In a World of Complex Banking Regulations: Perhaps Less means More!

The combination of new regulations, including Basel III and Dodd-Frank, with an increasingly uncertain business environment, has led to the realization within the financial services industry that the disciplines of model risk management, liquidity risk management, and risk data aggregation are interrelated business obligations.  Despite the market challenges, financial institutions must now devise a sustainable return to grown and at the same time be better protected against new or emerging risks.  

It is no secret that financial intermediaries are complex organizations.  Multiple, and often conflicting, interests influence a financial institutions behavior both individually and collectively.  On one side, yields and margins are heavily squeezed, while on the other side, regulatory, supervisory, market and stakeholder constraints are becoming increasingly stringent.  For example, never before have mandates on capital or liquidity buffers been this harsh.  Governance, operations, technology and even customer interaction now evoke regulatory scrutiny.

Regulations such as BASEL III, ILAS, CCAR, SCAP, Dodd-Frank, CMP, CFPB, PCBS, etc. seek to control the financial industry.*  In addition, increasing legislative moves are becoming customary for financial institutions and many of them are looking at them as just another box ticking-compliance exercise.  As my colleague, John Foulley, points out in a recent blog post, this is a dangerous move by banks.  In general, most financial institutions are reactive.  It seems as though bank failures, criminal fraud, market instability, bail-outs and the general aggravation that goes with this list drive regulatory moves.  And rightly so, having lived through what transpired in the recent past.  Unfortunately, most regulatory evolutions are seen as heavy-handed, incomplete, unsuitable for purpose and necessary evils, more evil than strictly necessary, by the larger financial services community.

Science and nature have proven over and over again that complex systems need simple controls.  The more complex the environment, the simpler the controls need to be for effective functioning.  Regulations should take a cue from this simple fact of common sense.  By doing so, the spirit of applicable laws will perceivably have a purity of purpose that is clear.  Capital adequacy, for example, could do well by employing leverage ratio as the front-stop and RWA (Risk Weighted Assets) to Tier-1 Equity as the back-stop – simple, easy to comprehend, and easy to compare the relative strengths of organizations.  More recently other industry commentators as well as a new report out from the World Bank titled Global Financial Development Report express the same tone as well.

More importantly, the essence of all regulation should ideally target one thing: internal discipline with information.  Regulation should ultimately encourage institutions to:

  • Eliminate inaccessible information islands
  • Eliminate discrepancies between risk, treasury, finance and customer management
  • Eliminate any and all errors or sources thereof in their ledgers
  • Eliminate delivery of information that is not timely and all causal elements
  • Eliminate lack of accountability at board and senior management levels for ill disciplined information management, and its consequences

Like the universal code for common decency, regulation should also ideally be recognizably consistent across the globe.  Regulation, empirically, has been an area of great focus, capital and operational expense, and a huge concern for most institutions that Oracle works with.  Technology can render the foundation for addressing what all regulation ultimately drives for – fair, responsible, transparent financial intermediation that minimizes systemic risks, contains the fallout when it happens, thoughtfully plans for resolution well in advance, turns a fair profit and is trusted.  The resources are well available, so all it shall take is the will to see it through and large doses of common sense.  Easier said than done!

In a world filled with complex regulations perhaps less and simpler control systems would probably lead to more adoption!

Join me in San Francisco at Oracle OpenWorld for a more in-depth discussion on Regulations and how banks can evolve their IT applications and systems to meet these disciplines on Monday, September 23rd at 2:30pm.  Do share with me your thoughts and comments on the blog as well.

Subin Paul is a Master Principal Consultant at Oracle.  He can be reached at subin.paul AT

*Of the acronyms above, ILAS is Individual Liquidity Adequacy Standards; CCAR, Comprehensive Capital Analysis & Review; SCAP, Supervisory Capital Assessment Program; Dodd-Frank, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, CMP, Crisis Management Proposals (US and EU); CFPB, Consumer Financial Protection Bureau and PCBS, the UK Parliamentary Commission on Banking Standards ‘Changing Banking for Good’ report of 2013.


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