Proposed regulatory reforms to impact Asia’s banking models

In September 2010, KPMG and Oracle conducted a survey of financial institutions across Asia Pacific & Japan, to seek their views on the potential impact of regulatory reforms on their business activities.

The survey was targeted at c-level executives at banks. Over 40 per cent of the respondents were Chief Risk Officers (CRO), while around 80 per cent were broadly based in the retail and corporate banking sector. Investment banking and Islamic banking entities are also represented in the survey. Most possess assets exceeding $10 billion.

Seventy-six per cent of respondents said regulatory reforms would affect their business. Over half said they expect their banks’ business models would need to change to address regulatory reforms and 48 per cent expect their banks would need to raise additional capital.

Areas of concern include high compliance costs, reduction in the banks’ competitiveness and higher cost of capital, which may become more difficult to access.

“If there is an underlying theme from these regulatory reforms, it is that the new regulations will hit banks' top and bottom lines, and more costs will be transferred to customers,” said Dr. John Lee, KPMG Asia Pacific leader for financial risk management.

Meanwhile, 72.5 per cent said they were of the view that new regulations such as Basel III should be applied to financial institutions in the Asia-Pacific region. However, only one-third of respondents thought the reforms would create a “level playing field” of global banks relative to Asian banks, since the latter are relatively more capitalised.

The top three important areas of regulation that are of priority to respondents are capital management, including the Internal Capital Adequacy Assessment Process (ICAAP), liquidity risk management and enterprise wide stress testing, across risk categories.

Most respondents thought their banks would require additional risk management infrastructure. Over 96 per cent said they considered that an integrated approach to risk, performance, compliance and capital was either critical or important/very important to “Future Proof” themselves.

In terms of challenges, 88 per cent of respondents highlighted data related issues while 75 per cent pointed to not having the right IT systems infrastructure in place.

“A ‘pooling of tools’ approach falls short in delivering the flexibility and integrated enterprise view that banks need to meet emerging regulatory requirements,” said Saloni Ramakrishna, Principal Architect (Risk & Compliance solutions) Oracle Financial Services, Asia Pacific & Japan. 

“We see data and data architecture mastery, an integrated and flexible technology infrastructure, interactive and transparent reporting, and functional risk, compliance and performance solutions as essential requirements for not only managing, but thriving, in the ‘new normal.”

Banks were also asked to consider what key operating areas would be affected as a result of reforms. 78 per cent cited lending and risk pricing, 59 per cent indicated performance management systems; 57 per cent said trading counterparty transactions while 35 per cent highlighted executive compensation.

Respondents indicated a number of constraints when implementing new regulatory obligations. These include lack of internal expertise and availability, complexity and lack of clarity, information technology capabilities, data availability and reliability.

The regulatory changes are also affecting governance structures and practices. More than 70 per cent said they have had to refine the terms of references of their risk management committees, while 46 per cent indicated that the board needed a more integrated view of risk management, and 35 per cent said they had appointed a steering committee to oversee the introduction of the new regulatory requirements.

In terms of the overall impact, 40 per cent thought it would improve the economic environment while an identical number thought the effect would be neutral. The remaining 20 per cent said they feared reforms would have an adverse affect.