The financial crisis has resulted in widespread bank restructuring driven by cost reduction, business optimization, competition and regulation. Initially, investment banks focused on immediate cost reduction and simplification programs; however, subsequent macroeconomic developments, coupled with the ensuing market and regulatory pressures, have triggered the need for structural change in business and operating models.
Rule-makers have been prolific in recent years, with individual jurisdictions seeking to reshape financial institutions and enhance their operational resilience. Since this persistent wave of regulation shows no signs of abating, banks can no longer rely on traditional ways of working and are being forced to make hard choices about their post-crisis business models.
Recent events revealed numerous weaknesses in global regulatory frameworks and banks’ risk management practices. Regulatory authorities are now considering new measures to increase financial market stability, including requiring each bank to provide a consolidated view across all businesses and types of risk (e.g., market, credit and liquidity risk). For example, the fundamental review of the trading book (FRTB) restricts banks’ capital, limits positions and curtails principal trading. As such, banks are faced with a new approach to market risk management.DOWNLOAD FULL CHALLENGE [PDF, 320 KB]
Institutions have less jurisdictional flexibility and need to solve for each set of requirements in the countries where they operate.
Institutions need to consider how legal entities will be governed in the jurisdictions where they operate.
Institutions must demonstrate comprehensive and effective risk management, with comprehensive risk reporting by legal entity.
Local and global regulations are forcing institutions to operate in a more capital-restrained environment.
Regulators are taking steps to ensure the stability of banking operations, including establishing provisions for state takeover in the event an institution becomes insolvent.
These rules help prevent the failure of one legal entity or business line from causing systemic failure across the enterprise.
Institutions need to consider reorienting their financial ledgers, performance management and reporting to support financial operations at the jurisdictional level.
Investment banks are now prepared to face the reality of this task—whether they have had time to digest their position or are playing catch-up with competitors.
Banks must synchronize their regulatory and strategic business planning and make restructuring in response to regulation part of their business strategy toolkit. Looking at the regulatory landscape holistically can help banks identify inter-regional synergies to leverage.
As investment banks look to tackle the restructuring challenge, five core considerations must be reviewed against business priorities. These considerations can help banks optimize capital and satisfy the bottom line, while adhering to regulations.
Shifting and streamlining core investment banking activities can help banks align specific activities with specific regions for business benefit. For example, concentrating broker-dealer licenses in a single jurisdiction may be cheaper than having licenses in multiple jurisdictions, particularly in low-volume situations. Activities such as securities trading, securities financing, securities warehousing, derivatives management, cash management and clearing can be analyzed for streamlining opportunities. Further examples include shifting from principal to agency business models, or leveraging the opportunities provided by trading venue development (i.e., systematic internalizer).
Tailoring propositions to geographic markets can help banks use scarce capital more efficiently.
Developing a targeted set of offerings can help banks allocate capital to business lines that generate appropriate returns on equity and potentially discontinue other products.
Targeting profitable client segments and exiting relationships that have a high cost of service can help banks improve their client mix.
Focusing on a combination of the factors listed above with a clear goal of optimizing capital, liquidity, funding or taxation can help banks reduce costs and increase net capital or revenue gains.
Against this backdrop, a “consolidation” operating model is starting to emerge. Investment banks are looking for ways to simplify their structures by streamlining their business activities and ultimately “thinning out” their legal entity structures to support consolidation and net capital benefits.
Regardless of what shape the business restructuring takes—for example, disposals or exits, acquisitions, transfers to improve capital and funding positions, transfers to improve resolvability or wind-downs—there is no single solution for responding to this challenge. Each institution’s response should reflect its strengths, weaknesses and future expectations. Banks can begin by taking the following steps:
Institutions need to think end-to-end across regulations and geographies, and holistically assess and communicate impacts across their business and operating models—to streamline the change response and identify smart investments.
Reputation may be a competitive advantage in the future, with clients and customers drawn to firms with strong ethical reputations that are capable of meeting their needs efficiently.
Institutions can address competitive challenges by focusing resources and attention on certain customer, product or geographic market segments. They need to consider the type of business they want to conduct in each location and the practical operations required to sustain those businesses.
Value can only be realized if planning is adopted effectively throughout the business. Further tuning of the new operating model will be required to help retain engagement and support from internal and external stakeholders.
Restructuring exercises require banks to consider a number of factors—a potentially cumbersome process if the bank has a particularly complex organizational structure. Without a logical framework, it can be challenging to determine the robustness and completeness of a restructuring plan. Typically, investment banks will need to consider six core components (see table above).
These components should be considered at each stage of the restructure, from due diligence to legal close, and accompanied by stringent regulatory and program management.
A structured framework is not a one-size-fits-all solution. Rather, such frameworks can help banks increase certainty and speed when conducting certain initiatives. In addition, calibration of local and global regulations can help frame implementation programs.
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