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    Global Banking Regulatory Radar

    The Moody’s Analytics Regulatory Radar provides an overview of the main regulatory guidelines affecting the banking industry. It is a proprietary tool developed to monitor regulations in the immediate, medium, and long term, across multiple jurisdictions.

    Over the past few years, the global financial services industry has experienced an unparalleled level of regulatory reform. This trend does not show signs of changing anytime soon.

    The G-20 and the Financial Stability Board are leading the overhaul of global financial services regulation that is fundamentally reshaping the industry, starting with the largest institutions. These reforms aim to reduce systemic risk, restructure banks, strengthen capital requirements, and increase transparency.

    Systemic risk reforms

    In November 2008, the G-20 stressed the need to review the differentiated nature of regulation in the banking, securities, and insurance sectors and to identify areas where systemic risks may not be fully captured. This has led regulators to consider new sources of systemic risk such as shadow banking, investment managers, and insurers. Hence, a worldwide program is underway to standardize regulations in these sectors.

    Systemically important institutions face specific requirements:

    • Higher capital requirements with the introduction of the Total Loss Absorbing Capacity for global systemically important banks and Higher Loss Absorbency requirements for global systemically important insurers.
    • Enhanced data management and reporting requirements, such as the BCBS 239 data principles and the Financial Stability Board’s data reporting requirements.
    • Risk concentration and resolution and recovery planning requirements.

    “Basel IV”

    It is now nearly six years since the Basel Committee on Banking Supervision developed Basel III in response to the global financial crisis. Despite the fact that many of the Basel III requirements are not fully implemented yet, new regulatory proposals are emerging on what is starting to be called the “Basel IV” reform. These new proposals focus on improvements to the methods banks use to calculate their risk, namely:

    • The fundamental review of the trading book, which includes plans to apply a standardized approach for calculating market risk.
    • A new standardized approach to counterparty credit risk (SA-CCR).
    • A review of the standardized approach for the calculation of credit risk and revisions to the estimate of risk weightings used for determining capital adequacy requirements.
    • A new international approach to large exposures.

    These proposals are expected to come into force from 2017 onwards. And given their importance, banks need to pay close attention to them.

    Stress testing continues to be a key regulatory tool

    Stress testing requirements are becoming tougher, not only on the quantitative side, but also on the qualitative assessment that regulators do of banks’ risk governance, processes, models, and tools.

    In the Americas, the US expanded stress testing requirements to large foreign banks. In Europe, the European Central Bank/European Banking Authority and the UK’s Prudential Regulation Authority run annual stress tests. Regulators in other regions are looking at these guidelines and developing local requirements, such as in China, Australia, and New Zealand.

    Regulators are also considering expanding stress testing requirements to other segments of the industry, such as asset managers and pension funds.

    IFRS 9 and CECL

    The International Financial Reporting Standard 9 (IFRS 9) that will enter into force on January 1, 2018, replaces the International Accounting Standard 39 (IAS 39).

    The new standard will substantially affect banks’ financial statements. The new impairment model will require more attention from banks given the fundamental changes that it proposes – estimating provisions based on expected losses and not incurred losses as required in IAS 39.

    In the US, the Financial Accounting Standards Board (FASB) has also been working to develop a new impairment model known as the “Current Expected Credit Loss” (or CECL) model. A final standard is expected to be released between Q4 2015 - Q1 2016.

    Impact for banks

    Banks will have to respond to this new wave of regulatory changes with enhanced enterprise risk management systems and processes to effectively manage risk and comply with the requirements.

    They must continue transforming their risk management, finance and compliance technologies, processes, and practices, in terms of capital calculation, expected loss estimation, data management, stress testing, and reporting.

    Figure 1. Moody's Analytics Global Banking Regulatory Radar
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    Moody's Analytics Global Banking Regulatory Radar
    Source: Moody's Analytics
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