• Service: Advisory, Management Consulting
  • Industry: Financial Services, Banking
  • Type: Business and industry issue, Publication series
  • Date: 11/14/2012

KPMG China Connect

KPMG China Connect - a bilingual business newsletter

It reports KPMG's latest research and insights, client events, news and firm-wide developments.



Technology carries the weight of regulation 

Technology carries the weight of regulation

By Simon Topping and James Mckeogh, KPMG in China


If there is one constant that has emerged from the Global Financial Crisis, it is the drumbeat of regulation. Regulators globally are rapidly devising and announcing new regulatory requirements aimed at reducing the potential for – and severity of – a future financial markets meltdown. Financial institutions, clearly, are the main target.

The impact on banks and other financial institutions has been significant. Some have failed, others have merged, and a few have even gained market share and new business as a result. Amidst all this change, many banking leaders are now starting to question how technology can be harnessed to respond to the growing demands of regulatory compliance.


Technology under stress
The pace and demands of regulatory change have put alarming strain on banks’ technology functions. For example, take the Basel III standards on capital adequacy, stress testing and market liquidity. Only a few years ago, most banks struggled just to add up point-in-time numbers to meet their compliance obligations; today, they are frequently asked to also run their data through a variety of stress scenarios. To meet the liquidity requirements, they have to add up the numbers and then model behavioural characteristics of their liabilities. Clearly, the complexity of compliance has grown exponentially and with it, the need for more robust and sophisticated technology to meet these obligations.


Other regulatory changes are also afoot that will be immensely disruptive to banks’ technology functions. Primarily in the UK, US and EU, but increasingly in other markets as well, regulators are starting to focus on how banks can be effectively ‘ring-fenced’ in order to quickly quarantine any future banking failures without disrupting the entire financial system.


To achieve this, UK regulators, for example, require banks to separate their individual business units’ technology systems and processes so each can stand alone in a crisis. This leaves banks with to two viable options: invest in separate systems (along with all the maintenance, management and infrastructure that goes with it) or outsource the technology function to a third party supplier that could serve the separated banks, yet be independent enough to survive a financial crisis.


The perils of short-termism
Unsurprisingly, many bank executives and technology leaders are somewhat overwhelmed by the changes required to respond to this influx of regulatory requirements. In many cases, this seems to have resulted in banks taking a rather short-term view of regulatory-related technology: identify the immediate requirement, build a quick fix, meet the compliance obligation, and move on.


This strategy, however, can only ever be a Band-Aid solution to a much more systemic problem. The reality is that regulatory change is not stagnant and technology will surely bear the brunt of the change requirements. Without a long-term view and strategy, banks are likely to waste budget, add unnecessary complexity, and deflect attention away from growing the core business.


Turning regulatory change into competitive advantage
What is needed, therefore, is a long-term and holistic view of not only the direction of existing and future regulation, but also an ability to overlay potential growth strategies to ensure that technology systems can both meet compliance requirements and enable the business going forward. For instance, Cloud Computing holds significant promise for enhancing efficiency, reducing costs and driving product innovation within banks. However, the use of Cloud services within banking is already coming under scrutiny by regulators who – as noted earlier – are keen to retain core system process within their jurisdictions. Tough choices and complex decisions will be needed.


The reality is that banks, with the right insight and careful planning, can quite confidently surmise the future direction of regulatory change. The overall objectives of today’s regulatory change are quite clear. So too is the preferred approach of individual regulatory bodies. All that remains is to translate directional assumptions into actionable strategies that can be integrated into the organization’s growth strategy.


To be sure, this will be no small task. But those banks that are able to achieve this will almost certainly gain significant competitive advantage through reduced system maintenance and upgrade costs, better use of internal resources, lower compliance burdens, reduced organizational complexity and ‘future-proof’ growth strategies. Simply put, it is the difference between reacting to regulatory change and taking advantage of it. 


Simon Topping

Simon Topping

Partner, Consulting

+852 2826 7283

James Mckeogh

James Mckeogh

Partner, Consulting

+852 2847 5018