The fifth anniversary of the collapse of Lehman Brothers’ passed just three days ago and the ramifications of that momentous day are still being felt across the financial, technology and banking world as new regulations emanating from then come home to roost, writes Neil Ainger. The Compliance Forum at Sibos 2013 got underway today looking at the impact these post-crash regulatory changes, from Basel III to Dodd Frank and an increased focus on sanctions and AML, are having on the industry, its business models and the requirement to invest in reporting, risk and automation technology.
Many of the 7,500 attendees at Sibos 2013 in Dubai, UAE, would have been in Vienna, Austria, five years ago when the first day of the conference opened to news of the official bankruptcy of Lehman Brothers, with the next day bringing news of the rescue of AIG, and the full force of the banking crisis of 2008 becoming more and more evident throughout the week. Everyone knew then that huge governmental and regulatory changes would result from that crash. The changes emanating from the post-crash Pittsburgh G20 meeting in 2009 – such as centralised repository and clearing requirements for over-the-counter (OTC) trading – are now coming home to roost.
The burden that the financial services (FS) industry is feeling under the weight of all these regulatory changes – such as the Basel III capital adequacy regime and the move towards a common legal entity identifier (LEI) to make unwinding trades in the event of another collapse like Lehman’s easier in future – was evident at Sibos 2013 during the Compliance Forum on day three of the trade show on Wednesday 18 September.
Comments such as “we are a bank and we have to earn money”, and “it’s ridiculous, we’re here to do business and not regulate others … we are not gatekeepers” were heard during the question and answer session of the opening Compliance Forum debate entitled ‘Regulatory evolution: Where are we today?’, which focused in on sanctions screening and anti-money laundering (AML) obligations, among much else. The lack of regulation against newcomers in the payments and banking world was also a source of frustration for many in the room as it creates an unequal playing field, with more regulatory costs and obligations heaped on banks in comparison to newcomers.
“There is no [implicit] trust in banks anymore. It’s trust and verify, that is the new regulatory approach now; almost like an audit procedure,” said William Fox, a Global Financial Crimes Compliance Executive, at Bank of America Merrill Lynch (BAML), speaking during the opening debate of the Sibos 2013 Compliance Forum.
“I think the regulatory regime is only going to get tougher,” continued Fox. “We’re all experiencing death by oversight …whatever we can do to calm that down – in terms of engaging with the regulators – we should do.”
According to fellow panellist, David Cracknell, Global Head of Sanctions Compliance, Standard Chartered Bank, there is a huge focus on technology right now. “As payment and transaction volumes go up [under the impact of growing world trade] so automation is crucial as there is no other way to do it. It’s too costly to do manually and you need reporting and risk systems for the regulators.” Standard Chartered found this out to their cost last year, of course, when they were fined by the US for handling sanctions-busting Iranian trades, just as HSBC were fined for laundering Mexican drug money. There is very little tolerance from regulators these days and this is a fact that the banking industry is slowly coming to terms with.
“Collectively we need to go past regulatory expectations [to effectively appease regulators],” advised David Wildner, Chairman of the AML oversight committee at BNY Mellon, “so that we can then engage with them more fully about future expectations.”
Taking the ball back from the regulator and getting them to understand the impact of regulation upon the business, profits and operations of a bank was a common refrain during the session, as was the need to drive out costs by using better technology in future. “We have to drive out cost from bank operations in order to be able to meet regulatory expectations,” advised Marcus Sehr, Global Head of Cash Management FI Product, Deutsche Bank.
Market Infrastructure Changes & Eurosystem CCBM Announcement
The compliance burden being felt by individual banks extends far beyond the world of internal payment and transaction systems, into fundamental industry-wide infrastructure changes. This was demonstrated by the Market Infrastructure (MI) Forum yesterday at Sibos 2013 [see the day 2 report here] and reinforced on day three when further discussions around the TARGET2Securities (T2S) single euro securities settlement engine in Europe, were held.
The Eurosystem, which comprises of the European Central Bank (ECB) and euroland central bankers, at least provided some more information for those that will be impacted by T2S and other regulatory moves in the central securities depository (CSD) space, such as the European CSD Regulation, at Sibos 2013. Their spokesman, Benoit Coeure, revealed that the collateral management rules surrounding the correspondent central banking model (CCBM), which was set upon the launch of the euro over a decade ago, have been relaxed at Sibos 2013 by the Eurosystem.
The repatriation requirements under the CCBM model will cease from May 2014, meaning that in future counterparties in the Eurosystem will be able to consolidate their holdings across Europe, rather than hold them domestically, thereby increasing the mobility of capital across Europe.
Coeure also revealed that in September 2014 the Eurosystem will make another important change, which is to support cross-border tri-party collateral management services. The new service is available to all firms, such as Euroclear, Clearstream and so on. In practice, it will allow counterparties to use tri-party services offered by an agent in another country [see the bobsguide news story here].
Wednesday Plenary Addresses Regulation
“The industry needs to think long-term, not short-term and more about social interest, not self-interest,” admonished Andrew Sheng, President of the Fung Global Institute, during Wednesday’s main plenary session at Sibos 2013 entitled ‘Regulation and beyond: Rebuilding trust’.
In a noticeably contrite session with senior bankers such as May Abulnaga, Head of the Regulation Department at the Central Bank of Egypt, and Werner Steinmuller, Head of Global Transaction Banking and a member of the executive committee at Deutsche Bank, expressing regret for the errant ways of the banking sector leading up to the collapse of Lehman Brothers’ five years ago, the need for reform was accepted. Steinmuller accepted that the regulator is acting on behalf of society and commented that “banks have to change and always think about what is in the interest of their client, not the profitability of the bank, so we need less risky structures and more relevance to the real economy”.
More technology to monitor, report and capitalise on risk assessments is also a necessity in this changed regulatory environment where more cost and a lesser return on equity demand ever greater operational bank efficiency and increasing automation and technology support – not to mention shared services such as SWIFT’s sanctions screening service and its planned Know Your Customer (KYC) platform. A key theme of Sibos 2013 has been this need to collaborate to reduce costs for non-proprietary systems.
Stefan Gavell, Global Head of Regulatory, Industry and Government Affairs at State Street Corporation, fears that all these new regulations won’t, however, solve the problem. “It’s been five years since Lehman’s and four years since the Pittsburgh G20,” he said, “and I just want this done now. The problem is that we keep adding to the regulations – the Basel III leverage ratio is a good example of this.”
‘Let’s get it done’ could pretty much sum up the mood of many of the 7,500 Sibos 2013 attendees in Dubai, UAE, as the drive to prevent another Lehman’s-style collapse enters its final regulatory end game and the business impacts increasingly become clear.
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