In the wake of the global financial crisis there have been countless discussions in the media and across the industry about how to get the lending market in order again.
As in 2009, the management of liquidity will be a high priority this year. Since last December companies should have been complying with Financial Services Authority regulations concerning their systems and controls. But the regulator says full transition to the new liquidity rules will be phased in over several years.
Lenders must also be prepared for the tougher stress tests and risk analyses that will form part of the FSA’s liquidity rules. By the middle of 2010 the FSA aims to provide individual liquidity guidance to big financial institutions. This process will map out a four-year journey on how they can reach the required levels of liquidity.
This year is likely to be characterised by developments at domestic and international levels, as the FSA works with the Basle Committee on Banking Supervision and the Committee of European Banking Supervisors.
Of course, the burden of regulation will continue to cause debate in the industry. Simon Hills, executive director for prudential capital and risk at the British Bankers’ Association, has already pointed out the risk of “choking off recovery by curtailing banks’ ability to lend”. Of course, most financial institutions are now operating with tighter profit margins than before. This has led many to cut costs and slim down. In fact, the Confederation of British Industry estimates that about 5,000 jobs were lost in the financial sector in Q4 2009.
In 2010, such actions that have an immediate effect on the bottom line will continue to be a priority as the slow recovery begins. But at the moment many banks have still not met the underlying challenge to improve their efficiency and quality control systems.
Research shows that industry expectations are shifting away from cost and towards a focus on enterprise and IT. Productivity gains will come from collaborative and innovative offerings that take advantage of new service-based and social media technologies.
In short, if lenders do not use this period to build scalability into their processes any effect on their bottom line will be short lived.
Lenders that are prepared for the upturn will be best placed to gain competitive advantage and grow.
In the past a lack of transparency, the inability to document risk profiles and low levels of data quality made it impossible for even sound banks to appropriately assess risk.
Of course, the importance of risk management has been highlighted by the consequences of the downturn. Now banks must ensure that any IT investment in risk management is seen as part of an integrated solution to improve their business processes.
Poor data quality presents a challenge to risk managers as it is impossible to build a solid solution on inade- quate processes. Lenders’ processes must be both efficient and high quality.
In line with this, the trend towards more simplicity in banking is likely to gain ground. Some online banks set up around Europe using simple processes have achieved a great deal of success.
This concept also extends to a more simple and transparent banking model, but making this change will involve a shift away from so-called casino banking. This will not be an easy transition as the culture of risk-taking dates back to the deregulation of the 1980s.
In a scenario of what might be called old-fashioned banking banks would base lending on the real economy rather than predictions. Those that encourage a culture of simplicity may be able to improve their efficiency and strengthen their customer relationships.
The collapse of confidence in the lending industry’s risk management tools and techniques has had a serious effect. The lack of confidence in the quality of data in risk evaluation models along with a lack of transparency and the inability to document risk profiles has made it impossible for lenders to obtain funding in the interbank market.
Lack of trust can have a catastrophic impact on an industry so it is crucial to rebuild confidence in the lending sector by demonstrating fundamental change in the risk management system.
Lenders must ensure they have an enterprise-wide view of their operations rather than take the silo approach that contributed to the crisis. This includes applying IT at a business level rather than in isolation.
It’s been a turbulent time for the industry and the bad news is that many of the trends that generated uncertainty are set to continue in 2010.
The regulation of liquidity, banks’ efforts to streamline their operations and preparations for recovery are all topics that will challenge financial institutions. But it’s also important to focus on customers by improving service through greater simplicity and rebuilding trust in the industry’s ability to effectively manage risk.