Investment banks are increasingly operating in a volatile, resource constrained and highly regulated environment. Rigorous focus on strategic and operational priorities provides the key to high performance. Complying with new and impending regulations presents major challenges for investment banks.
To help investment banks plan and execute with success as macro trends reshape the industry, Accenture has developed a list of the top 10 challenges to address in 2012. In this post I will discuss the three challenges investment banks currently face responding to regulations and restrictions by among others (local) governments.
1. Making Decisions in Uncertain Times
Fears in the financial services sector of a drastic increase in regulation – at a national and supra-national level –have been realised. As the financial markets begin to stabilize, governments are now seeking to develop an improved regulatory environment. With so much game-changing oversight being introduced, it is increasingly difficult for investment banks to ensure complete compliance while continuing to make money in an uncertain market. When the dust settles, relationships among banks, exchanges and clearing houses will have been completely redefined. In the meantime, how can organisations prepare?
Global capital markets are experiencing a period of tremendous instability driven by uncertain regulation. Investment banks are struggling to determine how they should respond. In this environment, decisive action is essential. Banks must abandon a “wait-and-see” approach in favour of proactive strategies that draw on market-leading analytical abilities and promote agile decision-making to leapfrog competitors.
Uncertainty need not breed hesitancy but instead should engender a sense of co-ordinated, flexible innovation.
2. Living with the New Trading Environment
If 2011 was about revolution, 2012 is about evolution. As the new regulatory framework continues to evolve and the resulting trading environment begins to take shape, it is clear that the industry landscape is significantly transformed. Therefore leading investment banks are already looking for ways to turn compliance into competitive advantage. What steps can banks take to navigate the uncertainty and seize emerging revenue opportunities?
As investment banks adapt to the new trading environment, they face a number of significant challenges. The changes to the trading environment are multifarious and nuanced. For all derivatives players this means moving fast to understand precise details, and reviewing pricing strategies across asset classes. With different pricing models for their US and European clients, the challenge here is to prioritize and organize responses in a climate where resources and budgets are already severely stretched.
Organisations should focus on being informed and decisive, understanding clients and their priorities, preparing to manage complex operational change, having the right technology in place, and approaching decisions with a global audience in mind. The winners will be those that can interpret regulation consistently, respond globally, and coordinate their legal and compliance teams to guide clients through the complexities. Therefore customer-centric processes and agile technologies will be essential.
3. Operating with a Restricted Balance Sheet
New regulation is raising the cost of doing business and restricting opportunities for growth in the investment banking industry. Increased funding costs, restrictions on leveraging and liquidity requirements are among the key factors driving banks to seek new and profitable sources of revenue.
The pressures on revenue growth and costs driven by this raft of regulation result in a complex set of strategic and operational challenges. Engagement with regulators is essential to ensure emerging initiatives are factored into strategic thinking as early as possible. In the coming months, organisations will be forced to make key strategic decisions regarding the clients they target, the types of products and services they offer, and the geographical markets they serve—and take measures to align their operations accordingly.
In my next post I will discuss the four more challenges Investment Banks face when they are building and maintaining a solid client base—and regaining client trust—which is necessary to drive profitability, gain analytical insights and improve efficiencies.