Cost cutting and better risk management remained high on the European financial services agenda at the recent World Economic Forum. Institutions worldwide are facing similar concerns, because of the ongoing instability in the current economic environment. Yet cost cutting initiatives and the move to further enhance risk management are often undertaken to the detriment of what customers today are looking for – innovation.
Regulation is intended to create transparency, but if not managed efficiently, it can run the risk of stifling business. Financial institutions need to re-investigate the way they look at regulation. They must think about how they can configure their business and technology to meet the increasing need for transparency.
There are signs, however, that an industry shift is starting to take place. Institutions realize that return on equity demands that the focus on core activities and services can be spun out or procured from technology service providers. In addition, some banks are already working more closely with other banks - in some cases even with competitors - to share non-proprietary IT infrastructure and platforms, and as a result drive down costs.
Our estimate is that global financial services institutions still need to reduce total costs by at least 20% - or approximately $500 billion* as they strive to get back to the return on equity levels they were achieving before the crisis. It goes without saying that this is not an insignificant figure. Any move to further reduce costs, deliver greater shareholder value and provide the customer with the ever increasing levels of experience they continue to demand needs to be well thought through.
Regulatory reform shows no sign of waning resulting in the new normal of higher capital burden. The institutions that will survive will be ones that look at how investments in innovation and restructuring of IT infrastructure will benefit them – and their customers - now and in the future.
*figures are given in US billions
Comments
@ Jonathan,
Quite agree and definitely worthy of mention. I'm not entirely sure where honour and trust sit in an increasingly virtual world. The financial institutions are certainly not perceived as honourable or trustworthy in poll after poll at the moment.
The interesting twist is that will ever-greater emphasis on the need for regulation drive public opinion even further down that road?
Have you seen the hack by Luc Gallopin http://www.managementexchange.com/hack/social-architecture-manifesto it seems very much in line with your sentiments.
What we are looking at is innovation in industry structure rather than "simple" enterprise process & organization. Ultimately it's not clear where risk regulation will actually occur as the iterations of Basel and Solvency gather momentum in the coming years. The trend is increasingly to move the process to the data, whereas many banks are still investing vast sums in moving the data to their process. That approach is going to get more and more expensive to sustain - requiring continuous cost-cutting elsewhere in the absence of profitable business growth.
I can see a situation where many banks have invested massively in risk regulation technology with three to five year "payback", only to find that new industry structures have emerged that monitor (and manage?) risk at source. All that cost-cutting whilst financing massive risk initiatives brings its own risks to the future of the management team and the reputation of the banking brand. I'm not convinced that those risks are effectively tracked in many institutions.
I take Jonathan's point on board, but to be fair this is more about management teams focusing upon regulation requirements and risk aversion rather than what the regulators say - at some length. Perhaps a simple approach would be to distance "risk management" from "regulation & compliance" as some institutions have already done, then bring greater accountability for innovation under the "risk" umbrella. To some extent this would push the CRO role into managing some serious contradictions - which to me is a hallmark of a "C" level role.
I agreed with the fact that risk management have to be broaden and be more innovative so that the baby will not be throw away with birthing water.
Innovation on IT should be focused on fraud prevention and regulatory compliance. Of course, transparency is best. But what best is transparency if the regulatory bodies, such as U.S. ‘s S.E.C. will continually grant exemptions and waivers to erring BIG Wall Street firms.
I agree as well, with one additional caveat. The tide of regulatory reform has been caused in part by the blantant abuses and criminality of a few bad actors. In some firms, flouting the law has become a culture. Since the banking industry has proven that it either cannot or will not regulate itself from within, regulations must be imposed from whthout. That being said, I have always favored transparency over regulation, but in the last crisis, there was plenty of outright lying going on. Once more, it comes down to first principles. Due diligence rules. It always has and it always will. If proper due diligence were universally practiced, there would be no Bernie Madoff, no toxic CDO's, and no bank bailouts.
I agree with your assertion. Innovation is critical in the competitive strategies institutions must make. In the market that demands a reasonable return on investment and financial risk management, institutions must be innovative and execute well.