The financial crisis that began in 2008 with the collapse of Lehman Brothers has led to a fundamental rethink of banking regulation. International bodies, including the G20, have sought to instigate a harmonized international regulatory response, while regional and domestic regulators have also been spurred into action. Around the world, banks will be expected to comply with fundamental reforms, including Basel 3, which are aimed at
enhancing the sector’s ability to deal with financial and economic stress by strengthening capital and liquidity requirements.
Although this wave of regulation will affect all banks, it could potentially have a disproportionate impact on institutions in emerging markets. Because these institutions are at an earlier stage of their development, the cost and complexity of complying with global initiatives, such as Basel 3, is likely to be much higher relative to assets. More mature developed market banks – for which complex compliance requirements and regulatory rules have become the norm – may now find themselves better positioned to build a presence in emerging markets, as the regulatory landscape is being reshaped by rules that are aligned more closely with their modes of banking and they can leverage head office systems to meet local regulatory challenges.
Yet this regulatory threat can also be perceived as an important opportunity for emerging market banks. Many western institutions are now paying the price for reacting to new international and domestic regulatory pressures in the wake of the financial crisis in a piecemeal fashion – on a regulation-by-regulation basis. They are now undergoing forced simplification processes under the guise of “risk transformation projects” in a bid to rationalize the complex, inefficient and costly IT infrastructures that they built up during this period.
Emerging market banks now enjoy a “late mover advantage” from the opportunity to leapfrog those from the mature financial services markets – by leveraging the latest technology solutions and implementing lean and efficient governance, risk and compliance platforms that can be built upon in future. To do this, however, these banks must start the simplification process now, taking advantage of technology, such as in-memory computing, to bypass the need for large data warehousing projects and to avoid complicating their organizational architecture.
In this research report, Chartis seeks to assess how banks in emerging market regions are responding to regulatory pressure, including their current state of preparedness, and their risk management priorities. Our research also highlights where the biggest challenges lie for these banks in implementing the platforms they will need for the future.
In addition to geographical trends, our data also revealed three distinct groupings of emerging banks, spanning across regions. These groups show distinct levels of sophistication in relation to risk management and compliance, in accordance with the banks’ progress towards Basel adoption.
This report examines how banks in emerging markets are addressing an increasingly complex regulatory and compliance environment. It aims to identify key regional differences in how these institutions are managing and mitigating different types of risk, and to reveal where they must focus their efforts in order to draw level with – and even move ahead of – industry leaders in more mature markets. Produced by Chartis, in collaboration with Misys, the report is based on a survey of 110 senior risk managers, predominantly at C-suite level, in banks across Asia Pacific, Latin America, the Middle East and Africa, and non-EU Europe. In addition to the survey, Chartis Research also conducted in-depth interviews with risk and compliance professionals at banks across these regions, as well as leading consulting firms with local knowledge.