Alvarez & Marsal’s Fernando De La Mora, Paul Sharma and David Lawton provided an update in top regulatory debates impacting bank strategy at #RiskMinds2017 in Amsterdam, discussing the progress to date of prudential and conduct regulation and the way forward. Click to learn more: https://finance.knect365.com/riskminds-international/agenda/1#the-global-risk-regulation-summit_an-update-in-top-regulatory-debates-impacting-bank-strategy #Amon #RiskMinds #RegulatoryDebates #BankStrategy

1. December 4th 2017
Top Regulatory Debates
impacting Bank Strategy
Fernando de la Mora
Paul Sharma
David Lawton

2. 1Risk Minds Conference | December 4, 2017
1.
Understanding Regulatory
Landscape
2.
Top Debates Impacting Bank
Strategy
3. The Way Forward
Content

3. 2Risk Minds Conference | December 4, 2017
321
New RisksPrudential Conduct
Bank Regulatory Landscape – Tail End Risks
Capital &
Leverage
Liquidity
Resolution
Business
Model 
NPLs 
Consumer
Protection 
Data
Protection 
AML
Compliance
Reputation
IFRS9 
Cyber
Risk 
Brexit
FinTech &
RegTech 
Valuation
Risk

4. 3Risk Minds Conference | December 4, 2017
Top Regulatory Debates
Low Bank Profitability
Conduct Culture & Reputation
NPL Resolution
IFRS9
Cyber & Data Protection Risks
Smart Compliance
1
2
3
4
5
6

5. 4Risk Minds Conference | December 4, 2017
Low Bank Profitability
Fitting Current Status Vs ‘16
Capital &
Leverage
RWA Density 35.6% =
K Generation +110bps
RORWA 1.1%
Dividend Yield 2.8%
Econ. Profit -2.1%
Liquidity
NIM 1.3% =
Funding Cost 0.8% =
Resolution
G-SIB Buffer 1.0% =
Resolvability
Ease
n.a.
Risk
Conduct Cost
(avg.)
€1bn
Diversification 83 =
Compliance Current Status Vs ‘16
Capital &
Leverage
CET1 12.8%
CET1 FL 12.8%
CET1 FL ST 8.6% =
Total Capital 18.2%
Leverage FL 5.9%
Liquidity
LCR 131% =
NSFR 112% =
Resolution
TLAC
Shortfall
-172bps
MREL
Assumed convergence to
TLAC
Risk
NPL 2.3% =
Coverage 60% =
1
Source: A&M analysis, SNL

6. 5Risk Minds Conference | December 4, 2017
Low Bank Profitability1
CET1
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
2011 2012 2013 2014 2015 2016 YTD
RWA Density RORWA
0%
10%
20%
30%
40%
50%
60%
70%
2011 2012 2013 2014 2015 2016 YTD
P/B 0.89 1.33
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
2011 2012 2013 2014 2015 2016 YTD
Source: A&M analysis, SNL

7. 6Risk Minds Conference | December 4, 2017
Conduct Culture & Reputation2
Conduct has resulted in… …lagging bank reputation
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Value of World’s Top 100 Brands
Rest of Brands Banks
Banks
20% of
Total
Banks
12% of
Total
£264 bn in fines since 2012
170bps CET1 conduct stress loss
30% of banks expect 2018 increase
37,9 43,8
62,6
27,8 28,6
63,4
0
10
20
30
40
50
60
70
80
90
100
2012 2013 2014 2015 2016
Conduct Costs (GBP bn)
Provisions EoP (GBP bn)
Source: A&M analysis, CCP Research Foundation, Bank of England, EBA Risk Transparency and Brand Finance

8. 7Risk Minds Conference | December 4, 2017
Conduct Culture & Reputation2

9. 8Risk Minds Conference | December 4, 2017
40%
43%
18%
12%
12%
5%
4%
4%
3%
3%
3%
2%
2%
2%
1%
8%
0%
5%
10%
3%
2%
4%
1%
1%
1%
1%
1%
2%
7%
0% 10% 20% 30% 40% 50%
GR
CY
PT
IT
IE
ES
EU
AT
FR
BE
DK
NL
DE
GB
SE
Jun-17 reduction vs. 2014 increase vs. 2014
NPL Resolution3
NPL ratio % < 4.5% 4.5% < x < 10% > 10%
Source: A&M analysis, EBA and ECB
ECB NPL Plans expect
stock reductions
ranging from 3% - 83%
in 3 years
NPL stock of €885bn… …needs further reductions

10. 9Risk Minds Conference | December 4, 2017
ECB NPL guidance
ECB’s stocktake of supervisory &
legal practices
EU Action plan to tackle NPLs
EU consultation on creation of
NPL secondary markets
ESRB report on macro-prudential
policy related to NPLs
ECB New NPL provision backstop
NPL Resolution3
2017 Regulatory Efforts
tution at the heart of the Eurosystem and the Single Supervisory
Europe work for the ECB in Frankfurt am Main, Germany. They perform a
ation with the national central banks within the Eurosystem and, for banking
supervisors within the Single Supervisory Mechanism.
The ECB’s President is Mario Draghi and the Vice-
&
tution at the heart of the Eurosystem and the Single Supervisory
Europe work for the ECB in Frankfurt am Main, Germany. They perform a
ation with the national central banks within the Eurosystem and, for banking
supervisors within the Single Supervisory Mechanism.
&
osignani
March
June
July
October

11. 10Risk Minds Conference | December 4, 2017
IFRS94
1
Accelerated depletion of
CET1 in year 1 due to
MTM provisions
2
Higher P&L volatility due
to Stage 2 and forward
looking scenarios
3
Increased complexity
driven by new parameters
and scenario construction
Year 1 … Year N
IAS39 ST IFRS9 ST
MTM
Effect
Recovery
depending on
time horizon and
portfolio lifetime
IFRS 9 will create P&L / Capital Volatility in Periods of Stress

12. 11Risk Minds Conference | December 4, 2017
IFRS94
Credit 3-yr CET1
depletion in bps
(ST 16)
Stage 2  & 3 
as % of Total
Cumulative CET1 Depletion
under IFRS9
IFRS9 Increased
Year 1 CET1
Depletion in bps
🇩🇪 Germany
🇫🇷 France
🇳
🇱
Nether-
lands
🇬🇧 UK
🇮🇹 Italy
🇪🇸 Spain
213
258
332
347
577
583
17
15
19
79
185
226
Year 1 Year 2 Year 3
🇪🇸
🇮🇹
🇬🇧
🇳🇱
🇫🇷
🇩🇪
1%
1%
1%
1%
3%
6%
2%
3%
2%
2%
13%
5%
Countries with high Stage 2 & Credit Risk are more exposed
Source: A&M analysis, EBA Stress Test Results in 2016

13. 12Risk Minds Conference | December 4, 2017
Cyber & Data Protection Risks5
Source: A&M analysis and EBA 2017 Transparency Exercise
0% 50%
Cyber & Data Security
Risks
Regulatory
Conduct & Legal
IT failures
Organisational change
Outsourcing
AML
Geopolitical
Fraud
Cyber as main op. risk …as evidenced by 2017 events
Legal
Fines
Income
Loss
Reputa
tion
Data
Loss
1Bn
customer
records
143mn
customer
records
57 mn
customer
records
20K
customer
money
lost
Ransom
ware
WannaCry
230,000
systems
150
countries
2 days
bank
outages
Phishing CEO
emails
CEO
emails

14. 13Risk Minds Conference | December 4, 2017
Cyber & Data Protection Risks5
Cyber
Attacks
Regulation
Industry
collaboration
Cyber
Program
Effective
Compliance
 GDPR (What, where…)
 ICT Risk (Availability, Integrity,
Security, Change…)
 PSD2
 ECB Incident reporting
 US Expectations
Turning Cyber into
advantage
 Leadership by CEO/Board
 Positive training / Culture
 Crisis management
 Data infrastructure layers
 Cyber mitigation recovery
Value for Investment
Made
 Strategy plan (cost vs.
risk and capital reduction)
 Asset Management
 Cyber intelligence
 Stress testing vulnerability
 Cyber dashboard
Industry
Consortiums
 RCSA
 Market Intelligence
 KPI / KRI benchmarks
 Attestation
 Stress Testing

15. 14Risk Minds Conference | December 4, 2017
Smart Compliance6
1
• By adopting a portfolio management view of
regulatory constraints and initiatives
• By optimizing legal entity structures in a
fragmented regulatory environment
2
• By integrating compliance information with
business plans and introducing forward
looking measures
3
• By adopting RegTech solutions and
streamlining compliance activities.
Bank compliance needs to become more efficient /strategic

16. 15Risk Minds Conference | December 4, 2017
Smart Compliance6
The RegTech universe currently comprises 400+ solution providers addressing various
regulatory problem areas and has been growing at c20% annually since 2014
1st
Line
2nd
Line
3rd
Line
• Business
line
• COO/ SBU
Mgmt
RegTech focus areas
Risk
Ownership
• Compliance
• Risk
• Internal
Audit
• Legal
Policy
setting,
Procedures,
Monitoring
and reporting
Testing,
Assurance &
Records
Organisation Role
Source: A&M & Burnmark Research
Emerging Regtech solutions & business models

17. 16Risk Minds Conference | December 4, 2017
0.0
1.2
2.4
0 6 13 19 25
Conclusion - The Way Forward
PrudentialChallenge
Brand
Ranking
Conduct Challenge
P/B 134
P/B 99 P/B 110
P/B >150
Source: A&M Analysis and SNL

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