Assessing regulatory compliance in banking


Nicola PastoreNicola Pastore, Commercial Manager, writes on finance and business planning

Moody’s, the credit ratings agency, has calculated that the funds set aside by the 15 largest UK and US investment banks to cover regulatory action in the wake of the 2008 crisis now total around 219 billion dollars. That is equal to roughly one per cent of the combined GDP of the two countries in 2014. It very vividly draws attention to the economic significance of regulator’s actions, and the need for affected organisations to respond effectively.

That is why a recent intervention by Andrew Tyrie, chair of the UK’s powerful Treasury Select Committee, is so important. His call to regulators to implement financial services reforms in full is not necessarily wholly correct (there are some areas where proposed regulations should be altered) but it is significant in a much broader sense. Business in general can have a short memory and, with post-2008 hires now reaching more senior positions, it is vital that the banking industry does not forget what led to these regulations being introduced.

Despite the size of the fines administered, the regulatory response following the crisis of 2008, at least in the UK, has been much less onerous than it could have been. There has been a balance between satisfying public demand for retributive measures, safeguarding the competitiveness of the industry, and reducing risks to the wider economy. However, banks should be aware that a second crisis, if they are seen to be responsible for it, may attract a more punitive response. Public opinion of the banking industry has not mellowed, and the political pressure for more radical action would be significant.

However, that does not mean that banks should simply accept regulation unquestioningly. Rather, a proactive approach is required – one that can enable the leaders in the sector to ensure that they are complying and demonstrate that they are doing so, while minimising negative effects. Furthermore, the requirement to collect data actually offers an opportunity to provide insight on the operations of the business that was not available before. This is not true of all information collected for regulatory purposes but data, for example, on the execution of trades, can make a real contribution to driving business performance.

If this data is managed in a manner that both allows details of individual trades to be explored, and can be manipulated and analysed across several dimensions, then it can be a powerful tool for managing the performance of traders, and for developing the trading strategy of the organisation.

For that to be viable, however, requires a very clear understanding of how value is driven in trading, as well as of the regulator’s requirements. In turn, that requires analytic technology that can reliably define and recognise what constitutes an optimum trade, both in the regulatory and the commercial sense. When such technology is in place, then not only can the negative impact of regulation be minimised, the threat can also be turned into a genuine competitive opportunity.

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