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Managing Profitability and growth in an increased compliance and regulated environment

Managing Profitability and growth in an increased compliance and regulated environment. Dr . Ranee Jayamaha Chairperson Hatton National BANK PLC 17 th October 2014. Global Financial System -Regulatory Rethinking. Financial crises and adverse impacts on world economy

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Managing Profitability and growth in an increased compliance and regulated environment

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  1. Managing Profitability and growth in an increased compliance and regulated environment Dr. Ranee Jayamaha Chairperson Hatton National BANK PLC 17th October 2014

  2. Global Financial System -Regulatory Rethinking • Financial crises and adverse impacts on world economy • imprudent banking and laxed supervision • market rigging and scandals • inadequate capital despite Basel I and II • Regulatory responsibilities • safeguard national and global financial systems • encourage to work within the global regulatory framework • safeguard interests of all stakeholders • Tightening regulation is considered to be the solution • Cost to banks, their growth and profitability are disregarded

  3. Global Financial System - Regulatory Rethinking • Regulatory tower is rising - new floors are added • “Bailing in” instead of “Bailing out” is considered • Regulators view global and systemically important banks are • too big to fail • too big to save • too big to fix • too big to jail

  4. Assessment of Basel Capital Adequacy Framework • Quantitative restrictions are like regulatory commandments • Basel I – “thou shall not”- simple and limited to credit risks • Basel II–“thou shall provide the internal model is correct” –too complicated - discretion with banks – DIY nature- non compliance • banks grew and made profits • supportive elements are missing • Due to simplicity, the Glass Stegall Act was far more effective

  5. Basel Capital Adequacy Framework Enhanced quantity and quality of capital under Basel III Source: Basel Committee - BIS

  6. Financial Regulatory Framework • National regulatory systems • USA - Basel plus Dodd-Frank regulation • UK - Basel plus Financial Policy Committee Regulations • Europe - Basel plus EU Directives • Stress testing and restrictions on trading book /investment banking • Profitability of banks is from: • reduction of branches / employees • selling /closing non profit earning units • reduced operations of investment arms • restructure overseas operations

  7. Sri Lanka’s Financial Regulatory Framework • On Basel II, and moving on to Basel III • Flexible and banks behave well. No criminalization of banking • Regulatory framework is tolerable and allows banks to grow/profit • Mandatory Corporate Governance has saved the banking industry • Need to avoid adhoc regulatory tightening • Inter-regulatory institutional coordination and internal consultation need streamlining

  8. Impact of Policy and Regulatory Changes by Advanced Countries • USA: reversal of ultra - loose monetary policy • free loanable funds from the Fed, ECB, BOE • helped banks to grow and maintain profits • Emerging markets benefited due to inflow of funds • Tapering off of QE programmes (June/July 2013) had severe impacts on global financial markets • Uncertainty and loss of business opportunities for banks in emerging countries

  9. Cost of Regulatory Reporting and Compliance • Ever increasing regulatory costs (normal + cost of raising extra capital) • Cost of providing data/ information • data requests by multiple regulators /different units of a regulator • not making use of such information for analysis; agony/frustration • maintenance of an army of compliance officers • Cost of compliance with FATF + , UN regulations , FATCA and others • Criminalization of banking business - USA • reprimanding /black listing of banks • unprecedentedly high penalties and non transparent settlements

  10. Overall Impact on Growth and Profitability of Banks • Growth has suffered; costs have escalated and profitability lowered • Severe competition and industry wide impact • M0vement of business to shadow and less regulated markets /institutions • asset and property bubbles – potential risks • Restrictions on investment banking and trading book • Shareholder/ investor frustration • Restructure / merge and consolidate

  11. Managing Growth and Profitability • Reduce other costs and conduct prudent banking • business restructuring • outsourcing of non-core functions • leaner organizations and use of technology • Share infrastructure and common platforms • Diversify and increase fee incomes where possible • Seek joint operations to minimize risks and leverage on expert knowledge

  12. Observations and Remarks • Financial system stability is a prime regulatory objective. Banks are prime constituents of the financial system. Both should survive • Balance between regulations and banking business is imperative • regulatory objectives should be clear • dangers of over-regulation should be understood • Watch dog’s failures should be accepted (2007-2009) • Regulation should not be a wining game • Catching/avoiding a crisis is difficult but complexity aggravates situation

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