Highlights some of the pressing regulatory and compliance issues banks must face during 2015.

1. Advisory-AsiaITfocus
Regulatory change is a business
opportunity,not a burden
Singapore-based Amit Agrawal highlights
some of the pressing regulatory and compli-
ance issues banks must face during 2015.
NAVIGATING the compliance, regu-
latory and operational risk landscape
has, without doubt, poised the biggest
headache for senior management and
front-line staff within financial institu-
tionssincetheplethoraofreformsimple-
mented after the 2008 financial crisis.
And the pressures aren’t likely to ease
any time soon, given the ongoing wide-
spread compliance failures over the past
12 months.
Gazing back through 2014, one can only
be but amazed at the amount of regulatory
reform and gains made, despite widespread
scepticism and intense industry blow-back.
Among the key achievements of 2014
has been the successful deployment of Basel
III across the European Union and other
reforms emanating out of the European
Commission.These have paved the way for
a reduction of systemic risk through meas-
ures relating to the safety and soundness of
both banks and market infrastructure and
to the effective resolution of failing banks;
advancing the wholesale and retail conduct
regimes; and setting out the supervisory stall
for assessing risk governance, risk culture
and risk data.
Looking forward to 2015 and beyond,it’s
apparent that reforms to date constitute only
thebeginningofalongjourneyahead,rather
than the end of the road. Both the USA and
the European Union continue to issue forth
with further reforms, compounded by new
initiativesemergingfromtheG20gatherings
and the Basel Committee in Switzerland.All
of this fuels further uncertainty,thus making
it difficult for institutions to plan ahead and
allocate resources.
Avoid over-complexity
As the Basel II compliance process dem-
onstrated prior to the onset of the 2008
financial crisis, large whole scale regulatory
change programmes must take a firm-wide,
business-focused view if they are to be suc-
cessful. Any operational and technology
change should run in tandem with business
model reviews to enable a more structured,
effective and cohesive outcome that helps
avoid over-complexity.
Glancing back to 2014 once more, there
is little doubt what proved the greatest

2. Journal of Regulation & Risk North Asia50
headache to senior management, compli-
anceandoperationalheadsandriskmanag-
ers in financial institutions.And there will be
no let-off this year, as illustrated by the fol-
lowing analysis.
Exponential IT investment
Oneofthemostpressingissuesduring2014,
and which remains true during 2015 is IT
expenditure and exponential costs associ-
ated with it, as risk and regulation continue
to demand large-scale technological invest-
ment to comply with the new regulatory
environment we find ourselves in. Chartis
forecasts that global risk IT expenditure in
financial services will rise by 14 per cent and
exceed a spending level of US$30 billion, by
the close of 2015.
Much of this growth will be accounted
for by businesses in North America, with
financial institutions picking up most of the
pace in an effort to mitigate against stiff fines
and penalties imposed by various regulatory
agencies and the US Department of Justice,
together with State supervisors and enforce-
ment agencies. Thomson Reuters estimates
that US authorities imposed penalties and
settlements fees that cost financial services
firms more than US$40 billion.
Highest growth in Tier 1 banks
The highest growth in spending is expected
to be amongst the Tier 1 firms who have
been among the greatest offenders, many
of which remain firmly in the crosshairs of
regulators and enforcement agencies. It’s
expected that these firms alone will increase
expenditures by some 24 percent compared
with 2014 outlays, whilst Tier 2 and Tier 3
firms are expected to increase expenditures
by 9 per cent and 10 per cent respectively,
according to the Chartis research.
In total, it was estimated that financial
institutions in the United States invested
more than US$28 billion on automated risk
managementandregulatoryITsystemsdur-
ing 2014, and that this figure is expected to
rise to nearly US$32 billion through 2015.
Next of our pressing issues is costs asso-
ciated with“capital”and“liquidity”.Liquidity
monitoring for financial institutions is a key
to profitability for many firms. It can reduce
credit/settlement risks during large value
paymentsandmanagingbank’scashinflow/
outflow. The implementation of liquidity
requirements will start from the beginning
of this year and is expected to be finalised by
2019.
LCR, NSFR & leverage ratio
The following is just a back-of-an-enve-
lope exercise in liquidity ratios that banks
and financial institutions need to begin
implementing as of now: first, we have
the Liquidity Coverage Ratio (LCR). This
is a mandate whereby banks are expected
to maintain a minimum 60 per cent LCR,
which will increase by 10 per cent each year
through to 2019, at which time the LCR will
constitute 100 per cent.
Next, we have the Net Stable Funding
Ration (NSFR). 2015 will kick-start this
initiative, with this year and 2016 being an
observation period, after which banks and
financial institutions will be required to
report their NSFR positions. From January
2018 banks will be expected to hold suffi-
cient stable deposits to fund all their long-
term lending.
Finally, we have the “leverage ratio”;

3. Journal of Regulation & Risk North Asia 51
as of January this year onwards, banks are
required to report their leverage ratios in any
andallfinancialstatements.Thiswillbecome
a binding requirement by 2018. Presently,
the Basel Committee has proposed it to be
3 per cent of a banks tier 1 capital. However,
heightened financial concerns mean this
minimum requirement may be revised
upwards and is thus likely to change.
Centralisation
Another pressing concern for banks and
financialinstitutionsistheir“centralisedrisk/
compliance operation model”. Outsourcing
and shared services is a more than two dec-
ades old strategy to improve back-office
efficiency. Financial institutions use different
operational models and approaches for this
method to work consistently.
Each model has its own set of merits/
demerits and thus it is vitally important
that operational models be aligned with the
organisational strategy.
It’s expected that outsourcing will reduce
in relevance as more and more businesses
move to more centralised operational mod-
els, aligning them with the rest of their
business to better manage risk and make
efficiency savings, thus driving down overall
costs.
Reports, reports, reports
Next on our pain index is regulation and
supervision. Moving through 2015, it’s
anticipated that regulators will require banks
to provide more and more reports of their
activities,inlinewithnewregulatoryrequire-
ments, which obviously translates to more
supervision. This will place another burden
onthebanksintermsofpeople,systemsand
quality assurance to support such reporting.
This will also have a direct impact on bank-
ing procedure for data capture, data recon-
ciliation (across system/regulators), control
process and review/governance procedures.
A pressing question that needs to be
answered during this process is about the
ability of banks and financial institutions to
aggregate risk quality accurately and across
risk types, activities and geographies and to
use this information to manage emerging
risks. One should not think of it as a busi-
ness burden and cost centre; rather,it should
be viewed as a business opportunity to add
to the bottom line.
Overlap and underlap
Moving on,our next topic of concern is gov-
ernance. As a result of the 2008 financial
crisis, banks have been pressurised by regu-
lators to introduce enhanced risk manage-
ment structures and reporting procedures,
many of which are“new”, shall we say, with
clear roles and responsibilities. This has led
to increased overlap and underlap in many
institutions as they struggle to cope with the
plethora of imposed changes.
The silver lining in all of this is that,given
the huge amount of work undertaken thus
far,best procedures and practices are emerg-
ing, thereby allowing for benchmarking and
for banks to raise the bar in terms of risk
management and risk governance.
Assuch,ourmaximshouldread:”Awell-
governed bank takes the amount of risk
that gives maximum value to shareholders,
subject to constraints imposed by laws and
regulations.“
Nearing the end of our pain thresh-
old, our next pressing concern focuses on

4. Journal of Regulation & Risk North Asia52
“culture and conduct”. It is to be hoped that
during the course of 2015, banks will spend
more time building“business-focus change
capabilities” so that they can address the
regulation challenge more effectively and in
a timely manner during a period of extreme
flux.
People of the right calibre
Banks need to ensure they hire the right
people for the job. Although time lines for
the implementation of new requirements
are strict and aggressive,properly addressing
this challenge requires assembling the right
team of experts with a sound understand-
ing of compliance, firm-wide risk require-
ments, process excellence and technology
capabilities.
This is of particular importance as focus
shifts from defining the regulatory response
to implementation and execution. While
there remains a vital role for compliance in
interpreting new regulatory requirements,
this should not be to the detriment of build-
ing a true change capability
Nearing the finish line, our final area
of concern is that all-encompassing one of
infrastructure and infrastructure redesign.
Silo effect
It’sawellknownfactwithintheindustrythat
different divisions within banks have histori-
cally been re-creating rather than sharing
systems.
This problem is further compounded
by mergers that result in banks inheriting
numerous IT systems and processes, thus
adding to complexity, system architecture
and army of staff required to service them –
which equates to a lot of inefficiencies. It‘s
to be hoped centralisation and cost-sharing
will eliminate much of this inefficiency and
reduce costs in the long run.
The new regulatory paradigm is meant
to achieve a safer,more stable banking envi-
ronment,protecting the banks,shareholders
and taxpayers alike from the horrors of 2008.
In this new era, banks need to change their
approach to executing regulatory change,
and recognise it as opportunity which
enhances the underlying business model.
To do this successfully, banks must rec-
ognise the symbiotic relationship between
process efficiency and compliance,and build
into the foundations of every change pro-
gramme a clear view not only of the regu-
latory imperative, but where it aligns with a
client or business improvement goal.
A clear strategy
This is not an immediately obvious relation-
ship,but thereisaclearlinkbetweenachiev-
ing successful regulatory change and driving
process improvements.
Furthermore,this illustrates how process
improvement is an essential component of
any solution,helping banks to achieve long-
term compliance and true business benefit.
Investment banks dealing with the current
high volume of regulatory reform must turn
their current challenges into opportunities to
drive strategic change.
By moving away from a short-term,
fragmented approach to implementing reg-
ulatory change programmes,and building a
clear strategy that uses process improve-
ment as a means to achieve compliance,
banks can begin to reduce the complex-
ity, and cost of their response to the new
regulatory environment. •