Global Banking Regulatory Radar

The Global Banking Radar highlights the busy regulatory agenda that banks will face over the next couple of years. The trend of increased regulation that began in the EU and the US is now spreading to other regions, requiring banks worldwide to comply with increasingly stringent and complex requirements. As a result, banks will need to overhaul their processes, IT, and business to move beyond reactive decision-making and merely complying with regulation to positioning their organizations for a future of strategic business growth. The following addresses high-level future regulatory guidelines and how they will impact banks.

The last pieces of Basel III will be finalized and implemented, such as the leverage ratio and the Net Stable Funding Ratio (NSFR) liquidity proposals. “Basel 3.5” is becoming more defined and will include a new standardized approach for capitalizing counterparty credit risk (SA-CCR), updated capital rules for exposures to central counterparty (CCP) and securitization standards, a fundamental review of the trading book, and an international framework for large exposures.

In the Americas, the US expanded stress testing requirements to large foreign banks. In Europe, the European Central Bank (ECB) / European Banking Authority (EBA) and the UK plan to run annual stress tests. In Asia, China and New Zealand will run stress tests within the next year.

Systemically important banks are facing three main requirement challenges:

1. Enhanced data management and reporting requirements, such as the BCBS 239 data principles and the Financial Stability Board (FSB) data reporting requirements
2. Risk concentration requirements
3. Resolution and recovery planning

Banks need to enhance their enterprise risk management systems and internal processes in order to effectively manage risk and comply with increasing regulatory requirements. They must closely review and transform their risk management and compliance technologies, processes, and practices, in terms of capital calculation, data management, stress testing, and reporting.

Banks will need to focus on the following areas:

• Enhancing their internal models and tools to calculate and manage economic and regulatory capital, including risk-based capital, the leverage ratio, and liquidity ratios. To effectively forecast risks, banks should augment their business intelligence processes and controls around model development and validation.
• Improving their IT infrastructure to have the capabilities and flexibility to support enterprise-wide scenario analysis, reporting, and modeling to meet regulatory demands.
• Creating a centralized risk environment by aggregating data across different groups and functions within the bank, in order to have a consistent and standardized enterprise-wide view of risk for stress testing and capital planning purposes.
• Strengthening the overall, firm-wide risk governance framework across processes, tools, technologies, policies, and people to successfully manage all regulatory requirements.

Figure 1. Moody's Analytics Global Banking Regulatory Radar

Source: Moody's Analytics analysis as of June 2014.

1. In the EU, the LCR will be implemented faster than originally envisaged under Basel III. The timetable will be: 60% in 2015, 70% in 2016, 80% in 2017, and 100% in 2018.
2. In the US, advanced-approach banks and non-bank SIFI institutions will have to meet 80% of the LCR by January 1, 2015 and 100% of the ratio by January 1, 2017.
3. The new standardized approach (SA-CCR) replaces both the Current Exposure Method (CEM) and the Standardized Method (SM) in the capital adequacy framework.
4. Framework for domestic systemically important banks in Australia.
5. FSB Data Gaps initiative to collect granular data from global systemically important banks. Phase 2 will be implemented in 2015 and will focus on liquidity and Phase 3 will be implemented in 2016 and will focus on additional balance sheet data. banks (G-SIBs).

This global radar provides an overview of the key global rules and regulatory guidelines affecting the banking industry. The radius of the semi-circumference represents the timeline that goes from 2014 at the center, to 2018 at the outer border. The regulations are grouped by global regions: APAC regulations are positioned on the left side of the radar, EMEA regulations are shown at the center, and Americas regulations are displayed on the right side of the radar. Flags represent the jurisdictions where the regulations or guidelines apply.