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Banks navigate uncertainty over impact of geopolitical change on regulation

Banks navigate uncertainty with geopolitical change

Today's shifting and unpredictable environment is creating uncertainty among global banks that are scrambling to identity what the future holds.


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The election of US President Donald Trump, the UK voting to leave the EU, the backlash against globalisation, the drumbeat of nationalist rhetoric worldwide and growing uncertainty about security in Asia driven by the actions of North Korea – a flurry of geopolitical change and political upheaval is raising fundamental questions about the potential impact on banking industry regulation. With such uncertainty on the global horizon, how can banks prepare for the future?

Focus on protectionism grows

The new world order that appears to be emerging signals a focus on protectionism and the sovereign rights of individual countries at the expense of global relationships.

The outlook in the US under President Trump is for the repeal of numerous financial industry regulations, including much of the Dodd-Frank financial reform legislation passed by the Obama administration in response to 2008's financial crisis.

In the UK, meanwhile, Brexit negotiations have yet to begin in earnest but the prospect of the UK departing the EU is sending shockwaves through the financial sector and beyond amid the prospect of changing economic rules, relationships and tariffs.

This shifting, highly unpredictable environment is creating uncertainty among global banks that are scrambling to identity what the future might hold on the regulatory front. What can banks expect for the time being? We look for three key conditions to prevail amid today's volatile environment:

  1. High expectations on banks
    Banks can be certain that regulators will continue to maintain high expectations and intense scrutiny on the industry. That should not be surprising for a global industry that has paid an estimated US$160 billion in fines since the financial crisis 10 years ago. Scrutiny by regulators has been intense and will remain exceptionally high.
  2. Greater focus on bank conduct and culture
    Look for a broader focus by regulators as they move beyond enforcement and course-correcting, placing greater emphasis on governance, compliance and the need for banks to maintain highly reliable infrastructure and controls. Regulators' focus will transcend traditional retail banking and insurance products to include investments, savings and pensions, and to the fairness of commercial lending practices.
  3. Bank 'safety' is a leading priority
    Thirdly, the industry can expect continued emphasis on the need for financial organisations to keep their capital safe. This will include increased reliance by regulators on `stress testing' and response planning –creating 'worst-case scenarios' for which banks will be required to provide detailed strategies, responses and solutions.

'Three lines of defence' to navigate uncertainty

As they navigate volatile conditions, banks will be well advised to adopt or maintain a more holistic, integrated approach to managing risk and uncertainty. This should include ongoing emphasis of the 'three lines of defence' framework. This framework is designed to help organisations:

  • Clearly identify the roles and responsibilities of their business unit (first line).
  • Practice ongoing risk management using standard-setters or risk-oversight groups that are responsible for establishing policies and procedures (second line).
  • Sustain effective risk-management activities via independent assurance providers who report independently to the board or the board's audit committee (third line).

Properly implemented, the three lines of defence will create dialogue and analysis aimed at preventing banks from overlooking emerging risk that could ultimately cause financial disaster, while also prompting banks to effectively manage ongoing risk across the organisation.

Avoid overreacting in Asia's markets

Finally, we believe the potential impact of geopolitical issues and regulatory changes affecting the US, UK and Europe will have a spillover effect in Asia, given the major presence of Western banks there. Some banks, pending Brexit's outcome, are already looking at repatriating aspects of their Asian bookings back to Asia, specifically choosing Hong Kong and Singapore as booking centres for business currently in Europe. There has been considerable pressure of late, particularly among European banks, to ‘look after’ their home market first. But banks should remain wary of overreacting and losing future profit and growth opportunities in nations such as Hong Kong, Singapore, Thailand, Malaysia and the Philippines.

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