Evolving regulatory reformBY LEONG KOK KEONG AND GARY CHIA
According to a recent joint KPMG and Oracle survey of executives from financial institutions across the region, the recently proposed reforms Basel III are likely to have a significant impact on banks in Asia-Pacific.
About three in four, or 76 percent of respondents said regulatory reforms would have an impact on their business. More than half said these regulatory reforms would likely mean changes to their banks' business models. Almost half or 48 percent expect their banks would need to raise additional capital.
Despite this, 72.5 percent of those surveyed said they supported the application of new regulations such as Basel III to financial institutions in the Asia-Pacific region.
Some areas of concern highlighted were to address the expected higher compliance costs which could mean a reduction in their banks' competitiveness and a higher cost of capital, which may also become harder to access.
The bottom line is that these regulatory reforms mean that new regulations will hit banks' top and bottom lines, and more costs may be transferred to customers.
Surviving the ‘new normal’
The top three important areas of regulation identified by respondents as a priority are:
• capital management, including the Internal Capital Adequacy Assessment Process (ICAAP)
• liquidity risk management and
• enterprise wide stress testing, across risk categories.
Most respondents thought their banks would require additional risk management infrastructure. Over 96 percent said they considered that an integrated approach to risk, performance, compliance and capital was either critical or important/very important to "Future Proof" themselves.
The regulatory changes are therefore also affecting governance structures and practices. More than 70 percent said they have had to refine the terms of references of their risk management committees, while 46 percent indicated that the board needed a more integrated view of risk management.
One aspect that is becoming more and more pronounced is the “integration” of the risk and performance space. The survey highlighted this across risk, compliance, performance and capital – pretty much the entire spectrum.
The importance of “interconnectedness” for these areas cannot be underestimated, and the survey highlighted that mastery of data and data architecture, integrated and flexible technology infrastructure, interactive and transparent reporting have emerged as the top of the demands that banks have in order for them to manage the “New Normal” demanded by this evolving regulatory landscape.
Liquidity and stable funding ratio proposals, not previously considered in the Basel II framework, may also require significant revisions made to policies and procedures, and revised systems capabilities for many banks.
These changes may require banks to construct and apply an integrated approach to risk management. This is a means of capturing the many risk, capital and balance sheet changes in an efficient, cost-effective, coherent and explainable manner.
Ultimately, the governance challenge will be to optimise balance sheet growth and structures within a significantly revised set of capital and liquidity constraints. These constraints will be more demanding than before, reflecting the interaction of higher minimum requirements and greater complexity, but potentially also be the subject of more variation than previously occurred as regulators respond to cyclical issues.
The eventual balance between business objectives and the outcomes of heightened regulatory demands will take time to be determined. Similarly, will the consequences for the metrics of performance measurement, public reporting and risk-based reward frameworks.