Saturday, August 7, 2010
Steps large banks can take to avoid being shrunk!
Global legislative and regulatory pressure continues to grow to prevent banks from becoming too big to fail. One of the potential outcomes is that banks may be forced to split retail banking (safe, low-margin business) from investment banking (high-risk, high-profit business) to create two (at least) legal entities.
If banks want to avoid a return to the restrictive days of Glass-Steagall (or a modern counterpart), they are going to have to become much more rigorous and transparent in their reporting, risk analysis and financial controls. In other words, making the transition from "too big to fail" to "too smart to fail" means seriously rethinking traditional banking operations.
STEP 1: IDENTIFY YOUR BANK'S 'TOO BIG TO FAIL' RISKS.
Improperly managed, a few key measures can create a big target on a bank's back. For example, if a bank can't prove liquidity levels, financial status or exposure to certain financial instruments and/or geographies, it risks being labeled as the kind of irresponsible institution that members of Congress say has necessitated the coming raft of regulatory change.
Banks that can't demonstrate the kinds of measures described above will lose market cap and long-term competitive advantage. For example, at the moment, the fear across both Europe and the U.S. is banks' exposure to financial institutions in Portugal, Italy, Greece and Spain -- if a bank can't prove a solid position or even fully understand its exposure to these markets, using technologies that support transparency and control, it is in danger of being forced to float off business units, which will greatly devalue the component parts.
Banks need to implement a comprehensive regulatory risk audit, taking worst-case scenarios into account for processes including regular liquidity reporting, complex/controversial financial instrument exposure assessments, and geographic risk reporting. If this review shows that a bank can't "see" information around liquidity and risk because that information is buried in the complexities of financial instrument creation, or because siloed parts of the business keep information locked away, it's a clarion call for greater transparency. The business can't make smart decisions about regulatory reporting processes without a clear and consistent view of risks across the global organization.
STEP 2: BRING IN TECH SUPPORT
Once a bank has identified the processes and protocols that keep information about risk hidden from key decision makers, it's time to consider which technology systems and solutions will support a transition to greater transparency. Ironically, compliance systems shouldn't be at the top of the list. Too often, these solutions sit at the narrow end of the funnel of information. By the time information gets to the mouth of the funnel, it's too late in the reporting process to measure the data's accuracy or its relevance to the organization's risk and reporting strategies.
Rather, banks need to consider compliance in the context of the many business processes that take information from one point to another throughout the organization. Rules-based business process management systems that require equal ownership between business and IT managers can create an operating environment that lends itself to greater transparency.
STEP 3: BENCHMARK AGAINST THE BEST
Banks that have successfully positioned themselves for the new regulations share three characteristics:
A customer-centric back office. Although customer service interfaces are typically the remit of the front office, companies that understand the relationship between data maintained in the back office and customers served in the front office have a more holistic view across the entire business.
Risk-aware culture. Not necessarily risk-averse, these banks have a culture of risk awareness that supports prudent decisions.
Agile IT infrastructure. Banks whose systems leverage the best in "enterprise 2.0" technologies, such as SaaS architecture and cloud computing, typically find it easiest to adopt systems that best support risk reporting, control and transparency.
American military general Omar Bradley once said, "Bravery is the capacity to perform properly even when scared half to death." Be brave, banks -- the long-term rewards of smart reporting investments will be worth the short-term fear of breaking the budget.
Court: David Sherriff, Microgen