The introduction of ring-fencing proposed by the Independent Commission on Banking (ICB) means that all UK Universal Banks will need to develop their target business model for operating in the new world. As each Ring-Fenced Bank (RFB) will be a standalone entity in legal and economic terms, cost structures and transfer pricing mechanisms will need to be much more transparent. Considerably tougher capital requirements will mean that the viability of existing products, channels and services will need to be reviewed.
Although the target date for the introduction of ring fencing by 2019 seems far off, banks need to start planning the end state solution today. As the proposals will significantly affect many banks’ strategies, it is important that quantification of the impact of particular scenarios is begun immediately to enable constructive dialogue at board level.
The timetable for the first Recovery and Resolution Plans (RRPs) to be submitted to the Financial Services Authority is mid 2012 and it is likely that these submissions will need to outline each bank’s view of the scope of its RFB. As well as setting out recovery options available to the bank in a range of severe stress situations, RRPs require banks to identify the economic functions they perform, map these to their business units and legal entities and report key metrics on them which enable their scale and importance to be established.
The ICB concluded that these reforms will cost banks between £4billion and £7billion per year. The CEO of RBS, Stephen Hester, is quoted as saying “the UK regulatory reforms on their own have probably cost £10billion to £20billion from our future market value.” Given the financial pressures of these changes, it is vitally important that banks rethink their strategies early on and aim to secure an early mover competitive advantage in the new world.
Banks should move now to harness management information to analyse and understand the key drivers of their financial performance and model scenarios for both the short term and the longer term. The first step in the process is to create a business driver diagram for the group as a whole and for each economic function, mapping the drivers of value back from financial outcomes to customer, business process, economic and market indicators. These driver diagrams should then be populated with relevant trend data, including budgets and forecasts, reported by the key business dimensions, such as legal entity, business unit, economic function, product, geography and customer segment. Understanding the key drivers of value creation and the trends of historic performance provides context for the evaluation of future scenarios.
The business driver diagrams can then form the basis for developing a model for evaluating future scenarios for the bank. The design of this model should enable it to support an agile planning process that is highly responsive to changes in external and internal factors affecting the business.
An effective planning model should use a top down, interactive and transparent approach that enables all directors and executives to engage personally with the process, rather than simply being an exercise for back-room experts. Whilst the underlying model is likely to be complex in its structure, it is possible to create a simple visual interface to the model enabling alternative scenarios to be evaluated live in a board strategy session and the results evaluated on the spot using graphical output that conveys real insight.
The model needs to show the results of reallocating assets, risks and service-giving functions within the group under different scenarios. The key output of this approach will be a well-considered top down design of the future business model that demonstrates the key financial attributes of the entities inside and outside the RFB and which identifies the changes that will be necessary for future profitable growth.
In parallel to this top down modelling approach, banks should adopt a pragmatic approach to integrate their finance and risk data, a need that is now widely recognised as being urgent. It is no longer sustainable to build multiple layers of adjustments into group-level finance or risk reporting to try to address the deficiencies in source data, since this loses all transparency and makes the exploration and understanding of variances virtually impossible. However, trusting technology-led data warehouse programmes alone to deliver the solution is likely to suffer the well-known pitfalls of large scale IT projects, such as high costs and the failure to realise the intended benefits.
The resolution to the data consistency issue lies in improving the quality and completeness of data captured at source. This process should be driven by what internal and external users of the information actually need, rather than what the business is capable of supplying, prioritising areas of business benefit. For example, improving the quality of data for advanced Internal Ratings-Based risk models may lead to significant capital savings, producing a very clear benefits case.
A systematic data-centric approach starts with the creation of a data policy, which focuses on the business outputs needed and defines the requirements for each source data set. Data governance procedures assign ownership to the producers of the source data and its end users in finance and risk, identifying mechanisms by which poor quality data capture can be addressed. The resulting data dictionary and data model provide the strategic data foundation, which should be developed in parallel with urgent initiatives to fix data and resolve issues.
By running these processes in parallel, the interactive top-down model of the business can be populated with the best current source of underlying data available at the time. This will enable business decisions affecting the operating model of the bank to be informed with rigorous data analysis at each stage and future scenarios to be explored and evaluated by a well-informed board and executive team. In the new economic and regulatory environment facing banks, the winners will be those that use management information effectively to support the generation and realisation of their strategic business vision.
By Andrew Mosely, COO at Metapraxis, the business analysis company
ECB stays put but warns about surge in infections
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank warned on Thursday that a new surge in COVID-19 infections poses risks to the euro zone’s recovery and reaffirmed its pledge to keep borrowing costs low to help the economy through the pandemic.
Having extended stimulus well into next year with a massive support package in December, ECB policymakers kept policy unchanged on Thursday, keen to let governments take over the task of keeping the euro zone economy afloat until normal business activity can resume.
But they warned about a new rise in infections and the ensuing restrictions to economic activity, saying they were prepared to provide even more support to the economy if needed.
“The renewed surge in coronavirus (COVID-19) infections and the restrictive and prolonged containment measures imposed in many euro area countries are disrupting economic activity,” ECB President Christine Lagarde said in her opening statement.
Fresh lockdowns, a slow start to vaccinations across the 19 countries that use the euro, and the currency’s strength will increase headwinds for exporters, challenging the ECB’s forecasts of a robust recovery starting in the second quarter.
Lagarde saluted the start of vaccinations as “an important milestone” despite “some difficulty” and said the latest data was still in line with the ECB’s forecasts.
She conceded that the strong euro, which hit a 2-1/2 year high against the dollar earlier this month, was putting a dampener on inflation and reaffirmed that the ECB would continue to monitor the exchange rate.
The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up nearly 7% over the last 12 months. Against the U.S. dollar, that number rises to over 10%.
Opening the door for more stimulus if needed, Lagarde confirmed the ECB would continue buying bonds until “it judges that the coronavirus crisis phase is over”.
Lagarde also kept a closely watched reference to “downside” risks facing the euro zone economy, which has been a reliable indicator that the ECB saw policy easing as more likely than tightening.
But she signalled those risks were less acute, in part thanks to the recent Brexit deal.
“The news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns is encouraging,” Lagarde said. “But the ongoing pandemic and its implications for economic and financial conditions continue to be sources of downside risk.”
Lagarde conceded that the immediate future was challenging but argued that should not impact the longer term.
“Once the impact of the pandemic fades, a recovery in demand, supported by accommodative fiscal and monetary policies, will put upward pressure on inflation over the medium term,” Lagarde said.
Benign market indicators support Lagarde’s argument. Stocks are rising, interest rates are steady and government borrowing costs are trending lower, despite some political drama in Italy.
There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.
The ECB has indicated it may not even need it to use it all.
“If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Lagarde said.
Recent economic history also favours the ECB. When most of the economy reopened last summer, activity rebounded more quickly than expected, indicating that firms were more resilient than had been feared.
Uncomfortably low inflation is set to remain a thorn in the ECB’s side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.
With Thursday’s decision, the ECB’s benchmark deposit rate remained at minus 0.5% while the overall quota for bond purchases under PEPP was maintained at 1.85 trillion euros.
(Editing by Catherine Evans)
Bank of Japan lifts next year’s growth forecast, saves ammunition as virus risks linger
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) – The Bank of Japan kept monetary policy steady on Thursday and upgraded its economic forecast for next fiscal year, but warned of escalating risks to the outlook as new coronavirus emergency measures threatened to derail a fragile recovery.
BOJ Governor Haruhiko Kuroda said the board also discussed the bank’s review of its policy tools due in March, though dropped few hints on what the outcome could be.
“Our review won’t focus just on addressing the side-effects of our policy. We need to make it more effective and agile,” Kuroda told a news conference.
As widely expected, the BOJ maintained its targets under yield curve control (YCC) at -0.1% for short-term interest rates and around 0% for 10-year bond yields.
In fresh quarterly projections, the BOJ upgraded next fiscal year’s growth forecast to a 3.9% expansion from a 3.6% gain seen three months ago based on hopes the government’s huge spending package will soften the blow from the pandemic.
But it offered a bleaker view on consumption, warning that services spending will remain under “strong downward pressure” due to fresh state of emergency measures taken this month.
“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month when it said growth was “picking up.”
While Kuroda reiterated the BOJ’s readiness to ramp up stimulus further, he voiced hope robust exports and expected roll-outs of vaccines will brighten prospects for a recovery.
“I don’t think the risk of Japan sliding back into deflation is high,” he said, signalling the BOJ has offered sufficient stimulus for now to ease the blow from COVID-19.
NO EXIT EYED
Many analysts had expected the BOJ to hold fire ahead of a policy review in March, which aims to make its tools sustainable as Japan braces for a prolonged battle with COVID-19.
Sources have told Reuters the BOJ will discuss ways to scale back its massive purchases of exchange-traded funds (ETF) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention.
Kuroda said the BOJ may look at such options at the review, but stressed a decision will depend on the findings of its scrutiny into the effects and costs of YCC.
He also made clear any steps the BOJ would take will not lead to a withdrawal of stimulus.
“It’s too early to exit from our massive monetary easing programme at this point,” Kuroda said. “Western economies have been deploying monetary easing steps for a decade, and none of them are mulling an exit now.”
(Reporting by Leika Kihara and Tetsushi Kajimoto; additional reporting by Kaori Kaneko; Editing by Simon Cameron-Moore & Shri Navaratnam)
World Bank, IMF agree to hold April meetings online due to COVID-19 risks
WASHINGTON (Reuters) – The International Monetary Fund and the World Bank have agreed to hold their spring meetings, planned for April 5-11, online instead of in person due to continued concerns about the coronavirus pandemic, they said in joint statement.
The meetings usually bring some 10,000 government officials, journalists, business people and civil society representatives from across the world to a tightly-packed two-block area of Washington that houses their headquarters.
This will be the third of the institutions’ semiannual meetings to be held virtually due to the pandemic.
(Reporting by Andrea Shalal; Editing by Chris Rees
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