The cost of complex global banking regulations

The various changes in regulatory regimes across the world have necessitated a fundamental review of each bank’s operating model. Many banks will need to decide which businesses and geographies to focus on and which to exit. According to an estimate by McKinsey & Co., the capital requirements under Basel III alone could reduce return on equity (RoE) for banks by about 3 to 4% , leave alone increasing operating costs due to KYC, FATCA, AML, interest cap etc.

The double whammy of stringent regulations and weak economic growth is forcing banks to review every aspect of their businesses. While compliance remains the top priority, banks need to continuously enhance the efficiencies in their day-to-day operations to prepare for a prolonged period of tight margins and high costs.

Banks face the daunting task of meeting stake- holder, regulator and customer expectations while complying with stringent new regulatory requirements. This will force them to seek more innovative ways of creating operational efficiencies and market differentiation.

Each bank will need to undertake a deep-dive analysis of its businesses and extract benefits to satisfy all stakeholders. Top management will be under pressure to make prudent IT investments. Clearly, there is no one-size-fits-all approach. The optimal solution could well lie in a combination of strategic decisions that revolve around efficient Balance Sheet Management and collaborative work environments that optimize operational efficiencies through smart outsourcing.

Moreover, industry participants can find additional avenues by partnering with third-party experts, divesting businesses that drag down capital or merging with synergistic institutions. Such measures can help organizations succeed in a risk-averse marketplace that is increasingly driven by complex global regulations.

2014-02-27