The growing intensity of supervisory interactions is encouraging many banks to develop dedicated, centralised Regulatory Affairs Offices (RAOs). Building a high-quality RAO poses a number of sensitive challenges, and can be particularly hard for banks entering the SSM. Banks creating their first RAO can learn from the experience of others, and existing RAOs should stay abreast of evolving best practices.
The shape and activities of European banks’ Regulatory Affairs Offices (RAOs) have changed significantly in recent years in response to growing cost pressures and the increasing intensity of supervisory interactions. Many large banks now want their RAOs not only to act as a single point of contact with regulators, but also to co-ordinate their entire supervisory interactions including taking responsibility for extensive exercises such supervisory Stress Tests or On-Site Inspections.
To fulfil this vision, RAOs must work across internal silos, drawing support from first, second- and third-line functions. That in turn means that RAOs require a multitude of skill sets; strong reporting and escalation frameworks; support from Boards and senior managers; and the authority to manage communications with supervisors.
Many banks are therefore investing significant time, effort and resources in developing efficient, effective and capable RAOs. But setting up a new RAO is not easy. Common challenges include:
Resolving these issues can be particularly hard for bigger banks, with a certain level geographic distribution and also for banks entering the SSM. For new banks under SSM, the number, intensity and frequency of ECB interactions tends to come as a surprise – up to three a interactions in a day would not be unusual for a healthy, average-sized SSM bank, and this can increase rapidly if problems arise. Of course, there is a wide variety of interactions, which may in some cases take only limited amount of efforts to respond to and some like an OSI, which take months in preparation and execution. For example:
New SSM banks can also find it hard to provide fast, consistent responses to ECB requests. Quick reactions are essential and successful banks often plan ahead by implementing new methodologies required by SSM banks and creating data and document repositories that contain pre-approved information. Speedy, effective remediation strategies are also vital when responding to critical supervisory findings. And clear external communications – speaking with one voice during every interaction – are particularly important during on-site inspections.
So what does a good RAO function look like? Every bank's approach must reflect its own activities and infrastructure, but we see the following as key components.
In conclusion, it’s critical for banks entering the SSM to understand how demanding supervisory interactions can be, and to learn from the experience of industry leaders. However, it’s equally important for established banks to avoid complacency. Supervision is continually evolving and almost all banks could improve the efficiency and consistency of their RAOs. Of course, KPMG can help banks to set up and optimize their RAO, and to align its operating model with supervisory requests and interactions with the ECB or national supervisors, ensuring a RAO doesn’t become a costly distraction – or a source of risk.