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Evolving Banking Regulation EMA Edition FINANCIAL SERVICES Evolving Banking Regulation EMA Edition The journey continues – the clock is ticking… February 2013 kpmg.com Giles Williams Jim Low Simon Topping Partner Partner Principal Financial Services Financial Services Financial Services Regulatory Center Regulatory Center Regulatory Center of Excellence of Excellence of Excellence EMA region Americas region ASPAC region KPMG in the UK KPMG in the US KPMG in China About this report This report is part of a regional series developed by KPMG’s network of regulatory experts. The insights are based on discussion with our firms’ clients, our professionals’ assessment of key regulatory developments and through our links with policy bodies in each region. For other regional reports, please contact [email protected] or see www.kpmg.com/regulatorychallenges KPMG Marketing and Project teams We would to like to thank members of the Marketing and Project teams who have helped us develop this report: Weronika Anasz KPMG in China Vinkal Chadha KPMG in India Charlotte Beck KPMG in the UK Meghan Meehan KPMG in the US Sarah Saunders KPMG in Canada Brittany Spriggs KPMG in the US © 2013 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Evolving Banking Regulation EMA Edition 2013 | 1 Contents Foreword 2 Executive Summary 4 Regulatory Pressure Index 6 Challenging times 10 Challenge 1: 13 Responding to each individual regulatory initiative. Challenge 2: 20 Responding to the combined and cumulative impact of regulatory initiatives. Challenge 3: 22 Combining regulatory reform challenges with other challenges – and shaping strategic direction and business models accordingly. Challenge 4: 26 Restoring confidence and trust in banks by tackling the deep-seated issues of culture and behavior. A view from Asia-Pacific 28 A view from the Americas 30 The regulatory landscape 32 An update on regulatory reforms in Europe, the Middle East and Africa (EMA). Abbreviations 43 Acknowledgements 44 © 2013 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 2 | Evolving Banking Regulation EMA Edition 2013 Foreword Welcome to this year’s Evolving Banking Regulation for the Europe, Middle East and Africa region. In previous years, we provided a global overview of regulatory reforms and their impacts on the banking sector. The pace of regulatory change and implementation now varies significantly across the key regions of EMA, ASPAC and the Americas, bringing with it unique challenges. This year’s regional editions highlight these Jeremy Anderson, CBE challenges, alongside a snapshot of global regulatory activity Chairman, Global Financial Services and what it means for banking, in 2013 and beyond. As we look forward to the year ahead, This year, we highlight the strategic and Senior management are having to focus the global financial system remains operational challenges that the waves simultaneously on two very different fragile and unstable. Meanwhile, the of regulatory reform will pose for banks aspects of their businesses. One is regulatory reform agenda continues to in Europe in 2013 and beyond. We also the internal re-engineering of corporate look far from a finished product, five and present a snapshot of how the regulatory and risk governance, and making a half years after the financial crisis began measures implemented in the Americas crucial changes to the roles of Risk and in the summer of 2007. and Asia-Pacific regions will affect Compliance functions. The other is a Regulatory reform was intended to major European banks with significant response to external pressures, from the make financial institutions and markets operations in those regions. market and regulators, to restructure, more transparent, less complex and less As I discuss these regulatory reforms alter the mix of business activities and leveraged. But progress has been limited with the senior management of banks, innovate in order to reduce costs and because many of the reforms are still in I am struck by the magnitude of the raise revenue during a period of the early stages of implementation, other challenges they face. First, banks are economic stagnation in Europe and slow reforms remain on the drawing board, being pulled in many directions at growth in the rest of the world. and crisis intervention measures are still once. The regulators want banks to We are also seeing that those banks in place in many countries. As the IMF be prudent. Customers want lower that undertake the fastest, smartest remarked in its Global Financial Stability banking costs. Banks’ creditors want transformation are most likely to Report of October 20121, “although to make sure they get their money succeed. Timidity in the face of turmoil there has been some progress over back. Shareholders want them to be is unlikely to win the day. My over-riding the past five years, financial systems profitable. There inevitably have to be sense, as I review the new financial have not come much closer to those trade-offs here, and striking the right regulations at various stages of desirable features.” balance is proving difficult for both the implementation and the uncertain In last year’s report, we focused on banks and their regulators. economic climate, is that simplicity is two main areas: the prospective impact Second, banks face a wide range of the best rule to follow. Given a choice of the Basel 3 package of regulatory regulatory reforms – both individually and for banks between two paths – whether reforms across regions and countries, collectively. There is then the even more they are strategies, processes, structures and the development of a ‘second wave’ important challenge of deciding what or services – the simpler one is likely of regulatory reforms, focused primarily these regulatory reforms – together with to prove more successful. on addressing the systemic risks inherent all the other drivers of the business – So what do we see as the future of in the structure of the financial system mean for each bank’s strategy and banking in the EMA region? Europe’s itself and the systemically important business model; and implementing banking industry is likely to see significant banks within it. effectively the necessary changes. consolidation – and to remain highly © 2013 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. Those banks that undertake the The future of banking fastest, smartest transformation Five to seven years on, we are likely • Focus on core activities – be it in are most likely to succeed. to see four common themes in the terms of profitability or reputational Timidity in the face of turmoil banking world. risk – and rebuild or create ones that do. Governance, structures, is unlikely to win the day. • Restructuring in favour of robustly processes, controls and reporting capitalized, locally funded, client now require the intense focus that driven businesses centered around building revenues had in the past. regional hubs. • Simplify the structure. Review • A real client focus at the heart of and rationalize entity and operating the organization will make firms structures to ensure they are fit for more agile. purpose – both for banks and their • The right culture and people will supervisors. engender trust and enable banks • Invest in people and infrastructure to successfully execute business. concentrated – despite the increased to deliver better customer and regulatory and supervisory pressures • Good relationships with business outcomes. on systemically important banks. The regulators, built on trust from • Actively engage in the policy second tier is likely to shrink in both regulators, investors and the public, process, providing much-needed breadth and number. Many will focus will provide sufficient freedom for industry perspective and insights. on their home turf and – apart from the banks to operate. biggest institutions – venture less • Build trusting relationships with outside their home country and region. Banks are taking steps to secure their regulators, investors and the Banks should also be designing their place in the new world order. There public. This will require the banks operations so they are sustainable at a are a number of actions that can and themselves to create a culture of lower return on equity than during the should be taken now. Banks should: integrity. Trust cannot be regulated boom years. We are likely to see the into existence. • Re-examine the purpose of each same brand names in the market, but of their businesses. There has never • Define new ways to motivate with fewer opportunities for challenger been a better time to re-examine employees, as it will be an increasing banks in the marketplace. There may, every assumption underpinning the challenge to retain and incentivize however, be a more competitive business. Now is the time to take skilled staff, in the face of the intense challenge from ‘shadow banks’. a step back and ask: “Why are we scrutiny from regulators and the This is a difficult and complicated doing this?” and “Are we doing this public.
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