Thanks to the global financial crisis that shook up investment banking six years ago, a highly regulated environment has become the new normal. Keeping abreast of the regulations has consumed management attention and valuable resources. This won’t change in 2015.
What needs to change is the way banks stay on top of these regulations, managing them in a strategic, cohesive manner.
Banks shouldn’t just throw resources at regulatory problems. They need to take a step back and make wider changes to the operating model so that regulatory reporting is consistent and information is readily available across the business. For many banks, this may involve revamping their core banking platform.
Another challenge for investment banks in 2015 will be constructing more out-of-the-box thinking with regard to collateral management. Banks need to transform their view of collateral management from a support function at the end of the trade lifecycle to one that now sits at the core of the business.
While the majority of banks have recognised the importance of achieving a consolidated view of collateral across all lines of business, Accenture takes the position that many financial institutions have a long way to go before achieving a truly efficient collateral-optimisation model.
That means creating a comprehensive solution that addresses several key areas, including capital and liquidity planning, dynamic use of assets as collateral, improved risk management capabilities and a consolidated, enterprise-wide collateral inventory. Collateral must have the ability to be redistributed quickly across the business where it is needed most in real-time.
Banks are already developing algorithms to assess collateral needs rapidly and accurately. That is the good news.
The next step is seamlessly integrating these new models with existing capabilities that manage everything from inventory, collateral requirements and margin calls, valuation of securities and communication with counterparties.
But perhaps most controversial is the pay issue. This will continue to be a challenge for banks in 2015. Staff costs still represent approximately 60 per cent of operating expenditure across the investment banking industry, a figure broadly unchanged since the financial crisis, according to Accenture research.
But what also remained largely unchanged for many investment banks are subdued returns on equity for shareholders. Banks are under increased pressure to reduce compensation levels – and also change the mix of pay to better align the objectives of the individuals and organisations beyond the short term.
Banks need to continue to optimise their businesses. Accenture has long argued that in order to reduce fixed operating costs in a sustainable way, banks must make bold decisions about their operating model.
For example, banks should look to outsource entrenched areas of operational cost in non-core areas, or in parts of the value chain where processes are commoditised and deliver no differentiating value to the business — for example in post-trade processing.
Banks should also explore the use of lower-cost locations for staff: in the UK, some banks have moved smaller client service teams out of London, while US banks continue to build out their presence in locations outside New York.
Banks could consider their options in Asia –while relocating to Bali or Phuket might not fly – moving more departments out of the highest-costing rent districts of Singapore and Hong Kong is an option.
Regulations are here to stay, how investment banks handle them will differentiate which banks remain here to stay as well.
Beat Monnerat is Accenture's senior managing director of financial services for Asia-Pacific.
For more on Accenture’s outlook for 2015 click here.
