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Managing Profitability and growth in an increased compliance and regulated environment. Dr . Ranee Jayamaha Chairperson Hatton National BANK PLC 17 th October 2014. Global Financial System -Regulatory Rethinking. Financial crises and adverse impacts on world economy - PowerPoint PPT Presentation
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MANAGING PROFITABILITY AND GROWTH IN AN INCREASED
COMPLIANCE AND REGULATED ENVIRONMENT
DR. RANEE JAYAMAHA CHAIRPERSON
HATTON NATIONAL BANK PLC 17TH OCTOBER 2014
Global Financial System -Regulatory Rethinking• Financial crises and adverse impacts on world economy
imprudent banking and laxed supervision
market rigging and scandals
inadequate capital despite Basel I and II
• Regulatory responsibilities
safeguard national and global financial systems
encourage to work within the global regulatory framework
safeguard interests of all stakeholders
• Tightening regulation is considered to be the solution
• Cost to banks, their growth and profitability are
disregarded
Global Financial System - Regulatory Rethinking
• Regulatory tower is rising - new floors are added
“Bailing in” instead of “Bailing out” is considered
• Regulators view global and systemically important banks are
too big to fail
too big to save
too big to fix
too big to jail
Assessment of Basel Capital Adequacy Framework
• Quantitative restrictions are like regulatory
commandments
Basel I – “thou shall not”- simple and limited to credit risks
Basel II–“thou shall provide the internal model is correct” –too
complicated - discretion with banks – DIY nature- non
compliance
banks grew and made profits
supportive elements are missing
• Due to simplicity, the Glass Stegall Act was far more effective
Basel Capital Adequacy Framework
Enhanced quantity and quality of capital under Basel III
Source: Basel Committee - BIS
Items of CapitalMain Components
Requirement as a percentage of risk weighted assets
Basel III requirements with capital
conversation Buffer of 2.5%
Basel II Basel III
Common Equity Share capital, retained profits and disclosed reserves
2.0% 4.5% 7.0%
Tier I Capital
Common equity plus other capital instruments which are subject to strict eligibility criteria and which encompass a loss absorption mechanism
4.0% 6.0% 8.5%
Counter Cyclical Buffer (Capital Conservation Buffer)
Common Equity 2.5%
Total Capital
Tier I capital and capital instruments subordinated to depositors and general creditors of the bank subject to strict eligibility criteria
8.0% 8.0% 10.5%
Financial Regulatory Framework• National regulatory systems
USA - Basel plus Dodd-Frank regulation
UK - Basel plus Financial Policy Committee Regulations
Europe - Basel plus EU Directives
• Stress testing and restrictions on trading book /investment banking
• Profitability of banks is from:
reduction of branches / employees
selling /closing non profit earning units
reduced operations of investment arms
restructure overseas operations
Sri Lanka’s Financial Regulatory Framework
On Basel II, and moving on to Basel III
Flexible and banks behave well. No criminalization of
banking
Regulatory framework is tolerable and allows banks to
grow/profit
Mandatory Corporate Governance has saved
the banking industry
Need to avoid adhoc regulatory tightening
Inter-regulatory institutional coordination and internal
consultation need streamlining
Impact of Policy and Regulatory Changes by Advanced Countries
USA: reversal of ultra - loose monetary policy
free loanable funds from the Fed, ECB, BOE
helped banks to grow and maintain profits
Emerging markets benefited due to inflow of funds
Tapering off of QE programmes (June/July 2013) had severe
impacts on global financial markets
Uncertainty and loss of business opportunities for banks in
emerging countries
Cost of Regulatory Reporting and Compliance
• Ever increasing regulatory costs (normal + cost of raising extra
capital)
• Cost of providing data/ information
data requests by multiple regulators /different units of a regulator
not making use of such information for analysis; agony/frustration
maintenance of an army of compliance officers
• Cost of compliance with FATF + , UN regulations , FATCA and
others
• Criminalization of banking business - USA
reprimanding /black listing of banks
unprecedentedly high penalties and non transparent
settlements
Overall Impact on Growth and Profitability of Banks
• Growth has suffered; costs have escalated and
profitability lowered
• Severe competition and industry wide impact
• M0vement of business to shadow and less regulated
markets /institutions
asset and property bubbles – potential risks
• Restrictions on investment banking and trading book
• Shareholder/ investor frustration
• Restructure / merge and consolidate
Managing Growth and Profitability
• Reduce other costs and conduct prudent banking
business restructuring
outsourcing of non-core functions
leaner organizations and use of technology
• Share infrastructure and common platforms
• Diversify and increase fee incomes where possible
• Seek joint operations to minimize risks and leverage on
expert knowledge
Observations and Remarks
• Financial system stability is a prime regulatory objective. Banks
are prime constituents of the financial system. Both should
survive
• Balance between regulations and banking business is
imperative
regulatory objectives should be clear
dangers of over-regulation should be understood
• Watch dog’s failures should be accepted (2007-2009)
• Regulation should not be a wining game
• Catching/avoiding a crisis is difficult but complexity aggravates
situation