Banking regulations have evolved over time. From the 1930 regulations of “One Holding Bank” in the US to the Basel Committee, we have come a long way
By Sunil Peter
With the emergence of digitisation across sectors and new business models, the entry barriers to traditional banks have been disrupted to the point where the lines between business and technology have been blurred. Fintech is the new buzzword in the business sector. Fintech stalwarts across the globe are challenging the status quo of financial services by highlighting the problems faced by consumers as seen from the point of view of technology.
There are a whole lot of security concerns to be addressed – financial services institutions have been wary of open or ‘permissionless’ Blockchains (like the one used as Bitcoin ledger) simply because the loopholes are still less understood. The very innovation that drives business growth and value also create first order cyber risks. Advanced technologies such as chip-based cards and SMS-based OTP have helped the banks to implement security controls to mitigate traditional cyber risks. However, as the technology has evolved, attack vectors have also become more sophisticated.
Questions are now being raised on technologies that were previously thought to be secure. As banks increasingly look to digitally transform, a focus on boosting the top-line, optimising costs, becoming more efficient, and developing new products and services is driving their efforts. Now, banks across the globe have dedicated initiatives and investments for driving digital transformation.
Tightening regulatory norms
With the rise in banking-related crimes, countries all over the world are tightening the leash on risk and view regulations as measures to reduce risk in the system. Risk management in banks have changed substantially over the years. Recently, the China Banking Regulatory Commission (CBRC) fined the Chengdu branch of Shanghai Pudong Development Bank (SPD Bank) for 462 million Yuan (about US$ 72 million) for illegally covering up bad loans. Numerous leading jurisdictions are strengthening their regulatory and supervisory practices to deal with cyber risk and the other likely threats.
Banking regulations: The Indian scenario
In this fast-changing landscape, banks are seen reworking their business strategies, innovating on products customised as per the requirements of customers, thereby improving efficiency in delivering services. The emergence of fintech companies in India are benefitting the banks by allowing them to adopt innovative technology and use their platforms to experiment with new business models.
The recent bang on Bitcoins also influenced the perception that made cryptocurrencies unpredictable. The cryptocurrency exchanges are moving away from interacting with the banking systems due to its heightened regulatory interest and operations. Therefore, the debate is still on as to whether bitcoin is legal in India. But the RBI stated that cryptocurrencies have many associated risks, due to which all banks in India will not provide services to business and entities who deal in or settle with virtual currencies.
According to a report by McKinsey & Company, there are at least six key trends that are powerful and certain enough to help understand the future risk function:
- Continued expansion of the banking regulations: The government’s tolerance towards the failure of the banks have depleted since the global financial crisis. Hence, the new regulations focus on the expansion of the regulatory framework by tightening micro and macro prudential regulation across the board. Open items still include the future of internal models for the calculation of regulatory capital and the potential use of a standardised approach as a floor. Also, governments are increasingly demanding both domestic and global compliance with their regulatory standards. Consequently, laws and regulations are increasingly applied with extraterritorial effect.
- Changing customer expectations: Another major factor will be shifts in customer expectations and technology that will inevitably cause massive alterations in banking and give it an entirely different profile.
- Risks of technology and analytics: Technology will not only alter customer behaviour, but also enable new risk-management techniques, often coupled with advanced analytics. Technological innovations such as crowdsourcing, big data and machine learning can reduce risk costs and fines. Banks that would adopt these techniques early and boldly can gain a competitive advantage. However, data privacy and protection are expected to be an important prerequisite.
- Better risk decisions through the elimination of biases: Another risk constitutes of making wrong decisions based on unrecognised biases. It is expected that there will be significant advances in the development and employment of de-biasing techniques in the near future to facilitate bias recognition and elimination techniques.
- Need for strong cost savings: With the tightening of regulations, the downward pressure on margins is expected to continue and even accelerate further across all geographies. As a result of these disruptions, banks will possibly need to rethink their operating costs so they can deliver more value at lower cost.
In 2019, the regulatory requirements will continue to increase in order to make banks more efficient, transparent and compliant.
(The author is the AVP – PMT, Maveric Systems)