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How New Regulations are shapingHow New Regulations are shapingHow New Regulations are shapingHow New Regulations are shaping
the Future of Bankingthe Future of Bankingthe Future of Bankingthe Future of Banking
Sanjoy Sen
Managing Director
Retail Banking Asia Pacific
Lunchtime Talk
Lee Kuan Yew School of Public Policy
12 March 2013

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Taking it forward
Evolutions of regulations post GFC
Implications to the Banks
The Global Financial Crisis (GFC)
Agenda

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Grimness of the long term economic outlook is
hurting the banks which has led to a change
in the banking model
• 5 years after the onset of the Global Financial Crisis, the global
banking industry is still struggling to create sustainable value.
• Europe’s sovereign-debt crisis, the sustainability of the US debt
levels, and global macroeconomic uncertainty continued to send
shock waves across the global economy.
• With the cost of doing business continuing to increase dramatically
and return on equity (ROE) expectations much lower than in the
past, many banks had initiated enterprise-wide & multi-dimensional
change programs to develop new target operating models.
• With the continued challenge of the regulatory and economic
environment, banks must proactively seek out opportunities to
improve revenue growth & profitability.

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Taking it forward
Implications to the Banks
The Global Financial Crisis (GFC)
Evolutions of regulations post GFC
Agenda

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Shift in regulatory environment… the pendulum
is swinging from self regulation to intervention
and control
Possible consequences for Banks
• Uncertainty: Operating conditions will be more challenging
• Conformity: Banks face a heavier compliance burden
• Autonomy: Retail banking will be valued as a business in his own
right and not as a poor relation to investment banking
• Flexibility & Agility: Flexible & responsive working practices will
be key in securing competitive advantage

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Understanding the regulatory agenda
The regulatory response to
the financial crisis has taken
the form of a series of
initiatives focusing on:
1) Systematic risk and
capital buffers
2) Customer and markets
3) Governance and
supervision
Source: Evolving banking regulations 2013, KPMG

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Systematic risk and capital buffers
• This focus on improving the safety and soundness of individual
banks and thus reduce the likelihood of banks failing.
• Regulations under this scope include:
• Capital: Increase both the quantity & quality of capital buffers
in order to reduce the possibility of bank failures.
• Liquidity: Ensure that banks have enough liquid assets to meet
a potential run on funds.
• Systematic change: Reduce risks to financial stability, from
the structure of the financial services sector or the failure of a
systematically important financial institution.

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Customer and Markets
• This involves changing the structure and practice within both wholesale and
retail financial markets to increase transparency and improve efficiency.
• It also enhance the quality of customer outcomes by changing the incentive
structures and requiring a more diligent assessment of customer activities
and needs.
• Regulations under this scope include:
• Customer Treatment: Protect the customer, help the customer make
informed investment decisions & ensure that the products sold to the
customer suit his/her investment profile.
• Market Infrastructure: Reduce risk in the wholesale markets and
regulate the Over the Counter (OTC) derivatives market.
• Financial Crime & Tax: Prevent market abuse & financial crime;
ensure that investors comply with the relevant tax authorities; use tax
as a means of paying for some of the costs of the crisis.

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Governance and Supervision
• Improve the people and infrastructure with which banks govern
their business.
• This area covers regulations under:
• Remuneration: Regulate excessive remuneration practices
• Governance: Ensure that Boards have sufficient skills,
experience & availability to assume full accountability for the
decisions taken by the organisation.
• Supervision and Reporting: Ensure that banks are properly
supervised, proportionately to the nature, size and complexity of
their business. Consider whether accounting principles need to
be revised & the additional disclosures that may be required.

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The evolution of regulations post GFC has
significant impact on the banking industry
Corporate
Structure
Customers
Business
Models
Liquidity
Capital

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• Banks are required to hold more capital against their
trading books under Basel 2.5 rules, forcing them to cut
the size of their balance sheets.
• Basel 3 requirements continue to be a considerable
challenge for all banks globally. Banks may need up to
$1.3 trillion of extra capital (as against 2012) to fulfill
this regulation.
• Holding more capital and lower yielding assets will
depress returns. ROE may drop from 20% in 2010 to
7% levels.
• This has forced banks to restructure through means of
retrenchment, disposing the non-core assets & focus on
core banking services, mainly on retail, wealth
management and corporate business.
Combined impact of new banking regulations may trim GDP by 0.7% a year over
the next 5 years and could cost some 7.5mil jobs over the period
Combined impact of new banking regulations may trim GDP by 0.7% a year over
the next 5 years and could cost some 7.5mil jobs over the period
Source: “Measuring the price of regulation” – The Economist
Increased capital requirements placed great
pressures on Banks’ profitability

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Liquidity – A bigger challenge than Capital
• Basel 3 compliance introduces 2 liquidity requirements on banks – the Liquidity
Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).
• Under LCR requirement, banks are to hold sufficient high quality liquid assets to meet
a severe cash outflow for at least 30 days. NSFR is intended to ensure that banks hold
sufficient stable funding to match their medium & long term lending.
• Banks faced significant challenges to fulfill the regulatory requirement. These include:
• Making expensive changes to their balance sheets & the ongoing ability to meet
the LCR
• Increased dependence on retail deposits which push up banks’ funding costs
• Requirement on extensive external & internal reporting to monitor the banks’
positions against these new liquidity ratios.

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Banks are being forced to consider radical
changes to their corporate structure
Structural change to corporate structure:
Structural separation between retail & investment banking
Ring-fencing of critical economic functions, limits on intra-group
transactions and the use of shared support services
“Localisation” of subsidiaries
Impacts on Banks:
Increase overall capital that a banking group needs to hold
Increase the cost of funding
Increase cost of data and information collection in operating the
independence and separation of ring-fenced banks

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The regulatory challenges are also shaping
the overall strategic direction & business
models accordingly
• From centralisation to decentralisation – moving core activities from
regional and global shared services to their respective domestic jurisdictions
• Sustainable cost management – thinking out of the box to improve
efficiency in current environment other than downsizing
• Shifting geographies and international business models – rationalise and
simplify structures
• Optimising business and control functions – building & operating an
effective risk and compliance framework
• Rationalising the right technology investment to meet reporting &
compliance requirements
Regulatory reform has the potential to deepen the divide between
stronger and weaker banks
Regulatory reform has the potential to deepen the divide between
stronger and weaker banks

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Regulations pushes a greater need for banks
to adopt a truly customer-centric culture
• Restore customer focus and trust in
banks by tackling the deep-seated
issues of culture and behavior.
• Banks’ financial advisors renewing their
efforts to improve their standing and
reputation among the public.
• Banks should stop marketing
themselves on a commodity basis, and
instead focus on building emotional
ties.
• Widen the focus of the advice banks
provide and employ a holistic approach
to consumers’ financial needs.
Use Customer Excellence as an antidote to regulationsUse Customer Excellence as an antidote to regulations

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Implications to the Banks
Taking it forward
The Global Financial Crisis (GFC)
Evolutions of regulations post GFC
Agenda

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The Journey from Regulation to Transformation
Source: Evolving banking regulations-Europe, 2013, KPMG

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Banks need to move from reviewing the regulations
to designing the right transformation model to
succeed
Challenge 1: Responding to individual regulatory initiatives
• This is necessary as any one banking regulation is sufficient to change the business models.
• However, it is not sufficient to view regulatory reforms in isolation.
Challenge 2: Responding to the combined and cumulative impact of regulatory initiatives
• Tackling new regulations one by one will pose a risk of missing key inter-relationships & co-
dependencies
• 4 key inter-relationships to look into: i) structural change; ii) re-pricing of products and services; iii)
the capital & liquidity interface; iv) collateral management.
Challenge 3: Combining regulatory reform challenges with other challenges
• Develop business, structural and operating models in full compliance with the new and developing
regulatory regime – while still attracting investors.
• Continue to improve efficiency while complying with new regulations.
Challenge 4: Restoring customer focus and trust
• Change cultures and behaviours to meet customer expectations and regulatory requirements and
deliver sustainable growth.
• Changing customer needs require innovation and investment – and new means of compliance.
Adopt an “optimized” parallel approach by taking advantage of common
business & processing traits across multiple regulations.
Adopt an “optimized” parallel approach by taking advantage of common
business & processing traits across multiple regulations.

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Regulators will force global banks to retreat… while
internationally active banks live globally, they may well
die locally.
• Different approaches by national regulators, with some jurisdictions
going beyond the global standards.
• Additional local requirements are placing an additional and ongoing
burden on already scarce resources. They also raised the potential
of conflicts between home and host regulators.
• Further fragmentation of markets become more likely as politics
come into play and governments and regulators want to
demonstrate that they are protecting local taxpayers.
• Forcing lenders to dedicate capital to local subsidiaries in multiple
countries could undermine the business rationale for global banks
operating across all asset classes and national boundaries.

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A view from Singapore
• Local incorporation will create more job opportunities for Singapore & allow
MAS to have a better grip on the foreign banks operating here.
• It strengthens Singapore’s banking sector to better compete with the
international rival markets such as Hong Kong.
• A decision for the foreign banks: 1) to commit & expand in this market &
compete against the domestic players or 2) to limit the scope of operation.
• With local incorporation, foreign banks will face significant set-up costs.
Hence, many of them will take the opportunity to re-evaluate their
geographical footprint in Asia.
How will foreign banks’ local
incorporation affect Singapore’s
banking industry?

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Taking it forward
Implications to the Banks
The Global Financial Crisis (GFC)
Evolutions of regulations post GFC
Agenda

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The
Bank
Deploy capital more
dynamically & efficiently
Develop strong
business rationales for
existing businesses
Develop new business
models: redesign service
delivery, create strong
brands & set right pricing
Capture growth
opportunities in
emerging markets
Make material changes to
compensation levels
Realistically reduce
costs
Taking it forward: A renewed focus on growth
and profitability levers
Source: Bank governance Leadership Network View points, 10 Nov 2011

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Banks must proactively seek out opportunities
to create strategic competitive advantage out
of today’s reality
1) Embrace compliance, not as a costly burden but as a strategic
imperative.
2) Create a positive compliance culture within the bank.
3) Consider compliance from a customer’s point of view.
4) Let common sense guide interpretation.
5) Seek compliance insight where available.
6) Create efficient compliance process.
7) Relationships matter.

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When faced with an unalterableWhen faced with an unalterable
obligation to spend much of your bankobligation to spend much of your bank’’ss
time on compliance, approachtime on compliance, approach
compliance with an optimistic spirit andcompliance with an optimistic spirit and
competitive intent.competitive intent.

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Thank you