Commentary

Having just come back from meeting with banks in Asia, the case for dynamic charging as a driver of customer profitability is clear.

PricewaterhouseCoopers LLP Asia Financial Services Leader Dominic Nixon talks about the Banking Banana Skin Survey 2010 and what bankers in Asia fear the most.

The recession may be key to much needed change - Ernst & Young explains why.

The last two years have been extraordinary by any standards. Established financial institutions have been swept away, amalgamated or nationalised in many countries across the world. Property bubbles have burst. Governments have been forced to step in to save entire industry sectors at a vast cost to the public. Government spending has also ended up in the limelight.

Recent events in the global financial markets are a poignant reminder that financial institutions have exposures that extend beyond the assumed risks. The recent crisis has prompted a thorough re-examination of liquidity risk, and how financial institutions should manage it more comprehensively. Now, more than ever, liquidity risk is on par with market, credit and operational risks. In the past, markets were flushed with liquidity and easily available credit, encouraging complacent attitudes towards liquidity risk. However, the financial crisis changed all that. Suddenly, there was a realization that the lack of liquidity could cause the collapse of not only specific institutions but an entire system. The market looks at liquidity risk broadly at two levels: at the institutional level, in other words an issue with a bank, or on a regulatory level, in response to broader market or systemic risk. On an institutional level, financial institutions are reviewing the type of assets they hold, whether they need to be lowered in order to boost liquidity, the maturity of those assets, and the currencies in which they are denominated (for example, US dollars). They are also assessing their funding sources, particularly non-domestic institutions and the degree to which they are dependent on liquidity funding from headquarters. The latest thinking on liquidity management is that each location should have means to raise liquidity or have access to it by itself. Stress-testing Generally, institutions are evaluating their entire liquidity picture to see if and how they can efficiently strengthen liquidity. In doing that, institutions need to recognize the importance of a robust risk management framework, including stress-testing. Stress-testing allows an institution to identify the impact of liquidity events that it can encounter, thus providing insight into potential liquidity shortfalls and the strategies needed to maintain an appropriate liquidity position. Although institutions have used stress-testing in the past, lessons learnt from the crisis have highlighted the inadequacies and failure of its prior practice to thoroughly quantify potential liquidity risk. Institutions are now prompted to re-think the stress-testing scenarios of their liquidity positions. Rather than looking at liquidity for funding, they now incorporate impact on the entity's overall balance sheet that is likely to be brought about in a crisis situation. For example, the impact on asset value in an illiquid or severely stressed market, and the consequence on capital and confidence. Financial institutions now perform stress-tests on their liquidity profile on a regular basis to ensure that a strong credit stress-testing policy is not only in place, but continually enhanced. Stress-testing processes, approaches and methodologies also need to include an expanded number of stress-test scenarios to evaluate the accuracy of projections. Maintaining liquidity targets to ensure that funds are available even under adverse conditions to cover customer needs, maturing liabilities, and other funding requirements is essential in managing liquidity risk across all classes of assets and liabilities. Management must not only recognize the need for change but also quickly and effectively execute programs and reshape the business to make sure they are in a position to respond and adapt. Evolving regulations Previously, due to a lack of industry-standard key risk indexes, evolving regulatory guidance and possibly no integrated view of an institution’s global liquidity position, it has been a challenging task for boards of directors and the C-suite to provide investors and regulators with an efficient flow of liquidity risk information. However, there have been steps towards liquidity regulations, including Financial Services Authority (FSA) rules on liquidity for banks operating in the UK. Regulators now demand that stress-testing considers forward-looking information and qualitative insight in order to identify and consider liquidity events for which there are no precedents. They also expect institutions to be able to perform certain ad hoc analyses in a timely manner. Given the recent events of global financial markets, such external pressures and internal demands are not likely to let up in the years ahead. Global regulatory regimes are still evolving, and it remains to be seen the extent to which they will be reshaped in Asia. In Singapore, the Monetary Authority of Singapore has said that it will continue to work on strengthening the risk management systems and processes of financial institutions, to assess vulnerabilities and fine-tune measures for them to mitigate financial stresses. These include building up prudent capital buffers to absorb losses when necessary. Many financial institutions here have already begun to identify scenarios that pose the greatest risk to the long-term viability of their business and have started to develop contingency plans that will help manage their business through a crisis. They are also beginning to review their scenario analysis capabilities to ensure that they have the ability to model a variety of short-term and protracted institution-specific and market-wide stress scenarios and assess specific vulnerabilities and systemic effects. While it is clear that the global financial crisis has brought unprecedented turmoil to many financial institutions with a landscape that continues to evolve, positioning the organization to emerge stronger from the crisis is now vital, as opportunities still exist for efficient and agile companies. No longer just the purview of the asset and liability committee of a bank, liquidity risk should now be an integrated part of the overall risk management function that requires a coordinated management approach by all who oversee risk - from the board of directors, chief risk officers, senior management as well as risk committees and other lines of business. Coupled with a potent cocktail of proper processes and tools that are aligned with liquidity risk programs to gather liquidity information across the organization, financial institutions will be better equipped for any future crunches and be able to hold competitive advantage.  

The United Nations Principles for Responsible Investment now claims over 550 signatories with more than USD 18 trillion in assets. UNPRI provides a framework for institutional investors to integrate environmental, social and governance (ESG) factors into investment processes. Also, the International Finance Corporation has sponsored a study on the prevalence of RI in emerging markets. High profile pension funds and sovereign wealth funds are starting to integrate ESG into their investment process.

Very few people regardless of their title, level or role can say they have enjoyed the last 12 months. And even fewer could currently tell you that they love both their job and their employer. The once dynamic and lucrative banking and finance sector became ‘public enemy number 1’ at the start of the GFC which was further compounded by the global press seemingly apportioning total responsibility of the world’s economic demise on a sector that up until then afforded a relatively solid reputation after years of good economic news. It was September last year when the shockwaves of the GFC started reverberating around the globe. Swiftly, every business became affected, be it directly or indirectly, and as cost management became the ‘Management Mantra’ of 2009 the market witnessed widespread redundancies as the financial services sector fought for its very existence. Whether you lost your job or not in the last 12 months, nobody was spared from the considerable torment as futures and careers hung in the balance at the mercy of management, management which on many occasions presided overseas - making decisions even harder to swallow.  Engaging with your staff when you only have bad news to deliver is extremely tough, unfortunately the market saw evidence of many management teams avoiding communication based on the false assumption that people only want to hear good news. This misconception led to employees making widespread assumptions and as they became paralysed by fear, the very jobs they were desperately trying to retain came under more and more pressure. Lack of communication and all the problems that stem from it, is one of the primary reasons people are looking to move jobs now that the world is starting to show signs of recovery – workers are disengaged with their current employers… Is it too late for employers to re-engage their staff? Not necessarily, if employers are open and honest with staff it is likely they can win them back. The aim now is to re-build staff confidence and commitment to the company and create buy-in through reaffirming the company’s short and long-term goals, displaying corporate commitment to not only their people but also to achieving success.  As an employee, think seriously before you leave your current company, times may have been bad but rest assured they’ve been bad for almost everyone. It is unlikely that you’ll find many people in a comparative role that have had a dazzling career in the last 12 months and even less likely that their engagement with their employer has improved. Ask yourself how you felt before disaster struck… About Robert Walters Robert Walters is a leading global recruitment consultancy, specialising in placing high calibre professionals into permanent, contract and temporary positions at all management levels. The Group specialises in the accounting, finance, banking, information technology, human resources, legal & compliance, sales & marketing, secretarial & support, engineering & operations, general management and supply chain & procurement industries. Robert Walters’ client base ranges across both multi-national corporations and SMEs and covers all market sectors. Established in 1985, Robert Walters has built a global presence with 38 offices spanning five continents and employs over 1400 staff worldwide.

Sustainability should and will move further up the agenda of governments, regulators and businesses. It will as there are signs of the economic crisis easing in parts of the world. This move will be further fuelled by the high profile UN climate change conference in Copenhagen, where world leaders will seek to agree an effective climate change deal. This will follow on from the first phase of the UN’s Kyoto protocol, which expires in 2012. There are several aspects to sustainability. Environmental sustainability is one of them. However, sustainability is about more than carbon levels. The economic crisis has raised questions about the viability of global markets from other perspectives. It has become clear that we cannot continue in the same track as before; a different vision of the world and business’s role in it must be achieved that meets the imperative of sustainability. The argument is no longer about ‘environment’ or ‘wealth’ but how to achieve a prosperous and sustainable world. To achieve a market system that promotes sustainability economic activity and business models must operate within environmental limits. Trusted flows of reliable and accurate information are central to the success of any system and especially to one that is as information-intensive as this. Information flows and the processes that support them are the natural territory of accountants and they and the financial services sector have a key role to play in developing markets that drive a world that serves both people and planet. If there was ever any doubt, the crisis has made it absolutely clear that the world’s capital markets are interlinked. That means there is a need for a globally coordinated response to the crisis and also a globally coordinated effort to promote sustainable markets, business and behaviour. There will be increased pressure on businesses to demonstrate their sustainable and ethical behaviour in months and years to come. And there will be increased pressure on investors to show that they invest in sustainable companies. A key objective of the Copenhagen conference is to agree targets for greenhouse gas emission reductions. As climate change is probably the single most important issue we all face today, this is a critical step in the direction of securing a sustainable worldwide economy and society and it will require boldness and leadership to achieve. However, the global effort to reduce emissions must be properly measurable and comparable across country borders, not least to allow investors to make more informed decisions about the companies they invest in. The ICAEW therefore believes it is essential to agree universal standards for measuring, monitoring and reporting greenhouse gas emissions. It is also important that this information is integrated into mainstream business reporting and linked to business performance. There is a wider need for a more integrated approach to reporting financial and non-financial information in areas that might impact on the achievement of a sustainable global economy. For all this to happen, we believe the world leaders in Copenhagen should support a collaborative effort to agree a global standard for the reporting of a company’s impact on its environment. Currently, investors, other stakeholders and regulators need greenhouse gas emissions information. Many organisations all over the world already report such data, something which has come about as a result of, among other things, investor requests. However, the challenge – especially for investors and companies operating across country borders – is that there is a vast number of reporting frameworks and protocols out there, meaning the type of information and the way it is presented varies greatly from business to business and from country to country. The various frameworks have different ways of calculating emissions, setting targets and monitoring progress. Overall, this paints a rather confusing picture and might hamper rather than aid decision-making. The lack of one agreed global framework might also encourage companies to avoid disclosure. Benefits of a uniform and transparent global standard for emissions are well documented. They include reduced complexity and increased clarity, comparability across country borders and better information to meet all stakeholders’ needs. The ICAEW has been actively engaged in working with the Carbon Disclosure Standards Board (CDSB) on developing an effective reporting framework that can provide guidance to businesses on what information they should include in their annual reports. The framework was published for public consultation earlier this year and is currently being refined ahead of the Copenhagen conference. It is not about more reporting but about better reporting. Rather than creating something new, the framework builds on existing protocols and standards. It also links an organisation’s climate change data to its risk, strategy and financial performance. A key aim of this initiative is to make climate change data reporting as mainstream as financial reporting. A long-term aim is also to ensure that all sustainability issues, not only greenhouse gas emissions, should be reported in the future to further aid the decisions of investors. Fundamental to the development of a market system that promotes sustainability is reliable and accurate information – this is the domain of qualified accountants and an area to which the accountancy profession can contribute. There are many lessons to be learnt from the financial crisis. If it can help us make sustainability a true boardroom issue, something good might still come out of it.

They enforce almost 1,500 conditions relevant to financial services institutions of which 48% block trade.

IASB* recently published an exposure draft on the classification and measurement of financial instruments. This is the first of three planned phases to replace the controversial International Accounting Standard 39 (IAS 39), which determines how financial assets and liabilities are accounted for. It is a complicated area, and has been the target of much debate in the international arena, with governments and companies around the world getting into the fray.

Valuations for private banking assets dropped significantly after the end of the last major boom in 2007. The landscape of private banking is rapidly changing as large local institutions try moving up the value chain and full service private banks try leveraging their corporate banking set-ups to gain bigger shares of the market. In a quest to tap Asian wealth, multiple initiatives in private banking have been created which will lead to multiple M&A opportunities in this sector. Although opportunities are developing, executives should resist the temptation to assume that their organizations possess the whole truth about M&A management and should be wary of the following “half-truths” regarding some of the common M&A pitfalls in the world of private banking: 1. To satisfy investors, an M&A transaction must unlock big value gains quickly: The way to impress investors is to deliver on your promises, so resist the impulse to promise more than you can deliver in a short time. 2. Focusing purely on the deal’s strategic purpose during the integration ensures that the vision will come true: You should translate the vision into an “end-state” definition that includes the new company’s products, platforms, resources, locations and other attributes. 3. A detailed master plan is essential for a successful integration: You need an overall plan, but don’t overestimate what you’re likely to achieve by creating one or underestimate the need to augment and revise it as you go along. 4. Responsibility shifts as merger cycle proceeds: There will be some role changes over the cycle, but the whole team should be involved from start to finish. 5. During integration you should strive to retain key managers and employees: You should re-enroll not only people inside the organization, but also other key constituencies, including customers, suppliers and business partners. 6. Constant communication keeps employees informed and prevents unwanted departures: You need more than just Rhetoric from the front office; you also need leaders who model the desired values and behaviors of the merged organization, as well as mechanisms that permit communication from the organization to the leaders. 7. To achieve planned revenue synergies, start implementation early and push hard: In the early stages, the challenge is to keep sales and customer service from getting hurt by the turmoil. Focus on avoiding harm rather than achieving big gains. 8. Precise targets for reduction are vital for capturing synergy: Being specific about reductions is important, but reductions from what? The starting point from which the cost reductions will be measured should be clear as well. 9. Day one should be issue free: Issue-free doesn’t mean perfection. Focus on essentials and go with solutions that are 70 percent perfect but 100 percent achievable. 10. Day one marks the end of the beginning: Day One is a crucial milestone but hardly the end of the line. Much will remain to be done and integration efforts will need to be redoubled as Day One fades into history. In regards to the Private Wealth Management industry, banks need to stick to their growth plans but they shouldn’t get too “greedy” – as investment banks have shown – by trying to do too much at times when valuations are comparably lower. Of course there is a window of opportunity for large local banks or foreign full service banks to become significant players in these sector but these firms need to make sure that it really is a match.

If this banking crisis is as bad as it gets, then Singapore’s banks can afford to pat themselves on the back.

How microfinance exchanges like ZOPA, Lending Hub, Prosper, Smava and Boober threaten banks.

The recent turmoil in the financial sector has highlighted the lack of sufficiently effective risk management among banks and other financial institutions. All too often, efforts in risk management are dispersed, isolated and unrelated to the wider organization strategy. Financial institutions should be adopting a more comprehensive and integrated risk management approach that not only takes into account strategic, operational, financial and compliance risks, but one that is also intimately linked to performance management.

Shrinking spreads in the region have retail bank franchises engaging in a battle for deposits and running into significant headwinds. As the cost of funding increases, analyzing the underlying cost of acquisition is just one area that retail banks can explore in their quest to reduce the cost of funding (which vary by the kinds of client groups the bank serves and the associated costs of distribution.)

“Nobody knows what’s going to happen,” said F1 guru, Bernie Ecclestone, when asked what the impact of the financial crisis will be on major sports sponsorship.