Fintech Insights

Shifting the Burden of Regulation

August 20, 2018

Financial institutions’ regulatory costs could more than double over the next five years, according to a survey by professional services firm Duff & Phelps. 1The survey finds that firms typically spend 4 percent of their total revenue on compliance, but that could rise to 10 per cent by 2022.

The survey puts fresh emphasis on the fact that regulatory compliance is diverting resources away from activities that will actually differentiate firms and help them grow. Banks are increasingly seeing this as a three-part problem.

First of all, as regulatory requirements increase in volume and complexity, banks have realized that they can’t just add headcount. For example, the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and Interest Rate Risk in the Banking Book (IRRBB) require the substantial level of analytics, compared to the ALM and Liquidity reports a decade ago. Today, the task goes well beyond the slice and dice approach of years past.

Banks need to be confident that the numbers being reported are complete and accurate, as they will be held accountable by regulators and senior bank staff. This means that banks need the right set of tools to consistently produce the range of reports and to give confidence that the numbers reported are correct.

Secondly, just becoming compliant is not enough – you need to stay compliant. Requirements – from the information that regulators ask for, to the formats in which they request them – change regularly. In fact, Thomson Reuters’ Regulatory Intelligence department says the number of regulatory changes a bank has to deal with every day has increased from 10 in 2004 to 185 today. That means interpreting and implementing a regulatory change every 12 minutes2 . So banks must constantly monitor and update their models and processes.

Finally, the results and ratios that you need to calculate are not used just for informational purposes (i.e., you file them and forget about them): they cost banks money by putting restrictions on how the balance sheet is shaped. Take the LCR: you have to keep a lot of liquidity, which doesn’t bring a lot of return. To minimize the costs, you have to optimize liquidity.

How banks currently try to “solve” it

As reports becoming increasingly complex, departments that are normally responsible for reporting, such as finance, can no longer tell if the results are correct. So many banks are asking teams that already use complex analytical tools on a daily basis – namely treasury and risk management – to produce and validate these reports.

But does it really solve the problem? A bank’s most precious asset – its experienced staff – is still being dedicated to regulation; the only change is which department does the work. Either way, highly skilled staff are spending time on low value regulatory reporting instead of strategic activities like managing the balance sheet and optimizing profitability.

Shifting the Burden of Regulation

When looking for an ideal solution, the three-part problem described above can be seen through the prism of tactical (short-term) and strategic (long-term) considerations.

Tactically, the goal is becoming compliant. Banks need software that can ingest all of the data that regulators want, perform the necessary calculations and produce the reports with the required level of detail, all within an automated process to save time and money. With the right tools, banks could shift responsibility for the reports back to the reporting departments as they should need less assistance from the treasury and risk teams. Finally, for the fastest and simplest implementation, this must be available out of the box.

Strategically, the bank would be also strengthening its operation. Off-the-shelf software, however, doesn’t address the difficulty of staying on top of regulatory changes. To future-proof their operations, banks need a solution that can also:

1) Keep up with regulatory changes to the existing reports by monitoring regulation, analysing the necessary changes, and configuring the software without significant input from the bank. With a vendor’s regulatory update service, the burden of maintenance can be delegated.

2) React to time-sensitive requests (e.g., ECB reports that provide a limited time until submission) and ad hoc inquiries by quickly adjusting the view of the report, calculating and pulling together the required results, and providing higher granularity.

3) Create business value out of the high-effort, low-value exercise of regulatory reporting with analytics and projection capabilities to help banks identify the key drivers of regulatory metrics, optimize the costly ratios like LCR and NSFR, and proactively manage future compliance by forecasting key indicators.

With a solution that combines software and services, banks can ensure compliance with fast-changing regulations while also future-proofing their operations and adding value to the business.