Market News

On July 19th, 2018 the European Banking Authority (EBA) has published its final revised Guidelines which aim to further enhance institutions’ supervisory review and examination process (SREP). The Guidelines focus on stress testing which will be used in setting Pillar 2 capital guidance (P2G), as well as interest rate risk in the banking book (IRRRBB). The publication also includes: A final report on the Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing. Revised final Guidelines on the management of interest rate risk arising from non-trading activities (IRRBB guidelines). The revised Guidelines reflect on developments in the Basel Committee on Banking Supervision (BCBS) and clarify internal and supervisory outlier tests requirements during the first phase of implementing the Basel standards. Final Guidelines on institution’s stress testing. The publication shows that the guidelines reflect industry practices and the incorporation of recovery planning. They provide detailed guidance on the way institutions should design and conduct a stress testing programme.

On 10 April 2018, 22 member states of the European Union signed a Declaration on the establishment of an European Blockchain Partnership. The Partnership will contribute to the creation of an enabling environment and should ensure that Europe continues to play a leading role in the development and roll-out of blockchain technologies. For more information click here.

  On 7 December 2017, the Basel Committee of Banking Supervisors (BCBS) issued the last elements of the Basel III (also referred to as Basel IV) guidelines on bank capital reforms. The revision aims to restore credibility in the calculation of risk-weighted assets (RWAs) and to improve the comparability of capital ratios. As stated before by the Bank of International Settlements (BIS), the reforms include revisions for the following elements: • Standardised approach for credit risk• Internal ratings-based approach for credit risk• Credit valuation adjustment (CVA) framework• Standardised approach for operational risk• Leverage ratio and a leverage ratio buffer for global and systemically important banks (G-SIBs)• Aggregate output floor, which will ensure that banks’ risk-weighted assets (RWAs) generated by internal models are no lower than 72.5% of RWAs as calculated by the Basel III framework’s standardised approaches. The European Banking Authority (EBA) forecasted that the output floor of 72.5% will increase to an average 12.9 percent of capital for EU banks and a 15.2 percent for the 12 largest banks, taking 2015 balance sheet as an example. The output floor will serve as a safety net to Financial Institutions that are currently using internal risk-based models to calculate capital buffers. European banks however, tend to hold more long-term assets on their balance sheets. In 2010 BCBS gave Basel III a seven year implementation period. For the upcoming guidelines, BCBS delayed the implementation from 2019 to 2022. Additionally, the Group of Central Bank Governors and Heads of Supervision (GHOS) has extended the implementation date of the revised minimum capital requirements for market risk, which were originally set to be implemented in 2019. Now the date has been changed to January 1st 2022. As a niche consultancy firm, FiSer Consulting finds it important to define strategies that equip Financial Institutions with the capabilities to solve regulatory issues but also to maximise value in the implementation process with the help of: 1. Identifying key touchpoints where BCBS’ final papers (Basel IV) will create a significant impact.2. Create a “Product life cycle analysis”. This analysis aims to provide a holistic view of the impacts across the four stages and processes of a financial product (for example a Retail Loan).3. Conduct an assessment within the organisation using our “Basel IV readiness questionnaire”. This questionnaire will determine whether there are significant gaps between current Basel program versus the new requirements.4. Determine a strategy and roadmap for implementationWhen utilising these tools, we can make sure that an organisation achieves a smooth and complete Basel implementation. At FiSer Consulting we are keen to understand your organisation and to bring the correct tools to implement any regulation. If you are interested in discussing the possibilities, please contact us at info@fiser.consulting. Information in this article was deducted from the official page of the BIS and the Financial Times (dated 08/12/17).

PSD2 will become effective as of January 13th 2018, which does not apply to the security measures as outlined in the RTS. The use of the measures will become mandatory 18 months after publication of the RTS in the Official Journal of the European Union, which is scheduled for September 2019. The RTS has made strong customer authentication the foundation for accessing customer payment accounts and for making online payments. These characteristics will enhance consumer protection and increase the flow of online payment across the European Union. The official press release on the final RTS can be found here.

On 27 October 2017, The European Banking Authority (EBA) launched a public consultation on draft regulatory technical standards (RTS) specifying the framework for cooperation and the exchange of information between competent authorities under the revised Payment Services Directive (PSD2). The RTS also clarify the type of information as well as the templates to be used by payment institutions when reporting to the competent authorities of the host Member States on the payment business activities carried out in their territories. The consultation runs until 5 January 2018. For the complete news item, please click here.

Consultancy.uk, the leading online platform for the consulting industry in the UK, has published an article on the GDPR regulation where Paul Nielsen, our Senior Consultant, shares his opinion on the adoption and the involved trade offs. The article can be found here.

Last year, 52% of the British population voted in favour of leaving the European Union, a historic and unexpected event known as ‘’Brexit’’. Brexit is said to have complicated and long-term impacts on the financial services sector in the UK since companies will no longer be able to operate within the European framework. This could potentially block access to clients and significantly interfere with business. London’s lead location as the core of the financial services industry is also under severe pressure. With Brexit, the race to become the new London has started and cities like Amsterdam, Paris and Frankfurt are lining up for the position. An interesting appearance amongst the large digitalised cities is Amsterdam. Big financial players such as Mitsubishi UFJ Financial Group (Japan’s biggest bank) and Royal Bank of Scotland are set to move their operations to Amsterdam. The big move towards Amsterdam has to do with the possibilities the city offers for Fintechs, clearing houses and high frequency trading. The digital connectivity of the city, its geographical location and that it already has a financial sector is another plus. The Netherlands also has strong insurance and pension sectors and big data storage centres, which can be interesting to large businesses. Apart from advantages, there are also numerous challenges. The Dutch financial world is still suffering from the 2008 financial crisis, which has led to continuous bank layoffs. The size of Amsterdam’s financial sector imposes another problem: it is simply too small to make it an interesting location for big banks. Another disadvantage for Amsterdam is the high corporate tax rate. This disadvantage is however being addressed by the recently published coalition agreement by the Dutch Government. The agreement increases the competitive advantage against other European cities by lowering corporate income taxes and the removal of the infamous Dutch dividend tax. Amsterdam is overall not the first choice for a potential post-Brexit city due its financial character and size. It can however function as an interesting hub that is part of a bigger network of cities that attract specific financial services sectors. This way, the city could continue to focus on its strengths, which are innovation and digital connectivity without the weight and responsibilities of the core of a financial heart. There is still a lot of on-going turmoil surrounding Brexit. For that matter, the European Banking Authority (EBA) has published an opinion paper, providing guidance to authorities and institutions on Brexit relocations. For the complete press release, please click here.

The European Banking Authority (EBA) has published today its revised Guidelines on Internal Governance. These Guidelines aim at further harmonising institutions’ internal governance arrangements, processes and mechanisms across the EU, in line with the new requirements in this area introduced in the Capital Requirements Directive (CRD IV) and also taking into account the proportionality principle. Effective internal governance is fundamental if individual institutions and the banking system as a whole are to operate well. For the complete press release, please click here.

Since December 2014, The World Economic Forum has strived to understand the impact of potentially disruptive Fintech technology innovations on the financial services ecosystem. They have presented their findings in three phases. Phase one ‘The Future of Financial Services’ discusses the potential of new innovative entrants, while phase two ‘The Future of Financial Infrastructure’ aims to illustrate the role of how financial infrastructure is going to enable the future of financial services. The third phase ‘Beyond Fintech’ is focussing on financial services sectors and areas that are slowly being reshaped by Fintech in a world where innovation technologies merge together. Fintechs can be defined as small, technology-enablers, entering and disrupting the financial services sector. The main aim of their existence is to overtake the financial services market. Even though Fintechs failed to become a dominant player due to scale and customer adoption struggles, they have managed to change the competitive landscape of the sector. First off, the wind of Fintech change gained tremendous strength in the payments, insurance, digital banking, lending, investment management, equity crowdfunding and market infrastructure. Additionally, Fintech is becoming the foundation for future disruption in multiple areas: Cost commoditization Profit redistribution Experience Ownership Platforms Data Monetization Bionic Workforce Systematically Tech Firms Financial Regionalization The impacted areas and sectors illustrate the astonishing speed of Fintech innovation developments. The last World Economic Forum report concludes how Fintech unleashes a new era of competition, innovation and job-creating productivity in the financial services sector. The original document can be found here.

A new era of automated mechanisms is set to disrupt how businesses, institutions and the government work. One of such technologies is the Blockchain and it’s said to impact current values and means of participation in our society’s financial and governmental systems. Blockchain: how it all started and widening its context As applied in the Bitcoin context in 2009, Blockchain is a decentralised ledger where information entering the technology is securely stored and recorded amongst a global network of computers. Third parties like banks, clearinghouses or middlemen are not required for completing transactions, which makes Blockchain a trusted carrier. This feature alone is game-changing for the financial services industry and insurance, trade finance and healthcare businesses. The distributed ledger could prove to become a broader changing force and improve transparency and integrity in today’s society systems and how businesses and the government work. Not to forget that all types of transactions can be processed by the technology. Think of documenting digital asset transfers, recording the ownership of intellectual property or establishing rights through smart contracts. In this way, Blockchain is cost-effective and enables businesses to operate both faster and more cheaply. The Financial Services industry responds to the Blockchain trend A growing belief in the technology is reflected in investments trends. There’s significant venture capital Blockchain start-ups and Fintechs in the financial services industry are more than willing to invest (a spending of $20 billion was detected from 2013 – 2015 alone), which puts even more pressure on banks in terms of limited Blockchain growth opportunities. The Blockchain is feared by many in the financial sphere because it democratises value and current legacy and changes the way consumers behave and how intellectual property is organised. Other areas and applications that receive a great deal of attention are trade execution, asset exchange, physical asset registration, supply chain management and cash reserve management. Blockchain’s substitutive power is why banks are doing everything to hop on the Blockchain train. They invest money in innovative technologies and reassess business models – but is this enough? Act, don’t sit on the side-line Change takes time and so do financial institutions need time to adapt to Blockchain and get a grip of its benefits and risks. Whereas only a few can afford to sit on the side-line, many businesses need to actively participate in the ongoing innovation cycle. They need to understand how Blockchain is shaping the sector and how to pursue opportunities as the financial landscape converges and evolves. Banks and financial institutions will be challenged during the Blockchain revolution. It is not so much about finding solutions but about identifying complex problems that require a Blockchain way of thinking. Businesses that will prosper are the ones that act fast, take advantages of new opportunities and harness the Fintech and Blockchain revolution. The original document of The World Economic Forum can be found here.