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Treasury & Capital Markets
Earning back the trust
Looking back at the Sibos conference held in Dubai from September 16 to 20
Daniel Yu 1 Nov 2013
 

Many delegates to this year’s Sibos event brought back fond memories of Dubai, a city of unlimited possibilities – the tallest building in the world; the longest unmanned metro train in the world; the largest mall in the world; the only man-made island in the world shaped like a palm; and the list goes on. But if Dubai is all about what is possible, bankers attending this annual gathering are coming to terms with the limits of how, as institutions, they will be allowed to behave in the future. The cost of regulatory capital, liquidity constraints, increased reporting requirements, and so on are intended to throw sand on their free-wheeling past. Even revenues are under pressure.

Coming as it did the same week five years ago when the collapse of Lehman Brothers sent shockwaves across the world, Sibos Dubai was more about trying to accept and adjust to the new reality. The mood has shifted. “Be prepared, but be aware that the road ahead may be dug up again” was how one described it. Much more muted, except for a handful of die-hards, were the calls to challenge the unintended consequences of the regulatory changes.

Operational issues have taken centre stage – from anti money laundering, CRD 4, dealing with sanctioned countries and the prevention of cybercrimes to Target 2 Securities and SEPA, which have specific deadlines that either have come or may be fast approaching. In a word, it is all about compliance – and the burdensome costs associated with it.

It is reshaping the business model of banks. Whereas in years past, some banks paid lip service to the concept of partnership, the heavy cost of compliance has been forcing them to take concrete steps as a way to share the pain and to be able to remain operationally competitive. It is two-fold. Institutions are establishing stronger links with those that may have the operational excellence they lack. Some banks are happy to buy services from others or share revenues when previously they would have taken a bet to build from scratch.

It is about mining the existing core client base and working with, say, investment banking, as a true partner to an organization’s transaction banking counterparts. One bank, for the first time, brought their investment banking colleagues to Sibos in a show of force and a show of unity.

Designed in panic

Yet, not unlike the early morning haze in Dubai – with the façade of the towering Burj Khalifa visible in the distance from the Dubai World Trade Centre, the site of this year’s Sibos – the image of that better future may appear as a mirage.

And the set of rules crafted to curb the riskier behaviour that was prevalent among some of the systematically important global financial institutions pre-crisis seem ill-suited to the challenges faced by institutions based in Asia. De-risking broadly runs the risk of curbing banks’ activity in the developing markets, where the role of financial institutions to support real productive activity is especially critical, such as financing the small and medium-sized enterprises (SMEs). “In the face of the new international standards, some banks opted to exit markets such as ours,” laments May Abulnaga, head of the regulation department at the Central Bank of Egypt. “This is going to cast a shadow on the growth of our economy.”

“The irony,” says Andrew Sheng, president of Fung Global Institute, “is that regulators in Asia, perhaps as a product of the Asian culture to always be competitive and to excel, are among the early adopters of Basel III. But in the US, the rules only apply to the large institutions and not to the smaller ones.” The problem, as Sheng proffers, is that the new regulations were designed in a period of panic. And that while the issue back then was too much debt, the solution became to add even more via quantitative easing. And while complexity was seen as compounding the crisis, the answer has been construct increasingly complex regulations.

Banks in emerging markets confront challenges that have little to do with what happened in the developed markets for which the regulations were meant. In Asia, it is about rapid urbanization and meeting rising expectations. It is about how to finance the SMEs, which may provide 80% of employment. Yet, regulations make it more difficult to support SMEs due to their perceived higher risk.

Fortunately, technology is making it possible to offer banking services to serve the millions in the far-flung places. And in a period when trust between the banks and the public remains fragile, this opportunity should be enhanced to bring banks to a better place in the eyes of the public.

As Sheng warns: “We need to move beyond Basel III and prioritize what’s important for Asia. If we do not do so, our system will have social failure."

 

 

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