to align the implementation of your country’s main regulatory reform with that of any of the following regulations? Select all that apply.

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Trading is running out in front

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 significant 60% have

completed the impact assessment. (See Figure 3.)

On reflection, 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 have

had to think through urgently what is the shape of the

business going forward, because the current business

won’t be profitable,” says the head of prudential

advisory at a consulting firm. “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 firms 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

flooding 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

financial 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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Figure 3. Q1, job function splitAt what stage is your company in preparing for

changes required by regulatory reform?

We have identified the regulatory changes relevant to our business

We have assessed how regulatorychanges will impact our business

We have begun implementing changes to our business based on our impact assessments


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A financial services partner at a consulting firm 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 firms. And it gets

more difficult as you move down from global statements

of principal into regional rule-making, and then further

down into national interpretation. We don’t see many

institutions that have an overarching view of the impact

on their firm. 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

fiduciary 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 first sight, this looks to be accounted for by the

banning of proprietary trading and constraints on

principal investment – two of the most profitable areas

of 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 profitable? And I think the answer to that

is unknown,” says the head of prudential advisory at

a consulting firm. “Moreover, if multiple banks change

their business in the same way, how many banks can

be profitable with the same type of business? How

many banks can be major flow players, for example?”

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Figure 4. Q3a, Do you agree or disagree with the following statements? We are looking at the new regulatory

environment as an opportunity to gain market share

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Figure 4. Do you agree or disagree with the following statements? We are looking at the new regulatory environment as an opportunity to gain market share.

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Figure 5. Q3a, functional splitDo you agree or disagree with the following statements?

We are looking at the new regulatory environment as an opportunity to gain market share


Figure 5. Do you agree or disagree with the following statements? We are looking at the new regulatory environment as an opportunity to gain market 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 field 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 treatment

of deferred tax assets (DTAs) might be more beneficial

for US banks than for European banks and, depending

on how it’s 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 difficulty than for a European bank; banks in

difficulty have hitherto been bought on the basis of the

benefits 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 for transformation

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 large

European bank operating in London. “The industry

may have gone a long way towards achieving overall

efficiency, but we have never achieved information

efficiency. 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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Figure 6. Q3b, geographic splitDo you agree or disagree with the following statements?

Scale of 1 to 5. We are looking at the new regulatory environment as an opportunity to transform our business model/structure


U.K.U.S.

Figure 6. Do you agree or disagree with the following statements? Scale of 1 to 5.

We are looking at the new regulatory environment as an opportunity to transform our business model/structure.

11

operations in a way that benefits 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 for

change,” he adds. “Historically, the cost-benefit 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-benefit 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 bank competitiveness?

A common motif of the emerging regulatory

environment is the aim of shedding new light on every

area of banks and financial markets. For example,

Dodd-Frank aims for greater transparency into risk

exposure across the financial system, and several

key components of the law require financial 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 state

financial regulatory agencies and the newly created

Office of Financial Research (OFR); among other things,

the OFR will be responsible for collecting data from

financial services companies.

Similarly, the UK’s 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 and

impose 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 specifically aim to increase transparency

in the trading arena, the trading function is the least

concerned about the impact. (See Figure 7.)

From data deficit to information advantage?

All new regulations mandate significant 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 UK’s 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 unified 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 fulfill many of the requirements, banks need to collect

more detailed information from the trading partners and

their 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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Figure 7. Q10d, functional splitDo you agree or disagree with the following statements?

Rate 1 to 5. We are concerned that the increased transparency required by new regulations will be a threat to our competitiveness


Figure 7. Do you agree or disagree with the following statements? Rate 1 to 5.

We are concerned that the increased transparency required by new regulations will be a threat to our competitiveness.

13

For some banks, data projects are about creating

value as well as compliance. “We identified 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 identified that this is an

area 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 find 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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Figure 8. Q5, overallIn what areas do you need additional or more detailed

information from counterparties, due to recent regulatory reform?

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Figure 8. In what areas do you need additional or more detailed information from counterparties, due to recent regulatory reform?

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Figure 16. Q6, “don’t know list”Due to regulatory change, which business functions do you anticipate

having to relocate or outsource, partly or completely?

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Figure 9. In what areas do you need additional or more detailed information from counterparties, due to recent regulatory reform?

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Figure 10. Q10a, overallDo you agree or disagree with the following statements?

Scale 1-5. We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the

new, higher levels required by new regulation.


Figure 10. Do you agree or disagree with the following statements? Scale 1-5.

We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the new, higher levels required by new regulation.

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Figure 7. Q10d, functional splitDo you agree or disagree with the following statements?

Rate 1 to 5. We are concerned that the increased transparency required by new regulations will be a threat to our competitiveness



We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the new, higher levels required by new regulation.

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Figure 12. Q10b, overallDo you agree or disagree with the following statements? Scale 1-5.

We have a company-wide strategy for identifying the systems that will require modification/upgrade to handle the new, higher levels required by new regulation



We have already identified the systems that will require modification/upgrade to handle the new, higher levels of data required by new regulation.

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RiskOperations

Figure 13. Q10b, functionalDo you agree or disagree with the following statements?

Scale 1 to 5. We have already identified the systems that will require modification/upgrade to handle the new,

higher levels of data required by new regulation


Figure 13. Do you agree or disagree with the following statements? Scale 1 to 5.

We have already identified the systems that will require modification/upgrade to handle the new, higher levels of data required by new regulation.

15

Banks are acutely aware of new data requirements

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

identified the systems which will need modification.

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 confident that once they have adopted

planned 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 confident than their

US counterparts. (See Figure 14 and 15.)

The shape of things to come

Some banks have already taken steps to refine the

shape of their organizations to minimize the impact of

regulations. In February, for example, the UK’s 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 is

regulated by the Federal Deposit Insurance Corporation

and needs no additional injection of capital. Before the

move, Barclays Capital, the group’s 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%

Figure 14.Q3d, overallDo you agree or disagree with the following statements? Please rate on a scale of 1 to 5. Once we have adopted changes to our data infrastructure, management will be able to

prove they have better control of information, as required by regulators


Figure 14. Do you agree or disagree with the following statements? Please rate on a scale of 1 to 5.

Once we have adopted changes to our data infrastructure, management will be able to prove they have 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%

Figure 15. Q3d, geographicDo you agree or disagree with the following statements?

Please rate on a scale of 1 to 5. Once we have adopted changes to our data infrastructure, management will be able to prove they have better

control of information, as required by regulators


U.K.U.S.

Figure 15. Do you agree or disagree with the following statements? Please rate on a scale of 1 to 5.

Once we have adopted changes to our data infrastructure, management will be able to prove they have better control of information, as required by regulators.

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 firms to relocate or outsource

any business functions, or create a shared utility. In 13

of the 17 areas of operation, the majority of respondents

said 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 office

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 office provider.

There are four areas (operations, risk management,

financial 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%

Figure 16. Q6, “don’t know list”Due to regulatory change, which business functions do you anticipate

having to relocate or outsource, partly or completely?

GTS

Mar

ket-m

akin

gC

lient

inve

stm

ent

man

agem

ent

Sale

sPr

ivate

ban

king

Cor

pora

te tr

easu

ryIR

/mar

ketin

g/

com

mun

icat

ions

Cor

pora

te

finan

cePr

oprie

tary

trad

ing

Trad

ing

Com

plia

nce

Cle

arin

gFi

nanc

ial c

ontro

lRe

sear

chRi

sk m

anag

emen

t

ITO

pera

tions

Figure 16. Due to regulatory change, which business functions do you anticipate having to relocate or outsource, partly or completely?

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 financial 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 bank’s risk management, allowing

us to mitigate or accept risks based on a composite

impact analysis rather than through isolated and market-

specific 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 of 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 benefits. 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 be

paid away somewhere else. The result is sprawling

global institutions, often comprising hundreds of

different entities, vehicles and participations, which

have been made more efficient 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 firms 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 profitability

and risk management of the entity that is paying away.

Untangling this spaghetti to create an enterprise map will

prove extremely difficult for some. And the existence of

shared services may make it more difficult.

“The detail is challenging,” says the head of prudential

advisory at a consulting firm. “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 it’s 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 difficult 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?”

18

Conclusion

As financial 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 clarification 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

final 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 find

solutions that make the financial system safer while

maintaining competitiveness – or they may just drag out

the uncertainty.

19

0% 20% 40% 60% 80% 100%

89%

59%

25%

Figure Q2. Have you or do you plan to align the implementation of your country’s main regulatory reform with that of any of the following regulations? Select all that apply

Basel III

IFRS

FACTA

0% 20% 40% 60% 80% 100%

31%

13%

56%

Figure A-1. At what stage is your company in preparing for changes required by regulatory reform?

We have identified the regulatorychanges relevant to our business

We have assessed how regulatory changes will impact our business

We have begun implementing changes to our business based

on our impact assessments


Figure 2. Have you or do you plan to align the implementation of your country’s main regulatory reform with that of any of the following regulations? Select all that apply.

Appendix

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%

Figure Q3. Do you agree or disagree with the following statements? Please rate on a scale of 1 to 5 where 1 is strongly agree and 5 is strongly disagree.

*Figures do not add to 100% due to rounding.

We are looking at the newregulatoryenvironment

as an opportunityto 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 following statements? Please rate on a scale of 1 to 5 where 1 is strongly agree and 5 is strongly disagree.

Figures do not add to 100% due to rounding.

21

0% 20% 40% 60% 80% 100%

80%

39%

38%

23%

23%

Figure Q4. In what areas do you need additional or more detailed information from clients, due to recent regulatory reform? Select all that apply.

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 information from clients, due to recent regulatory reform? Select all that apply.

22

0% 20% 40% 60% 80% 100%

44%

53%

54%

43%

33%

26%

18%

Figure Q5. In what areas do you need additional or more detailed information from clients, due to recent regulatory reform? Select all that apply.

Transactional data

Collateral

Corporate structure

Capital allocation

Client communications

Licensing

Competition issues

Figure 5. In what areas do you need additional or more detailed information from counterparties, due to recent regulatory reform? Select all that apply.

23

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%

Figure Q6. Due to regulatory change, which business functions do you anticipate having to relocate or outsource, partly or completely? Select all that apply.


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 Don’t know

Figure 6. Due to regulatory change, which business functions do you anticipate having to relocate or outsource, partly or completely? Select all that apply.


24

0% 20% 40% 60% 80% 100%

33%

33%

34%

33%

31%

25%

18%

Figure Q7. What impact will relocation and/or outsourcing decisions have on attracting and retaining talent? Select all that apply.

The ability to hire qualifiedstaff is a top criterion whenselecting where to relocatespecific business funtions

We are confident that our outsourcing arrangements

will help us retain staff

We are concerned thatwe are likely to lose staff

due to outsourcing

We are concerned that we are likely to lose staff

due to relocation

We are concerned that we will have difficulty hiring qualified

staff in the areas we are considering for relocation

We are confident thatour relocation arrangements

will help us retain staff

We have a retention strategy to lock in key staff when

outsourcing, relocating or creating a shared utility

Figure 7. What impact will relocation and/or outsourcing decisions have on attracting and retaining talent? Select all that apply.

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 providers will save us money in the long run

Our plans to outsource certain business functions will create

significant complications for our liquidation plan

We anticipate working with new middle office providers

due to regulatory change

We anticipate working with new back office providers due to regulatory change

The way in which we will have to transform our legal and financial

structure in order to comply with global liquidation requirements will have a

significant negative effect on revenues

Strongly agree

1 2 3 4 5

Strongly disagree



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 systems that will require modification/upgrade

to handle the new, higher levels of data required by new regulation

We have a company-wide strategy for identifying the systems that will require

modification/upgrade to handle the new, higher levels of data required by new regulation

The board and senior management have a good understanding of the changes to systems needed to handle the increased levels of

transparency required by new regulations

We are concerned that the increased transparency required by new regulations

will be a threat to our competitiveness

The board and senior management have a good understanding of the implications

increased data transparency will have across the business

The board and senior management have a good understanding of the implications

increased data transparency will have across the industry

Strongly agree

1 2 3 4 5

Strongly disagree



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Change amidst uncertainty: how banks are adapting to the