The world’s systemically important banks are racing to complete their recovery and resolution plans (RRPs) in order to have them in place by the Financial Stability Board’s (FSB's) deadline of the end of 2012. However, a number of national regulators, including those in the UK, US and Canada, are pressing for other banks in their jurisdictions to complete their RRPs by this June.
In response, banks in many countries are assessing how they will need to change their structure or operations to demonstrate they are resolvable. But in the UK and US, the task is being complicated by the Independent Commission on Banking’s (ICB's) recommendations and Dodd-Frank.
In December the UK government published its response to the ICB report. Whilst final requirements may be more flexible around some thornier issues raised by the banks, the government has endorsed the proposal to ring-fence UK retail operations from investment banking-type activities.
The government will publish a White Paper this spring with further details on how the recommendations are to be put into practice. The reforms will then be implemented in phases, to be completed by 2019.
The push towards simpler, stronger and more focused businesses, in line with the ICB’s proposed changes, is already in evidence. Royal Bank of Scotland is cutting back its Global Banking and Markets division, with other institutions undertaking similar appraisals. Depressed investment banking returns seen at present are also providing additional impetus for bank restructuring.
Various developments coming out of the US regulatory change process are proving highly controversial. Several regulators recently expressed concern about Volcker Rule proposals which will ban banks from proprietary trading or all but de-minimise investments in hedge funds and private equity funds. Banks but also governments have warned the rule in its current form could undermine market making activity in general, and some specific markets such as sovereign debt trading, as at present it does not include an exemption enabling banks operating in the US to engage in proprietary trading of non-US sovereign debt.
Although many aspects of Dodd-Frank remain to be clarified, it is evident the Act will have a substantial impact on the activities of non-US banks, with the full extent of its impact on activities outside US borders still to be clarified.
Understanding the impacts of Dodd-Frank, and the changes stemming from the ICB, will be critical for banks as they plan their future business strategies and prepare their RRPs. Meanwhile, to further complicate matters, the industry is still awaiting the European Union’s final Crisis Management proposals, which will set out its requirements around RRPs.
Banks will need a structured process that enables them to navigate the multiple drivers of change. They will need to develop legal entity, organisational and financial operating models that allows them to meet the requirements of the different jurisdictions in which they operate, while satisfying their own strategic needs.
