A technology and regulatory change is driving a new revolution in Banking was the key judgement presented by EY at a recent seminar at the Sunborn. Led by Johann Olivera, Partner at EY, and Faith Howe, Senior Manager, EY, the event was an opportunity for delegates to learn about the impact of recent technological transformation and regulatory change in the Banking sector.
Commenting on that change Mr Olivera said: ‘The speed of evolution and impact of technological innovation on business models is accelerating. We are experiencing a scale of transformation not seen to date in the Banking arena. It is no longer sufficient to review change through the prism of hindsight or rely on incremental adjustment. We need to be imagining what the future will look like and then determine what we can do to position ourselves, and quickly.’
Key emerging themes included:
- Technology fueled transformation changing the competitive landscape
- Unprecedented economic and political risks challenging global strategies
- Regulatory and supervisory approaches continuing to evolve
- Many large financial institutions are in the early stages of transforming themselves into more agile, digital-age companies.
‘Under increased competitive pressure from Fintech and other technology companies, banks are identifying ways to leverage technology to improve customer service, increase efficiency, simplify structures and operations, and make better use of their data’ said Mr Olivera. ‘They are also increasingly identifying where they can partner with technology companies.
‘Transformation will require some difficult trade-offs and new ways of thinking about talent and culture if banks and large firms are to successfully address legacy structures, processes, and systems to build a platform for the future. Financial institutions are operating in an unprecedented monetary and fiscal policy environment, and that environment may be with us for some time, as the underlying causes of slow growth are largely structural, not cyclical.
‘However, regulation will always lag behind market developments. The revolutionary change in the financial services landscape is likely to be met with a more gradual process of regulatory evolution,’ said Johann.
The four imperatives for the Banking industry in 2017 have not changed:
- Managing tighter capital and liquidity requirements
- Making resolvability part of business as usual
- Keeping conduct risk under control
- Embedding good governance
What has changed:
- Demands from Supervisors to make real progress on these imperatives
- The economic and political environment
- The rise of Fintech.
The combination of these factors is bringing to the fore the need for banks to have sustainable business models that are able to consistently generate a return on equity in excess of the cost of capital
The economic environment of low growth and low interest rates weakens bank’s earnings. Changes to US economic policy, on-going stagnation in Japan, lower growth in China and elections in France and Germany and Brexit all create uncertainties
Faith Howe, senior manager at EY provided an overview of the new classification and measurement and impairment rules introduced by IFRS 9, and effective 1 January 2018.
Faith commented that this new standard represented “the most significant change in accounting standards since 2005. The key change affecting banks relates to the introduction of the expected credit loss model in response to the global financial crisis where banks were felt to have provided “too little too late”.
Faith Howe commented whilst that there is a substantial amount of technical accounting changes, the real challenge (and opportunity) rests in finance, credit and risk functions working together to develop internal credit risk models that generate loss provisions in accordance with the standard.
There was a clear message from Faith for Audit Committees around the need to have strong governance over the project implementation.