Change amidst uncertainty:

how banks are adapting

to the emerging regulatory
landscape
Thoughts

Written by the Economist Intelligence Unit

Written by the Economist Intelligence Unit

2
 Change amidst uncertainty: how banks are adapting to the emerging
regulatory landscape
Capco is pleased to present this
report, which explores how capital
markets firms are dealing with
the dramatic changes that are
underway in the financial services
industry. Based on research
conducted by the Economist
Intelligence Unit in March 2011,
the report provides insight into seven critical questions
regarding banks’ readiness for regulatory reform, which
were the subject of a recent Capco white paper.*
Among the many insights the survey provides, two are
especially noteworthy, and potentially reasons for caution.
First, it is clear that the traders are driving change.
Trading operations are taking the lead in implementing
business models and processes to operate in the newly
regulated environment. In some cases, they are quickly
executing on geographic strategies, in jurisdictions
where regulations may be more favorable. In doing so,
trading operations appear to be outpacing their back-
office and compliance functions by a wide margin. In
fact, more than half of the trading operations surveyed
could be conducting business in an environment
without the necessary obligations support – capabilities
that simply may not exist in the local back office yet, or
that regulators may not have even fully defined.
*For further discussion of these questions please see the Capco
Thoughts white paper, Regulatory Reform: 7 Critical Questions for
Financial Services Firms, available on capco.com.
3
The second, related observation is that some bank
leaders may not fully understand the exposure created by
inadequate governance of trading operations within the
new environment. Laws in the United States and the UK
now impose stronger fiduciary and oversight requirements
on a firm’s board members and executives, requirements
that extend to maintaining robust compliance around all
trading operations and banking.
Whether or not their front-office moves are part of
broader corporate strategy, firms can become exposed
to significant fiduciary and reputation risks by executing
new business strategies without adequate controls,
communications strategies and change management
in place. On the up-side, reorganizing quickly and
purposefully, and creating compliance programs that
meet the test of global regulators, can position banks
to increase market share and margin, both in existing
and emerging markets.
We hope the findings of this report help you chart a
course to new opportunities, leveraging solid governance.
Please let me know if you would like to discuss the
results or have any questions.
Sean Culbert
Partner and Co-lead of Finance, Risk and Compliance
sean.culbert@capco.com
 About this report
Change amidst uncertainty: how banks are adapting
to the emerging regulatory landscape is a Capco
report, written by the Economist Intelligence Unit.
It examines how, in light of continuing regulatory
uncertainty, financial institutions are reshaping their
capital markets businesses to operate effectively in the
new environment, and focuses particularly on the likely
effect of regulation on overall structure as well as front,
middle and back office operations.

The research is based on three components:

• A survey of 60 senior executives at financial

institutions, half operating in the UK and half in
the US. All firms had annual global revenues of
more than US$5bn and all respondents work in
operations, risk, trading or regulation.

• Interviews with a range of industry participants and

experts, as well as a follow-up qualitative questioning
of survey respondents. Because of the sensitivity of
the topic, interviewees spoke off-the-record.

• Desk research, including a review of financial

institutions’ regulatory filings.

The author of the report is Geraldine Lambe and the

editor is Monica Woodley.

4
Executive summary
As the scale and intensity of the financial crisis became
clear, industry participants knew that a tough regulatory
response would follow. Those expectations have now
been met. While the final rules remain uncertain in many
areas, a raft of regulatory change is in process.
The regulations create new capital requirements, address
liquidity and counterparty risk, and push trading of more
products onto exchange and into central clearing. They
put in place new consumer protections and seek to
reduce systemic risk in order to avoid the need for future
government intervention. The cumulative effect is forcing
the financial industry to fundamentally reassess business
models and operating practices.
This assessment is driving significant change in financial
institutions. Banks are already exiting some businesses
and are likely to shrink or exit others as new capital
rules make them less profitable. The location of new or
expanding businesses will be rethought as firms assess
the relative impact of each jurisdiction’s regulatory
constraints. New systems and processes are being put in
place to meet demanding data capture, data management
and stress testing requirements. Communications with
clients and counterparties are being revamped, and new
reporting lines put in place. Connectivity will have to be
developed and new processes established to connect to
a swathe of new entities that will spring up in the clearing
and settlement space.
In this changing environment, the Economist Intelligence
Unit conducted research, on behalf of Capco, to find
out where banks are in terms of preparation for new
regulations and what impact these are having on
operations. This research is based on a survey of senior
executives at 60 banks, half based in the US and half in
the UK, working in operations, risk, trading or regulation.
The survey results have been supplemented with in-
depth interviews with industry participants and experts.
Because of the sensitivity around this topic, interviewees
preferred to speak off-the-record.
5
Key findings from the research include:
Banks see more opportunities than threats in
the new regulatory environment. Almost a third of
respondents believe that new regulations will provide
opportunities to take market share as other banks
retrench or rethink their business models. Almost
two-thirds see regulatory change as an opportunity
to transform their business at a systems and process
level. Some see this as a way to gain competitive
edge. However, they are unsure whether the greater
transparency required by regulation will have a
positive or negative impact on competitiveness.
While preparations are well underway, the impact
of regulations on bank structures is unclear.
More than half of respondents say they are at
implementation stage. The US is further behind than
the UK, however, as the industry waits for many
elements of the Dodd-Frank Act to be translated into
regulations. Almost three-quarters have identified
where changes to systems need to be made in order
to handle the new, higher levels of data required. A
similar number say they have a strategy in place to
communicate the impact of regulatory changes to
clients and counterparties.
However, the industry remains uncertain about
how to adapt business entities and operations to
new regulations. More than half of respondents are
keen to retain existing organizational structures and
operating models. However, in 13 out of the 17 areas
of operation covered by the survey, the majority of
respondents do not know if their firms will relocate or
outsource business functions, or create a shared utility.
Boards and senior management believe they have
a good understanding of regulatory impact. The
crisis has been a wake-up call for board members
and senior management. With regulators and policy-
makers taking an increasingly tough line, boards and
executive management will be more accountable
for a firm’s decisions. According to the majority of
respondents, they have risen to this challenge and have
a good understanding of the implications increased
data transparency will have at their own businesses
as well as across the industry. Once changes to data
infrastructure are adopted, respondents are confident
that management will be able to prove they have better
control over information, as required by regulators.
 Introduction
In its 10-K regulatory filing to the Securities and
Exchange Commission (SEC) for the fiscal year ending
in March 2011, Goldman Sachs revealed the impact
that US regulations have already had on the bank’s
operations. “In light of the Dodd-Frank Act, during
2010, we liquidated substantially all of the positions that
had been held within Principal Strategies in our former
Equities operating segment, as this was a proprietary
trading business. In addition, during the first quarter of
2011, we commenced the liquidation of the positions
that had been held by the global macro proprietary
trading desk in our former Fixed Income, Currency and
Commodities operating segment.”

US regulations are shaping European institutions’

strategy too. Deutsche Bank announced in March that
it would deregister its US subsidiary so that it would no
longer be a bank holding company. Deutsche hopes
that by changing the status of Taunus Corp – a part of
which is highly leveraged and under new rules would
need recapitalizing – it will take Taunus out of the scope
of the Dodd-Frank Act and avoid having to raise billions
of dollars in new capital.

Compliance is diverting management, IT and legal

resources from day-to-day operations as IT races to
keep pace with front office transformations. Some firms
have recruited additional expertise in specific areas.
The impact assessment itself is a major task. The
Dodd-Frank Act, for example, is long and complex at
2,307 pages, 16 titles and 540 sections. It is expected
that regulators will create 243 new rules, conduct 67
studies and issue 22 periodic reports. Hundreds of new
rules will require consultation with the industry before
they can be implemented. One bank’s response to
the Markets in Financial Instruments Directive (MiFID)
consultation alone takes up 66 pages. The bank says its
legal and compliance department has doubled in size in
the last two years.

So, while much of Dodd-Frank, the Financial Services

Act 2010 and other regulations still need to be
defined, it is clear that banks’ strategy and front
office operations are already moving forward, while
governance and compliance are lagging.

6
Assessment, understanding and
implementation
The sales and trading functions of financial services Figure 1. At what stage is your company in preparing
firms seem to have moved quickly to determine which for changes required by regulatory reform?

regulations are relevant to their businesses, consider

100% U.S.
what the regulatory impact will be and even to move
U.K.
forward with implementing changes based on their 90%

impact assessments. More than half of respondents to 80%

the survey say they are at the implementation stage.
70%
Looking at responses by geography, the UK is slightly
58%
ahead of the US, with 58% compared with 53%, 60%
53%
respectively, already implementing changes. Industry 50%
participants say that this is explained by the fact that
40%
there is more still to be defined in US regulation than 32%
30%
there is in Europe, meaning that firms in Europe have 30%
a head start. UK firms are also more likely than those 17%
20%
in the US to align the implementation of their country’s 10%
main regulatory reforms with those of Basel III and 10%

IFRS. (See Figures 1 and 2.) 0%

We have identified We have assessed We have begun
the regulatory how regulatory implementing
The UK operations of a European bank are already changes relevant changes will impact changes to our
to our business our business business based
advanced in several areas, including those surrounding on our impact
assessments
internal transfer pricing models. These are central to
complying with the UK’s liquidity buffers, which were Figure 1. Q1, geographic split. At what stage is your company
implemented in June 2010, as well as Basel III’s liquidity in preparing for changes required by regulatory reform?
coverage ratios. The bank’s CEO says the bank’s Figure 2. Have you or do you plan to align the
decentralized business model has given it a head start implementation of your country’s main regulatory
reform with that of any of the following regulations?
in such areas. Select all that apply.

97%
“We introduced transfer pricing for liquidity risk to all 100% U.S.
U.K.
our branches in June 2009,” he says. “Each branch 90%
has to match-fund itself. The reason we have been able 80%
80%
to move so quickly is because we operate a devolved
68%
model, where each branch is responsible for setting 70%

the appropriate prices for its own market. For this kind 60%
of decentralized pricing model to work, it’s critical for 50%
50%
branches to be charged the correct internal cost for
liquidity, so we already had the processes in place to 40%
enable us to implement this regulation.” 27%
30%
23%
20%

10%

0%
IFRS Basel III FACTA

Figure 2. Q2, geographic split. Have you or do you plan to align

the implementation of your country’s main regulatory reform with that
of any of the following regulations? Select all that apply.

7
 Trading is running out in front

According to the survey, by function, trading is way

out in front in terms of preparation, with almost
three-quarters (73%) saying they are already at
implementation stage. Interestingly, the regulatory
function, which may be expected to be most advanced,
is the least prepared. Only 20% say they are at
implementation, although a significant 60% have
completed the impact assessment. (See Figure 3.)

Figure 3. At what stage is your company in preparing On reflection, it is unsurprising that the trading space
for changes required by regulatory reform? is the most advanced in terms of preparation; they
are already positioning for the higher capital charges
100% Operations for various products contained in Basel III and for the
Risk
90%
Trading
proprietary trading ban in the Volker Rule.
Regulation
80%
73% “If you look at the changes to the trading book
70% 67%
treatments, they are so substantial that people have
60%
60% had to think through urgently what is the shape of the
business going forward, because the current business
50% 46% 46%
won’t be profitable,” says the head of prudential
40% advisory at a consulting firm. “And those trading
30% 27% book requirements hit much earlier [than some other
19% 20% 20% changes], so in the trading area it has become critical
20% 14% to move quickly. The treatment of counterparty risks
8% in trading books and of bank-to-bank exposures has
10%
0% gone up three to four times in total, and the treatment
0%
We have identified We have assessed We have begun of securitization books has gone up enormously, so
the regulatory how regulatory implementing
changes relevant changes will impact changes to our
people have already taken action, moving things out of
to our business our business business based trading books and into banking books.”
on our impact
assessments

There are concerns, however, that implementation may

Figure 3. Q1, job function split
At what stage is your company in preparing for
changes required by regulatory reform?
be piecemeal. While many firms have created working
groups or task forces, these are typically organized at
a national level, and therefore do not address change
at a global, enterprise-wide level. In addition, some
have suggested that the amount of new regulations
flooding into the market may lead banks to focus on
the trees but lose sight of the forest – a criticism which
has been leveled at banks, regulators, ratings agencies
and politicians, and held at least partly to blame for the
financial crisis. If regulators are aware of this danger, the
feeling that the sense of urgency for change is already
dissipating means that they want to press on while
there is still a chance of getting new regulations passed.

8
A financial services partner at a consulting firm agrees
that the amount of new regulation is clearly an issue. “The
message from our research is that the sheer volume of
change is proving very challenging for firms. And it gets
more difficult as you move down from global statements Figure 4. Do you agree or disagree with the
following statements? We are looking at the new
of principal into regional rule-making, and then further regulatory environment as an opportunity to gain
down into national interpretation. We don’t see many market share.
institutions that have an overarching view of the impact
100%
on their firm. They may well be doing things on a local U.S.
U.K.
or regional level – but they do not have a consolidated 90%

view of the overarching impact.” Given the new uniform 80%

fiduciary standard obligations for advisers and broker
70%
dealers, that could prove problematic for US executives.
60%

50%

40% 36%
32%
30%
30% 26%
Threat or opportunity? 20%
23%
20% 17%
If banks see the challenges posed by regulation, they 10%
10% 7%
also see the opportunity. This is particularly true in
0%
the UK, where almost a third (32%) of respondents 0%
1 2 3 4 5
strongly agree that the new regulatory environment is Strongly agree Strongly disagree
an opportunity to gain market share. Bankers in the
US, however, are less optimistic, with only 20% clearly
positive about the potential for opportunity. (See Figure 4.)
Figure 5. Do you agree or disagree with the
Figure 4. Q3a, Do you agree or disagree with the
following statements? We are looking at the new
following statements? We are looking at the new regulatory
At first sight, this looks to be accounted for by the regulatory environment as an opportunity to gain
environment as an opportunity to gain market share
market share.
banning of proprietary trading and constraints on
principal investment – two of the most profitable areas
100% Operations
of investment banking in recent years – that have been Risk
90%
imposed on US banks by way of the Volker rule. But Trading
Regulation
looking into the survey results by function reveals that 80%
82% of traders agreed with the potential to gain market
70%
share, and none of them disagreed. It is the operations 64%

and risk functions which see more danger than promise 60%

in the new regulatory environment. (See Figure 5.) 50%

42%
40% 40%
40%
However, it will not be easy for banks to pick a winning 33% 33%
model – or to make it successful in a crowded market. 30%
24%
21% 20%
“The question is, what is the shape of the business 18% 17% 18%
20%
that will be profitable? And I think the answer to that 13%
10%
10% 8%
is unknown,” says the head of prudential advisory at
0%
0%0% 0% 0%
a consulting firm. “Moreover, if multiple banks change 0%
their business in the same way, how many banks can 1 2 3 4 5
Strongly agree Strongly disagree
be profitable with the same type of business? How
many banks can be major flow players, for example?”

Figure 5. Q3a, functional split

Do you agree or disagree with the following statements?
We are looking at the new regulatory environment
as an opportunity to gain market share

9
 There is also a worry that the changes in Basel III are
so big, if any provision unwittingly creates an unlevel
playing field it could proffer huge advantages to certain
players. Unequal treatment in just a single area of Basel
III could have far-reaching effects.

“For example, there has been a worry that the treatment

of deferred tax assets (DTAs) might be more beneficial
for US banks than for European banks and, depending
on how it’s implemented, that would have a number of
consequences. Firstly, it would immediately make their
Figure 6. Do you agree or disagree with the capital levels higher and their costs lower. Secondly,
following statements? Scale of 1 to 5. it would make it easier for an American bank to buy a
We are looking at the new regulatory environment as an bank in difficulty than for a European bank; banks in
opportunity to transform our business model/structure.
difficulty have hitherto been bought on the basis of the
100%
benefits of the DTAs, because some of that tax can be
U.S.
U.K. clawed back. Seemingly small inequalities could have
90%
large ripple effects.”
80%

70%

60% New regulations as an opportunity for

transformation
50%

40%
39% Part of the optimism surrounding the chance to
29%
win market share or gain some form of competitive
30% 26% 27%
23% advantage is tied to the potential of new regulations to
20%
20% 17% have a transformative effect on the business. This has
13%
clearly been picked up by survey respondents, with
10% 7%
0%
more than half (57%) agreeing with this proposal and
0%
the UK, again, markedly more optimistic than the US.
1 2 3 4 5
Strongly agree Strongly disagree (See Figure 6.)

However, more than half (54%) of respondents were

Figure 6. Q3b, geographic split
Do you agree or disagree with the following statements?
Scale of 1 to 5. We are looking at the new regulatory environment
as an opportunity to transform our business model/structure
keen to maintain their current operation models and
structures. But this is not as counterintuitive as it may
seem, as it relates to where bankers see the greatest
opportunity for transformation – and this is in systems
and processes rather than at the organizational level.

“Banks have grown as groups of discrete business

silos, with each silo capturing data, interrogating data
and leveraging that data,” says the head of IT at a large
European bank operating in London. “The industry
may have gone a long way towards achieving overall
efficiency, but we have never achieved information
efficiency. New regulations – while onerous and costly
– offer us an opportunity to take a fresh look at how
we manage these and other processes, and to retool

10
operations in a way that benefits the group, rather than
how it suits the individual business. If we can break
down silos, there are clearly opportunities to generate
competitive advantage from that.

“There is an element of ‘pre-crisis’, and ‘post-crisis’

thinking here, with new regulations as the catalyst for
change,” he adds. “Historically, the cost-benefit of
streamlining systems and processes relative to the cost
of doing nothing meant it was not worth the hassle
or the tax cost. Going forward, that cost-benefit may
change. Living Wills or other resolution mechanisms,
for example, will force banks to think through a more
streamlined structure, and this is helpful in the new
Basel III world.”

Will transparency help or hurt bank

competitiveness?

A common motif of the emerging regulatory

environment is the aim of shedding new light on every
area of banks and financial markets. For example,
Dodd-Frank aims for greater transparency into risk
exposure across the financial system, and several
key components of the law require financial services
institutions to collect and report on risk exposure in
their business. The Financial Stability Oversight Council,
in its role as systemic risk monitor, will collect risk
data from various sources including federal and state
financial regulatory agencies and the newly created
Office of Financial Research (OFR); among other things,
the OFR will be responsible for collecting data from
financial services companies.

Similarly, the UK’s Financial Services Act and Basel

III both impose a high degree of transparency on key
metrics, including bank capital, liquidity, collateral and
counterparty risk, requiring such data to be reported
to bank boards and regulators. The European Market
Infrastructure Regulation, meanwhile, will try to bring
transparency to the over-the-counter markets and
impose data reporting requirements for transactions
to new trade repositories. A central plank of the review
into the Markets in Financial Instruments Directive,
currently underway, is to increase transparency in post-
trade reporting.

11
 Banks are uncertain about the effect of these
transparency requirements on their competitiveness,
although some have expressed concern that sensitive
data about capital, liquidity and exposures could easily
leak out into the marketplace. Although some of the
regulations specifically aim to increase transparency
in the trading arena, the trading function is the least
concerned about the impact. (See Figure 7.)

From data deficit to information

advantage?
Figure 7. Do you agree or disagree with the
following statements? Rate 1 to 5. All new regulations mandate significant additional data
We are concerned that the increased transparency and reporting requirements. These present collection,
required by new regulations will be a threat to our
competitiveness. integration and management challenges for banks’
information architecture.
100% Operations
Risk Basel III, for example, aims to eliminate the kind of
90%
Trading
Regulation regulatory arbitrage where a bank moves assets from
80%
the banking book into the trading book in order to get
70% better capital treatment. It therefore requires banks to
consolidate positions from all of their trading desks
60%
and to make their trading book compatible with their
50% 46% banking book. This requires data to be both accurate
40%
40% 38% 38% and clean, and will be a challenge for any US banks
25% 27%
which have not been applying Basel rules up to now.
30% 24% 25%
24%
20% 20% 20%
18%
20% To meet the UK’s liquidity rules, banks will be required
10% 9% to identify, measure, monitor and stress test liquidity
10% 8% 5%
4%
0% 0% risk in a much more detailed way, and to process and
0%
deliver the data to the Financial Services Authority (FSA)
1 2 3 4 5
Strongly agree Strongly disagree on a regular basis.

Basel III also requires a unified view of counterparties

and counterparty credit risk, and the capacity to
Figure 7. Q10d, functional split
measure and process the data. In addition, the move
Do you agree or disagree with the following statements?
Rate 1 to 5. We are concerned that the increased transparency to centralized collateral management, as well as the
required by new regulations will be a threat to our competitiveness introduction of the net stable funding ratio and the

liquidity coverage ratio, will require new data models.

To fulfill many of the requirements, banks need to collect

more detailed information from the trading partners and
their clients. Respondents to the survey highlighted
several areas where they needed additional data from
counterparties, led by collateral and transaction data.
By function, there were some noticeable spikes in data
requirements. (See Figures 8 and 9 on page 13.)

12
For some banks, data projects are about creating
value as well as compliance. “We identified information
architecture as the lynchpin in meeting new regulations
early on, so we are quite a long way down the road in
terms of where we need to be in order to change our Figure 8. In what areas do you need additional or
information systems,” says the head of IT at a large more detailed information from counterparties,
due to recent regulatory reform?
US bank. “Because we also identified that this is an
area where we could create value for the business, we
100%
prioritized this over some other IT projects.”
90%

There is a high cost associated with meeting new 80%

requirements, however. “There is a huge impact on data
70%
systems across multiple product and business lines,” says
the head of compliance at a large European bank operating 60% 54% 53%
in London. “Estimates suggest that it will cost large banks 50% 44% 43%
around $100m each to put the systems and processes in
40%
place to comply with Basel III. We will have to find ways of 33%

calculating the newly introduced net stable funding ratio 30% 26%

and the liquidity coverage ratio, and have the capability to 18%
20%
stress test our calculations and report to our board and to
10%
regulators. Because the Basel Senior Supervisors Group
favors a standardized centralized risk data set – the so- 0%
called single source of truth – on the IT side, this means

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Figure 8. Q5, overall
Figure 9. In what areasyou
In what areas do doneed
youadditional or more detailed
need additional or
moreinformation
detailedfrom counterparties,
information fromdue to recent regulatory reform?
counterparties,
due to recent regulatory reform?

100%
100% Operations
Risk
90% Trading
Regulation
80%

70% 64%
62% 62%
60% 60%
60% 54% 55%
48%
46%
50% 43% 42% 42% 42%
40%
36% 36%
40% 33% 33% 33%

30%
20% 21% 20%
17% 18%
20%
10%
9%
10%
0%
0%
tio t
iss ion
ral

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Figure 16. Q6, “don’t know list”

13
Due to regulatory change, which business functions do you anticipate
having to relocate or outsource, partly or completely?
 Figure 10. Do you agree or disagree with the
following statements? Scale 1-5.
We have a company-wide strategy for identifying the
systems that will require modification/upgrade to handle
the new, higher levels required by new regulation.
Figure 11. Do you agree or disagree with the following
statements? Scale 1-5.
We have a company-wide strategy for identifying the
systems that will require modification/upgrade to handle
the new, higher levels required by new regulation.

100% 100% Operations

Risk
90% 90%
Trading
Regulation
80% 80%

70% 70%
60%
60% 60%
52%
50% 50% 46% 46%
38% 38%
40% 36% 40%
33%
30% 30% 25% 25%
20% 20%
20% 16% 20%
10%
8% 8% 9%
10% 10% 5%
2% 4%
0% 0%
0% 0% 0%
0% 0%
1 2 3 4 5 1 2 3 4 5
Strongly agree Strongly disagree Strongly agree Strongly disagree

Figure 10. Q10a, overall

Figure 12. Do agree
Do you you agree or disagree
or disagree with the
with the following statements? Figure 13. Do youFigure
agree7. or disagree
Q10d, functionalwith
splitthe
following statements? Scale
Scale 1-5. We have 1-5.
a company-wide strategy for following statements? Scale 1 to 5.
Do you agree or disagree with the following statements?
We have the
identifying already identified
systems the systems
that will require that will require
modification/upgrade We have
to handle the Ratealready
1 to 5. Weidentified the that
are concerned systems that will
the increased require
transparency
modification/upgrade
new, higherto handle
levels theby
required new,
newhigher levels of
regulation. modification/upgrade to handle
required by new regulations will bethe new,tohigher
a threat levels of
our competitiveness
data required by new regulation. data required by new regulation.

100% 100% Operations

Risk
90% 90%
Trading
Regulation
80% 80%

70% 70%
60%
60% 60%
54%
50% 50%
44%
38% 40%
40% 40% 36% 36%
33%
28%
30% 30% 25%
19%
20% 16% 20% 18%
10% 13% 10%
10% 9%
10%
2% 4% 4%
0%
0% 0% 0% 0%
0% 0%
1 2 3 4 5 1 2 3 4 5
Strongly agree Strongly disagree Strongly agree Strongly disagree

Figure 12. Q10b, overall

Do you agree or disagree with the following statements? Scale 1-5. Figure 13. Q10b, functional
We have a company-wide strategy for identifying the systems that will require Do you agree or disagree with the following statements?
modification/upgrade to handle the new, higher levels required by new regulation Scale 1 to 5. We have already identified the systems
that will require modification/upgrade to handle the new,
14 higher levels of data required by new regulation
Banks are acutely aware of new data
requirements
Figure 14. Do you agree or disagree with the following
The survey revealed that almost three-quarters of
statements? Please rate on a scale of 1 to 5.
banks have a strategy in place in order to identify where
Once we have adopted changes to our data
changes to systems need to be made, or have already infrastructure, management will be able to prove they
identified the systems which will need modification. have better control of information, as required by
regulators.
Three of the four business functions surveyed are well
advanced in terms of preparation, led by operations, with 100%
only the regulatory function lagging. (See Figures 10 through
90%
13 on page 14.)
80%

Banks have a strategy for communicating the impact of 70%

regulatory changes to clients and counterparties. About
60%
three-quarters (74%) agree or strongly agree that they
have a strategy to communicate changes to clients and 50%
counterparties.
40% 36%
30%
Most banks are confident that once they have adopted 30%
20%
planned changes to their data infrastructure, their 20%
management will be able to prove they have better 8%
10% 7%
control of information, as required by regulators.
However, UK banks are much more confident than their 0%
1 2 3 4 5
US counterparts. (See Figure 14 and 15.)
Strongly agree Strongly disagree

Figure 14.Q3d, overall

Figure
Do you 15.
agree or Do you
disagree agree
with or disagree
the following with Please
statements? the following
rate on a scale of 1 to 5.
Oncestatements?
we have adopted Please
changesrate ondata
to our a scale of 1 to 5.
infrastructure, management will be able to
Once
provewe have
haveadopted changes to our data
The shape of things to come they better control of information, as required by regulators
infrastructure, management will be able to prove they
have better control of information, as required by
Some banks have already taken steps to refine the regulators.
shape of their organizations to minimize the impact of
regulations. In February, for example, the UK’s Barclays 100% U.S.
U.K.
disclosed that in November 2010 it had deregistered 90%
its US bank-holding company. The bank said this was
80%
to better align the business with the appropriate capital
regimes; in doing so, the bank avoided having to inject as 70%

much as $12bn to make up a capital shortfall in the US. 60%

50% 45%
As a result of the change, Barclays folded a credit-card
39%
operation into a new US entity that is a direct subsidiary 40%
of the British parent company. The credit-card bank is 27%
30%
30%
regulated by the Federal Deposit Insurance Corporation 20%
and needs no additional injection of capital. Before the 20%
13%
10% 10%
move, Barclays Capital, the group’s investment bank, 10%
3% 3%
was held within Barclays Group US Inc., which was
0%
subject to federal capital requirements. It will now be 1 2 3 4 5
subject to SEC regulation instead. Strongly agree Strongly disagree

Figure 15. Q3d, geographic

Do you agree or disagree with the following statements?
15 Please rate on a scale of 1 to 5. Once we have adopted changes to our
data infrastructure, management will be able to prove they have better
control of information, as required by regulators
 While the restructuring of Barclays and other banks
suggest that senior management is swiftly taking steps
to reshape business entities, survey respondents across
most areas of business were undecided about whether
new regulations would lead firms to relocate or outsource
any business functions, or create a shared utility. In 13
of the 17 areas of operation, the majority of respondents
said they did not know what the impact of regulation
would be on organizational structure. (See Figure 16.)

However, over a third (36%) of UK and almost half

(47%) of US respondents agreed or strongly agreed
that they anticipate working with new back office
providers due to regulatory change, compared to about
a quarter of UK and over a third of US respondents who
anticipate working with a new middle office provider.

There are four areas (operations, risk management,

financial control and IT) where new strategies are clearly
being contemplated. In operations, more than a quarter
(26%) of US respondents and a third of UK respondents
said they anticipated the creation of shared utilities.
Operations professionals were even more enthusiastic,
with almost 48% suggesting this was a possible route.
Similarly, the creation of a shared utility was seen as a likely
choice for risk management, with a third of all respondents
and 43% of risk professionals suggesting this option.

Figure 16. Due to regulatory change, which business

functions do you anticipate having to relocate or
outsource, partly or completely?

100%

90%

80%
68% 66%
70% 66% 65%
63%
61% 61% 60% 58% 58%
60% 53%
50% 50% 48% 47%
50% 43%
39%
40%

30%

20%

10%

0%
g

t
les

ce
tio /

rch

s
en
ry

IT
S

ing
ing

g
kin

tro
ica ng

fina ate
ge nt

n
ns

e
nt
GT

din

ari
su

lian

tio
Sa

em
na me

nc

sea
un keti

n
ak

an
me

Cle
rea

co
Tra

era
rpo

tra

mp

ag
t-m

eb
t

Re
ma es

mm ar
et

Op
ry
Co

an
cia
co /m

Co
v

vat
rke

eta
rat
t in

km
an
R
Pri
Ma

rpo

pri
en

Fin

Ris
Pro
Cli

Co

Figure 16. Q6, “don’t know list”

Due to regulatory change, which business functions do you anticipate
having to relocate or outsource, partly or completely?
16
By function, traders see the greatest potential for
regulations to shape operations strategy: 40% of traders
thought new regulations would lead to trading operations
being relocated; 30% thought that market-making and
prop trading will be relocated; 40% thought that a shared
utility may be created for client investment management;
and a third thought that IT may be outsourced.
Shared services such as regional data centers are already
common practice at many global financial institutions,
particularly at retail banks, which rely heavily on gathering,
processing and analyzing customer information in order
to tailor services. The CEO of the EMEA consumer
division of a major US bank says shared services offer
big advantages for bank and customer. But he notes that
there are already forces in play which may put pressure on
this business model.
“Customers execute business with us through
applications hosted in our data centers. One example is
the fraud analysis we do on credit cards. Another is the
risk analysis we perform under the new requirements of
various jurisdictions. Using regional data centers is an
advantage for several reasons. The facilities are state of
the art, present a closed circuit and have no major single
points of failure within the core infrastructure. Our data
centers enhance the bank’s risk management, allowing
us to mitigate or accept risks based on a composite
impact analysis rather than through isolated and market-
specific analyses. Such centers allow us to maintain
consistent processes across regions. We have an ‘end-
to-end’ view of the data, which improves the quality
and timeliness of services provided. It also allows us to
better comply with legal/regulatory requirements. Several
jurisdictions are looking to require local data processing,
however. The intentions are understandable, but as
outlined above, would undermine several of the same
public policy goals.”
The impact of resolution regimes on
structures
The push towards bank resolution regimes, or Living
Wills, will also have a material impact on strategies
in this area because the patchwork nature of many
banking groups do not lend themselves to drawing
clean lines between businesses.
17
Global banks are complex entities that have typically
evolved to satisfy a variety of drivers from growth, to
cost cutting, to tax benefits. Often, they do not develop
as standalone entities but share functions with other
parts of the group. Business done in one country
may be transferred somewhere else for management.
Likewise, income generated in one location may be
paid away somewhere else. The result is sprawling
global institutions, often comprising hundreds of
different entities, vehicles and participations, which
have been made more efficient through the use of
cross-agreements for the provision of services, people
and funding.
Up to now, banks have been indifferent to how these
structures looked. But in the world of Living Wills and
resolution regimes, if a crisis means a bank must ring-
fence a particular business, write it down or sell it, the
parent needs to know exactly how it interrelates with
all the other parts of the jigsaw. Regulators will want
reassurance that, if firms have transferred positions
from one jurisdiction to another, there is enough capital
and risk management capacity to contain the risks in
the transferred positions. If the business has paid away
income, regulators will ask how that affects profitability
and risk management of the entity that is paying away.
Untangling this spaghetti to create an enterprise map will
prove extremely difficult for some. And the existence of
shared services may make it more difficult.
“The detail is challenging,” says the head of prudential
advisory at a consulting firm. “Banks have to ask
themselves if a business could be broken up and sold
off, and what they would do about critical elements
that they would have to pass on to someone else?
Is it standalone or is it dependent on other parts of
the organization? If it’s not standalone, what needs
to be done to make it saleable as a standalone
operation? Could they provide the right information
to the authorities so that they can maintain critical
functions such as current accounts? All of this is
actually extremely difficult to achieve. In that sense,
shared services could become an obstacle to a viable
resolution plan. If you wanted to sell a business that is
dependent on a shared service, how standalone is it?
Can someone else buy it, or does the shared service
affect the viability of the business?”
Conclusion
As financial institutions operating in the US and UK
continue to ask themselves questions such as these,
attempting to determine how best to reshape their
businesses in light of new regulatory requirements, they
also await clarification from regulators on both sides of
the pond. The interim report of the Independent Banking
Commission in the UK was released mid-April, but the
final report is not out until September. However, the
recommendations of the Commission, such as ring-
fencing retail operations and improving capital buffers,
are just that – recommendations, which must be accepted
by the government and implemented before banks have
absolute clarity on the detail of new regulation. In the
US, the SEC and other regulators are working towards
a July deadline for implementation of Dodd-Frank but
already there is talk of a delay of up to 18 months for
some parts of the Act. These delays may give gives
banks more opportunity to work with regulators to find
solutions that make the financial system safer while
maintaining competitiveness – or they may just drag out
the uncertainty.

18
Appendix

Figure 1. At what stage is your company in preparing for changes required by regulatory reform?

We have identified the regulatory

changes relevant to our business 31%

We have assessed how regulatory

changes will impact our business 13%

We have begun implementing

changes to our business based 56%
on our impact assessments

0% 20% 40% 60% 80% 100%

Figure 2. Figure
Have A-1.
youAt
orwhat stageplan
do you is your
tocompany in implementation
align the preparing for changes
of required by regulatory
your country’s main reform?
regulatory
reform with that of any of the following regulations? Select all that apply.

Basel III 89%

IFRS 59%

FACTA 25%

0% 20% 40% 60% 80% 100%

Figure Q2. Have you or do you plan to align the implementation of your country’s main regulatory reform
19
with that of any of the following regulations? Select all that apply
 Figure 3. Do you agree or disagree with the following statements?
Please rate on a scale of 1 to 5 where 1 is strongly agree and 5 is strongly disagree.

1 2 3 4 5
Strongly agree Strongly disagree

We are looking at the new

regulatoryenvironment
as an opportunity 26% 25% 33% 11% 5%
to gain market share

We are looking at the new

regulatory environment as an
25% 33% 23% 13% 7%
opportunity to transform
our business model/structure

We aim to maintain our current

operational model/structure as much
as possible, only making changes 11% 43% 18% 23% 5%
where explicitly required by new regulation

Once we have adopted changes to our

data infrastructure, management will be
able to prove they have better control 30% 36% 20% 8% 7%
of information, as required by regulators

We have a strategy for communicating

the impact of regulatory changes to 31% 43% 15% 7% 5%
our clients and counterparties

0% 20% 40% 60% 80% 100%

Figure Q3. Do you agree or disagree with the following statements? Please rate on a scale of 1 to 5
where 1 is strongly agree and 5 is strongly disagree.

*Figures do not add to 100% due to rounding.

Figures do not add to 100% due to rounding.

20
Figure 4. In what areas do you need additional or more detailed information from
clients, due to recent regulatory reform? Select all that apply.

Risk tolerance 80%

Areas willing to invest in/ 39%

areas to avoid

Willingness to lend securities 38%

Demographic information 23%

Household/individual 23%
balance sheet

0% 20% 40% 60% 80% 100%

Figure Q4. In what areas do you need additional or more detailed information from clients, due to
recent regulatory reform? Select all that apply.

21
Figure 5. In what areas do you need additional or more detailed information from
counterparties, due to recent regulatory reform? Select all that apply.

Transactional data 54%

Collateral 53%

Corporate structure 44%

Capital allocation 43%

Client communications 33%

Licensing 26%

Competition issues 18%

0% 20% 40% 60% 80% 100%

Figure Q5. In what areas do you need additional or more detailed information from clients, due to
recent regulatory reform? Select all that apply.
22
Figure 6. Due to regulatory change, which business functions do you anticipate
having to relocate or outsource, partly or completely? Select all that apply.

Relocate Outsource Create shared utility Don’t know

Operations 16% 16% 30% 39%

Trading 19% 5% 19% 58%

Market-making 12% 5% 17% 66%

Proprietary trading 17% 9% 17% 58%

Sales 12% 5% 18% 65%

Client investment management 5% 7% 22% 66%

Clearing 10% 21% 19% 50%

GTS 12% 5% 14% 68%

Private banking 12% 7% 18% 63%

Corporate finance 9% 11% 21% 60%

Risk management 11% 9% 33% 47%

Compliance 10% 10% 26% 53%

Financial control 12% 7% 31% 50%

Corporate treasury 14% 2% 23% 61%

IT 12% 28% 17% 43%

IR/marketing/communications 2% 16% 21% 61%

Research 9% 21% 22% 48%

0% 20% 40% 60% 80% 100%

Figures do not add to 100% due to rounding.

Figure Q6. Due to regulatory change, which business functions do you anticipate having to relocate or outsource,
partly or completely? Select all that apply.

*Figures do not add to 100% due to rounding. 23

Figure 7. What impact will relocation and/or outsourcing decisions have on
attracting and retaining talent? Select all that apply.

The ability to hire qualified

staff is a top criterion when
34%
selecting where to relocate
specific business funtions

We are confident that our

outsourcing arrangements 33%
will help us retain staff

We are concerned that

we are likely to lose staff 33%
due to outsourcing

We are concerned that we will

have difficulty hiring qualified 33%
staff in the areas we are
considering for relocation

We are concerned that

we are likely to lose staff 31%
due to relocation

We have a retention strategy

to lock in key staff when 25%
outsourcing, relocating or
creating a shared utility

We are confident that

our relocation arrangements 18%
will help us retain staff

0% 20% 40% 60% 80% 100%

Figure Q7. What impact will relocation and/or outsourcing decisions have on attracting and
retaining talent? Select all that apply.
24
 Figure 8. Do you agree or disagree with the following statements?
Please rate on a scale of 1 to 5 where 1 is strongly agree and 5 is strongly disagree.

1 2 3 4 5
Strongly agree Strongly disagree

Moving utilities to other providers

will save us money in the long run 8% 30% 44% 12% 7%

Our plans to outsource certain

business functions will create
5% 33% 36% 18% 8%
significant complications for
our liquidation plan

We anticipate working with

new middle office providers 8% 23% 41% 20% 8%
due to regulatory change

We anticipate working with

new back office providers 12% 30% 36% 18% 5%
due to regulatory change

The way in which we will have to

transform our legal and financial
structure in order to comply with global 8% 16% 51% 16% 8%
liquidation requirements will have a
significant negative effect on revenues

0% 20% 40% 60% 80% 100%

Figure Q8. Do you agree or disagree with the following statements? Please rate on a scale of 1 to 5
where 1 is strongly agree and 5 is strongly disagree.

Figures do not add to 100% due to rounding.

25
 Figure 9. Do you agree or disagree with the following statements?
Please rate on a scale of 1 to 5 where 1 is strongly agree and 5 is strongly disagree.

1 2 3 4 5
Strongly agree Strongly disagree

We have a company-wide strategy for

identifying the systems that will require
modification/upgrade to handle the new, higher 36% 38% 16% 8% 2%
levels of data required by new regulation

We have already identified the systems

that will require modification/upgrade
28% 44% 16% 10% 2%
to handle the new, higher levels of data
required by new regulation

The board and senior management have a good

understanding of the changes to systems
needed to handle the increased levels of 34% 34% 18% 10% 3%
transparency required by new regulations

We are concerned that the increased

transparency required by new regulations 8% 23% 29% 30% 7%
will be a threat to our competitiveness

The board and senior management have

a good understanding of the implications
increased data transparency will have 20% 43% 30% 5% 5%
across the business

The board and senior management have

a good understanding of the implications
15% 51% 25% 7% 3%
increased data transparency will have
across the industry

0% 20% 40% 60% 80% 100%

Figure Q9. Do you agree or disagree with the following statements? Please rate on a scale of 1 to 5
where 1 is strongly agree and 5 is strongly disagree.

*Figures do not add to 100% due to rounding.

Figures do not add to 100% due to rounding.

26
 About Capco
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