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Articles Written by Greg Baer

The CRO can use those insights to digitize its core functions, expand digital capabilities to other parts of the bank, and make sure that all critical enablers are in place. See Exhibit 5. Digitizing the Core.

Bank mergers: An idea whose time should never come

In digitizing core risk processes, the CRO will improve the quality and speed of decision making, free capacity, reduce errors, and foster forward-looking quantitative discussions. Reporting processes will be automated, steering integrated, and decisions managed by a small, highly skilled team with specialist expertise. In addition, risk models will be more precise, predictive, and granular, aided by data visualization, big data analytics, and AI. Automated model development that uses fintech solutions allows teams to run source data through concurrent simulations, select the most accurate, and use the time saved to address other important business questions.

Regulatory affairs will also be simplified, thanks to AI-supported smart workflow tools that consolidate contact points, route queries to responsible experts, and increase transparency and access. Moving Beyond the Core. With core functions modernized, the CRO should leverage acquired digital capabilities to bring specialized risk management expertise to other parts of the organization. Because regulatory reporting will be largely automated, the CRO will be able to focus on economic and risk-based steering, providing predictive insights to guide C-suite-level discussions and assisting other stakeholders.

By examining the needs of key stakeholders across the bank, risk control can pave the way for broader digitization. Using advanced modeling techniques, for example, the CRO will be able to create or contribute to an early-warning system. Pattern analysis tools could comb customer transaction data and external information, such as online ratings or satellite data, looking for signals and triggers that would allow risk managers to take effective countermeasures.

Our project experience shows that a fully automated system can accurately predict a negative event in time to send warning signals as much as 18 months in advance. Key Enablers. To turn this future into reality, the risk function will need to alter its organization structure and processes. Governance mechanisms, metrics, incentives, and reporting practices must be adjusted to support greater collaboration among risk control, finance, and treasury while maintaining appropriate separation.

Banks that adopt agile ways of working can enjoy dramatic gains in productivity, development speed, collaboration, and innovation. However, some banks have run afoul of regulatory authorities and their own compliance functions because they failed to adjust their risk management practices to keep pace with the more rapid and iterative development approach that agile methods employ. The internal compliance function of another bank blocked the release of a new IT application because of risk management concerns.

Columbia Law School's Blog on Corporations and the Capital Markets

To avoid negative regulatory findings and allow agile programs to achieve scale, banks need to develop their risk management and monitoring practices in three ways. First, banks need to shift from using sequential, or waterfall, approaches and apply more dynamic and adaptive oversight methods. Second, they need to implement a risk-based and resource-efficient coverage model for individual agile teams. It allows a bank to demonstrate to regulators that risk oversight is embedded in its agile approach, simultaneously improving the quality of risk oversight more generally.

Third, banks need to make their own risk management processes more agile, especially those that involve significant manual labor, such as model development. In terms of data and technology, the risk control function needs to inventory existing data sources, determine where the gaps are, and consider how additional data can be accessed and stored. Working with IT, risk leaders then need to lay out the optimal IT architecture. Instead of monolithic legacy systems, they will require a flexible, service-based architecture that enables application autonomy, cloud computing, and real-time processing to manage ongoing regulatory changes and support fintech interfaces.

In Depth - Merger of Banks

The underlying data platform will need to serve as a single source of truth, capable of pooling structured and unstructured data from multiple sources, including commercial data providers, publicly available repositories, and internal sources. To speed and eliminate risk from the transformation, the CRO has to determine which parts of the digital value chain the function should make or buy. Managing the evolving fintech ecosystem will require risk leaders to develop formal processes for overseeing outsourcing and logistics from a governance standpoint.

While no one can know exactly what the future will bring, some signposts of change seem unequivocal. First, in terms of data infrastructure, the easy availability of inexpensive storage and processing will lead to the overhaul of legacy IT systems. Second, as fintechs attack high-value services, as ecosystem players including Alipay expand into banking, and as big techs like Google and Apple enter the payments business, banks will be forced to adapt their go-to-market models to digital channels and platforms.

Third, in terms of operations, competitive and cost pressures will force banks to mimic the lean style of technology companies—with straight-through processing, instant payments, smart automation, the use of a single cloud- and service-based software backbone, and real-time data and analytics.

These changes will have massive implications for treasury. Furthermore, advanced technologies will allow bank treasuries to create new sources of value, and bank treasuries have already started digital diagnostics to define use cases.

Why Agile Works

These include machine-learning-enabled business forecasting that allows treasuries to improve the timing and execution of long-term funding transactions. Likewise, cash management optimization, backed by better analytics and smarter modeling, can help treasuries reduce the size of costly liquidity buffers. Better steering of the balance sheet can improve profitability while helping banks satisfy stress tests and other regulatory risk management measures. The benefits for banks are threefold:. Risk, treasury, and the business units have, broadly speaking, tended to operate in silos.


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That structure makes it hard for banks to satisfy regulatory demands efficiently, given the cross-cutting nature of most compliance metrics, such as Common Equity Tier 1 CET1 , the liquidity coverage ratio LCR , and the net stable funding ratio, commonly known as NSFR. Traditionally, overall balance sheet management has been led by the CFO function treasury, planning, and capital management , but risk management can contribute by applying its rich information capital and rigorous modeling methodologies and by employing strong analytics to quantify the impact of managerial actions.


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To implement an integrated balance sheet management approach, the risk function leaders should start by identifying key regulatory and steering metrics, such as CET1, LCR, and net interest income. They should then conduct a deeper analysis of the composition of these performance indicators to determine which parameters ultimately drive performance.

Following that, they need to design the target model. Parameters for each input—including, for example, loan portfolio and government securities—should be designed to adjust automatically over time to reflect changing macroeconomic variables such as GDP, unemployment, interest rates, and share prices. These analytics help banks run multiyear simulations of their entire financial position under a variety of macroeconomic scenarios.

They can enable banks to react proactively to changes in market conditions by evaluating the impact of ad hoc managerial actions on the prioritized KPIs. For example, should government bond spreads tighten and new lending flows increase dramatically over the fourth quarter, the usual countermeasures, in light of the underfunded balance sheet, would be to increase funding targets for the following year. However, such rebalancing takes time and considerable effort. With an integrated balance sheet management approach, banks can identify impacts earlier and proactively optimize resources by, for example, financing growth with short-term instruments such as repos.

Once the balance sheet management tool has been piloted and refined to produce consistently reliable results, banks should define the target architecture and implement the changes. The architecture should be robust enough to handle fast computations related to hundreds of scenarios and to allow for a probabilistic interpretation of results. With that architecture in place, banks can focus on bringing the forecasting capabilities of the tool to scale and developing additional modules such as IFRS 9, as well as exploring advanced credit risk simulations and capital planning.

Gerold Grasshoff. Matteo Coppola. Thomas Pfuhler. Norbert Gittfried. Stefan Bochtler. Volker Vonhoff. Carsten Wiegand. BCG uses cookies to improve the functionality, performance, and effectiveness of our communications. Detailed information on the use of cookies is provided in our Privacy Policy. By continuing to use this site, or by clicking "I agree," you consent to the use of cookies.

Why Agile Works Getting optimal results from agile requires a commitment to strategic clarity that is critical yet uncommon. How should leaders prepare their companies to thrive in a rapidly evolving landscape? What will it take to win the '20s? Choose your location to get a site experience tailored for you. Notes: 1. LLPs and capital charges are barometers of macroeconomic and regulatory conditions that, taken together, represent the risk costs that banks incur.

The value effects of bank mergers and acquisitions | SpringerLink

Regional Performance: A Mixed Picture The major markets—Europe, North America, and Asia-Pacific—continue to run at different rates, hobbled or aided in turn by the strength of the economic recovery in each region, the ongoing impact of NPLs, and stubbornly high cost structures. Time to Prepare for Economic and Technical Change Banking remains a three-speed world in which European banks continue to struggle, North American and Asia-Pacific banks strive to stay the course, and the developing markets of South America and the Middle East and Africa continue to show high profitability.

European regulators have stepped up their engagement over the past 12 months. The banks struck the deal from a position of strength, analysts said. Each reported strong fourth-quarter earnings last month and there were no signs of pressure near to mid-term, said Terry McEvoy, managing director at Stephens.

Analysts largely expect regulators to approve the deal, although it is expected to draw scrutiny from vocal bank critics like Senators Elizabeth Warren and Bernie Sanders as well as from the Democratic-controlled House. The combined company will remain comfortably under the asset threshold that would make it a systematically important financial institution, sparing it increased regulatory scrutiny. Shares of Atlanta-based SunTrust jumped 8. The talks between the two banks began in , according to advisers. The two banks have hundreds of branches within two miles of each other, but they serve different segments of the market.

Changes in U. All three measures of concentration show that the HHI for the banking industry is well below the moderately concentrated level of and therefore is classified as unconcentrated. Specifically, the HHI of assets, deposits and loans is , and , respectively. The change in the HHI of assets, loans and deposits for the banking industry that is obtained after combining BBT and STI is immaterial across the three major balance sheet items. Specifically, the change in assets, deposits and loans is 3, 4 and 6 points, respectively. As shown above, the proposed merger has a minimal impact on the degree of concentration of the banking industry.

Disclaimer: The views expressed in this post are those of the author s and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.