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In the final part of our over-regulation white paper series, we look at a 4-stage strategy transformation approach that would help banks avoid running duplicating programmes and mitigate the cost of reform.
Essentially banks should aim to marry strategy, governance and enterprise performance management. To do this successfully would require banks to conduct detailed assessment reviews across a range of strategic dimensions that would underpin the development of an effective strategy going forward. We advise a 4-stage strategy transformation approach that would help banks avoid running duplicating programmes and mitigate the cost of reform: Leadership teams should aim to formulate a high level strategy that would aim to maintain or improve profitability, return on equity (ROE) and economic profit and shareholder value. The new regulation requires banks to monitor new metrics aimed at balancing liquidity and capital management. See our summary of Basel III. The design of a suitable enterprise transformation blueprint must align the above strategic targets with departmental performance management. Tackle multiple regulations by breaking them into discrete solution elements, so that the common aspects of multiple requirements can be dealt with in a single solution. To assist in this process, Bigham Consulting�s High Impact Framework offers a robust structure within which enterprise strategy and governance can embrace strategic change initiatives and address these against the required timelines and desired outcomes. The bank should assess the impact of each regulation on their baseline economic model. We recommend a careful alignment of implementation costs, product profitability, business process analysis and other fundamental economic drivers to the regulations as a whole against the desired strategy; chart a course to the business model that will enable that strategy and can be supported by an infrastructure which is robust enough for the requirements but also efficient enough to be affordable with the needed size, scope and flexibility. In order to ensure that the organisation retains the broader perspective, it is important to take a business model view of the impacts of the change programme, highlighting the involvement of all areas and not just risk management and IT. The financial institution can develop regulatory implementation programmes based on the business priorities to maximise returns from its required regulatory investment. For example, in strategic areas related to the business model and to establishing and maintaining a competitive advantage, programmes may be designed and implemented to separate retail from wholesale activities, to limit risks from proprietary trading, or to change the business model. Another common functional component is technology, and here implementation programmes may be aimed at integrating finance and risk architecture, improving data governance and the overall quality of data, or sourcing and distributing reference data. Market initiatives might include linking with central counterparties for derivatives or developing solutions that more closely correlate collateral requirements with securities held and/or traded. Even organisations that choose only to meet basic compliance standards will have their work cut out. The desire is to create an approach which also returns tangible benefit to the organisation beyond the basics of overcoming these regulatory hurdles. This is not to underestimate the implementation challenges posed by regulatory changes themselves. At a minimum, financial services firms will need to set up effective governance for their regulatory programmes, transform and align finance and risk functions, revamp current client on-boarding and data collection processes, establish stronger frameworks for operational risk, and develop crisis management plans. In addition, regulations demand stronger efforts to curb financial crime, including anti-money laundering measures and development of client solutions for compliance with the Foreign Account Tax Compliance Act (FATCA). These encompass extended reporting structures and new know your customer (KYC) processes and will require a significant level of investment and resources for both U.S. and non-U.S. banks. Even organisations that choose only to meet basic compliance standards will have their work cut out. The desire is to create an approach which also returns tangible benefit to the organisation beyond the basics of overcoming these regulatory hurdles. A comprehensive business assessment will help to align priorities; once identified these accountabilities should be embedded in the accountabilities of each affected department leader�s �Primary Scorecard�. This will assure the alignment to enterprise strategies (�The Senior Scorecard�), using the �High Impact Management� Enterprise Governance Framework. There will be overlapping challenges to implementations, and demands will call for cross-functional project teams; For example, Dodd-Frank, Basel III, MiFID II, EMIR and CRD IV all have certain requirements or elements that will result in changes to the affected institutions. There will be overlapping challenges to implementations, and demands will call for cross-functional project teams. Doing so will necessitate coordination among the finance, risk, treasury, operations and technology functions, as well as the business lines themselves. Governance of mandated regulatory response implementation will demand a similar level of coordination across key functions. Bigham Consulting�s framework for implementing transformation strategy will help organisations rapidly get to grips with the challenges they face and formulate strategies that support both shareholder needs and enterprise governance.
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