As we move into 2018, Asia-Pacific banks are facing a range of challenges — from implementing Basel III reforms and keeping pace with technology advancements, to responding to the disruption and opportunities posed by new, non-traditional market entrants. Pressure is also coming from investors, who are demanding that banks improve returns on capital in an environment where economic growth continues to be modest and competition fierce.
Banks should not expect respite from regulation
At a global level, policy makers have effectively drawn a line under dealing with the problems of the past. Overall, the post-crisis reforms have made banks less likely to fail, as well as easier to resolve if they do reach the point of non-viability. The reforms have forced — and will continue to force — banks to increase capital, augment liquidity, improve governance, sharpen controls and alter their structure. Banks are now more resilient and the financial system as a whole is more robust. If the same problems were to arise again, banks would be better prepared to deal with them.
But this doesn’t mean banks can expect to see a period of regulatory respite. The Basel Committee’s finalisation of the Basel III regulations in December 2017 provides banks with a greater degree of certainty around the future of capital and liquidity requirements. However, it also marks the beginning of a period of increased fragmentation as supervisors around the world start to implement their own specific versions of the reforms, with each jurisdiction adapting the Basel agreements to reflect its own preferences and practices.
Banks continue to have a full regulatory agenda, as they work toward meeting the rapidly approaching implementation deadlines for rules adopted some years ago, whilst also contending with the possibility that both investors and supervisors may front-run the deadlines for implementing others, such as Basel III.
In Asia-Pacific, regulators are having to balance specific domestic economic factors against global regulatory alignment. The prospect of disruption to global trade on the trade-exposed markets of Asia-Pacific, along with the potential implications for regional markets as a result of the expected unwind of the unprecedented quantitative easing of the past decade, are likely to result in conservative regulatory settings.
New entrants and technologies creating new challenges
Both globally and across the Asia-Pacific region, banks are trying to keep up with and best respond to the challenges and opportunities posed by disruptors to traditional banking models. Even greater pressure in this space is likely to come as regulators reset rules in response to new technologies. New market entrants, open banking and even the potential introduction of a central bank digital currency, are all on the radar.
Governments are now actively promoting the entry of technology-based firms and FinTechs to introduce more innovation and competition into the banking industry. The regulatory “sandboxes” set up in Australia, Hong Kong, Kuala Lumpur and Singapore are a prime example of this type of activity. Asia-Pacific banks are actively looking for opportunities to partner with non-traditional providers, like FinTechs, to increase their technology capabilities and deliver new or better services to their customers, or achieve more cost-effective regulatory compliance in areas such as financial crime and anti-money laundering (AML).
Don’t let a good recovery go to waste
Whilst the immediate outlook for banks as we move into 2018 is favorable, these conditions are unlikely to last and, at some point, the economic cycle will turn down again. The recent announcements from the US on potential trade sanctions, equity market volatility and rising interest rate environment highlight the risks to be navigated.
In this environment, investors and regulators alike are asking whether banks have business models that are strong enough — both in concept and execution — to survive not only a possible downturn, but the disruption that will ripple across the industry as new technology takes hold. In light of this increased scrutiny, Asia-Pacific banks need to review their business strategies and models to ensure they will hold up under the new market conditions and that their investor returns will rise over time.
For those banks that decide to stay and play, the current environment presents a window of opportunity. But it will require the implementation of strong programs and robust strategies across five key areas: good governance; a culture of compliance; data management; data analytics and technology adoption. To be successful, banks will have to anticipate and meet rapidly evolving customer needs, whilst also generating the level of returns that satisfy investor expectations.
The views in this article are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Gary Mellody is the Asia-Pacific financial services risk advisory leader at EY. With over 20 years’ experience in financial markets, Gary has worked with organisations across an extensive range of risk management areas including market risk, treasury, ALM, equity trading and group strategy and group risk functions.