Supervision of large, international financial institutions is undergoing a fundamental, global transformation. In the interests of safety and soundness, regulators in major markets are ramping up their engagement.
There is a consensus emerging regarding key features of supervisors' new approach. It will include a broader scope of analysis, greater engagement with management and the board, and in many cases, a willingness to intervene earlier based on judgments.
The supervisors' aim is to develop a more complete picture of financial institutions and their risks. They seek to gain an "insider's insight" via a process of "triangulation," starting at the top with an improved dialogue with the board and management, then moving down to the businesses, risk management, and control functions. Supervisors will be seeking insight into strategy and competitive positioning, business models, risk appetite, and risk management and culture.
This evolving supervisory approach presents challenges. Supervisors will need enough experienced people to interact at senior levels within financial institutions on complex strategic issues. Trust must develop to allow for candid discussion and information sharing. But both supervisors and financial institutions have an interest in getting this right. As one regulator put it: "Don't [we] all have an interest in building strong global financial institutions? We need to work together."
Privacy and data governance: risks and opportunities for leading insurers
Competitive pressures are driving insurers to seek the greatest possible advantage from the large amounts of data at their disposal. At the same time, security and privacy concerns are limiting their ability to do so. Regulation and customer expectations are elevating standards for privacy and data governance, and insurers need to develop systems, personnel, and governance policies to meet these higher standards. Yet even while they face greater constraints in how customer information can be deployed, insurers are using big data to improve underwriting, risk management, operating efficiency, customer relations, and product innovation. This ViewPoints synthesizes views among insurance leaders about how best to manage the manage the tug-of-war between deriving strategic value from data and safeguarding consumers’ rights.
A leadership crisis for top insurance groups
Recent trends have placed leadership and talent questions squarely on the table for insurance industry board members, executives, and regulators. Disruptions from technological developments and the emergence of new competitors have brought qualities such as flexibility, adaptability, and speed to the fore, while the traditional virtues of stability and prudence remain important. At the same time, broader trends are posing stark challenges for the leaders of large institutions, including leading insurance groups. As a result, industry non-executives and executives need new skills and new ways of leading. This ViewPoints synthesizes views among insurance leaders about how boards can effectively meet the challenge of finding and developing the leaders who will help the industry survive and thrive in the face of widespread mistrust of institutions, skepticism about traditional forms of leadership, and a rapidly transforming industry.
The changing shape of international banking and the future of Europe
BGLN participants met on November 28, 2017 in London. They were joined over dinner by Lord Jonathan Hill, former European commissioner. Banks remain under pressure to focus on core businesses, reduce costs, and update their technology, while still in the midst of implementing a range of new regulations. European banks, particularly in wholesale and investment banking, face global competition, while retail banking faces the greatest threat of disruption from new entrants. These pressures reopen debates about the relative benefits of simplicity and scale in various businesses. Participants discussed these issues, as well as Brexit, subsidiarization, and other challenges for international banking models, including the implications of Brexit for European operations.
Innovation in banking and the changing financial services policy landscape
Rapid advances in technology, changing customer expectations, and competitive pressures are driving bank leaders to identify opportunitites for innovation. But encouraging innovation in the context of large, international institutions, which are closely supervised, is not easy. Nor is it easy for boards to understand what is possible and how quickly and in what areas they should be investing in innovative approaches. Regulators are determining how best to encourage responsible innovation, while politicians debate significant changes to regulation in the US and internationally. BGLN participants discussed these and related issues over the first half of 2017, culminating with a meeting in New York on June 8.
Banking in transition: overseeing non-financial risk in the midst of technological and business model transformation
Non-financial risks have been among the greatest sources of risk for large banks since the financial crisis. Conduct and compliance issues, systems failures, and cybersecurity have risen to the top of risk committee agendas, but remain difficult to monitor, measure, and predict. Even as technology offers new mitigation tools, the transformative changes underway in large banks are creating new and different sources of non-financial risks. As banks overhaul systems, operations, business models, and structures to become more agile and efficient, the pace and scale of change is creating execution risk. As banks navigate their way through this transformation, boards and executives are identifying ways to improve management and oversight of these risks.
Cyber risk management: the focus shifts to governance
Cyber risk has attracted a great deal of attention in recent years, and banks, who are among the most-targeted, have made substantial investments in cybersecurity. Despite this investment, cyber vulnerability continues to present unique challenges for risk management and oversight. As technology is increasingly embedded in all aspects of banking, cyber risk is expanding, requiring greater board attention. In response, boards are taking steps to improve governance and oversight of cybersecurity. At the same time, regulatory authorities are becoming increasingly prescriptive in defining cyber risk expectations and emphasizing the role of governance and controls.
The paradox of unity and division: an unprecedented political landscape leads to high policy uncertainty
In the US, the Republican Party now controls the presidency and both houses of Congress for the first time in a decade. This may clear the way for a more pro-business policy agenda; however, populist and anti-business sentiment remains strong and, to date, President Trump has proven to be a highly unconventional leader. A participant summarized, “Whatever rulebook you thought this all played by is going into the shredder. Plan for unexpected events and curveballs.” In this ViewPoints, leading insurers exchange views on the changing US political landscape and the potential effects on US commercial markets and the insurance sector.
Revolutionary change is transforming the financial services landscape
In October 2016, Tapestry Networks and EY hosted the Financial Services Leadership Summit, which brought together more than 80 financial sector leaders to discuss the extraordinary changes happening across the financial services landscape. Participants included directors and executives of the largest global banks, insurers, asset managers, regulators, fintech entrepreneurs, and other subject matter experts. ViewPoints synthesizes these and other discussions with participants in the Bank and Insurance Governance Leadership Networks over the second half of 2016. Technology is lowering the barriers to entry for emerging competitors and transforming the way incumbents do business, rapidly altering the competitive marketplace. At the same time, unprecedented macroeconomic and geopolitical conditions, driven by underlying structural changes, are creating a degree of uncertainty about the environment through which leaders must guide these institutions. Regulation will need to continue to evolve in response. A summit participant summarized, “Revolutions only get called with hindsight … We are in a period of accelerated evolution that will be called a revolution in financial services.”
Accelerating the technological transformation of banking
Technology is reshaping the competitive and operating landscape for banks. They face competition from tech-enabled competitors with new models, and pressure to reduce costs and improve efficiency. As technology becomes increasingly central to all facets of bank strategy and operations - from compliance and data analysis to the customer interface - bank boards need a more holistic, strategic view of technology investment. Regulation meanwhile, is slowly adapting to the changing environment.
Clarifying supervisory expectations for non-executive directors and boards
Governance is now a cornerstone of supervision. As such, effective boards are important to supervisors, who have been raising expectations for boards and directors, accompanied by increasing calls for board and individual accountability.
Over the last several months, directors and supervisors shared perspectives on expectations for bank boards and directors, including roundtable discussions in New York and London. These discussions highlighted that while directors accept heightened expectations for engagement, including a significant time commitment relative to other corporate boards, there remain opportunities to improve clarity regarding the role of a bank board and realistic expectations for what it can accomplish.
Changing regulatory capital regimes: implications and market reactions
Despite years of regulatory reform, insurers now face another wave of new requirements. The European Union’s Solvency II has just come into force, and the International Association of Insurance Supervisors, anticipates completion of the International Capital Standard and additional systemically important insurer requirements by 2020.In this ViewPoints, leading insurers share perspectives on how these regimes may operate or require adjustment in the future, as well as how shareholders and markets may interpret and react to new solvency metrics.
The future of banking in Europe: regulation, supervision, and a changing competitive landscape
All large banks continue to face political, regulatory, and market pressure. European banks face particularly daunting challenges. As Europe pushes for a banking union, the ECB’s role as a single regulator and supervisor for the Eurozone becomes an important player in the transformation of European banking. Having completed its first year, it wants to establish itself as a strong regulator and ensure the stability of the European banking system. At the same time, many European banks are faced with the need to fundamentally address their business models in the context of a broader policy debate about what banking structures will best support European economic growth.
Top and emerging risks: improving identification and oversight of key risks facing large banks
Bank boards continue to face increasing accountability for ensuring banks are effectively overseeing risks. Yet, despite improvements in risk identification, participants in the BGLN question whether they are truly engaging in the right ways on the key risks that could bring down an individual bank or have a broader systemic impact. BGLN discussions over the last six months, including two meetings in June, focused on top and emerging risks and how boards and supervisors can improve oversight. This ViewPoints captures the essence of these discussions with individual sections focused on top risks including emerging sources of systemic risk, persistent conduct challenges, increasing strategic risk intensified by possible disruption, and the growing cyber threat.
Navigating amongst icebergs: leading insurers address emerging risk
Regulatory risk requirements and the evolution of emerging risk management (ERM) have contributed to a significant maturation of risk management within leading insurers. Despite this progress, boards still wonder if they are prepared to spot the next big challenge, especially in a world where risks seem to multiply exponentially. In this ViewPoints, leading insurers share perspectives on how boards can enhance the governance of emerging risks, along with which emerging risks are most likely to materialize and cause significant harm.
Risk and opportunity in an increasingly digital world
As the world becomes more digital, insurers are faced with important questions about strategy, risk, market and organizational structure, workforce, and culture - issues that, in the final analysis, require the full board's careful attention. Like the technology itself, insurers' understanding of the impact of digitization is evolving rapidly. Despite progress on digital strategies, a tremendous amount of work remains to be done. In this ViewPoints, leading insurers share their perspectives on how the industry remains relevant and how companies can lead in a rapidly transforming world.
Addressing conduct and culture issues in banking
Persistent misconduct caused commentators, bank leaders, and regulators to question whether something is fundamentally wrong with the culture of banks and banking. BGLN discussions over the last six months, including two meetings in March, focused on how bank boards, management, and supervisors can address cultural issues within their institutions and across the industry. This is a long-term, multifaceted challenge that will require changes to hiring, accountability, incentives, governance, and business models.
Creating a common language for regulating global insurers
Though the post-crisis reform agenda has been underway for many years, insurance supervisors have yet to create a truly common and international language through which to understand complex insurers’ vast operations. Many see global capital standards and recovery and resolution planning as essential elements of this common language. However, making progress on these standards will require addressing significant tensions within existing regulatory frameworks, and meaningful consensus within, and across, the public and private sectors.
Too big to govern? Expectations for bank boards continue to evolve
A number of conduct and compliance issues have emerged in banking, even for banks that have reputations for being well managed and well governed. This has renewed questions about the governability of the largest, most international, and most complex banks, and the roles and responsibilities of group and subsidiary boards.
Leading in an era of intensive conduct supervision
Supervision of insurer conduct and the emphasis on outcomes continues to grow. However, little agreement exists on appropriate conduct standards and expectations, or how to achieve the goal of good outcomes. IGLN participants noted that boards and executives are devoting significantly more time to improving conduct and mitigating associated risks. Global insurance directors, executives, and regulators gathered to discuss this new era of supervision and to consider practical approaches for addressing conduct challenges.
Developing effective and sustainable risk cultures in banks
For banks and supervisors, a focus on embedding effective risk cultures into banks has become the next area of focus for improving risk governance. Over some time, the BGLN has been discussing risk culture among over 50 members in the banking and supervisory community, bringing together a roundtable in March 2014 to discuss collective challenges. This ViewPoints captures the essence of these discussions and aims to provide a common base to think about instilling, monitoring, assessing, and sustaining effective risk cultures in banks.
A new era of conduct supervision: consequences, challenges, and opportunities
Conduct-related issues go far beyond monetary costs, raising concerns of prudential strength and negatively affecting the reputation of individual banks and the entire sector. While banks have invested heavily in conduct improvements, new expectations and approaches to conduct supervision are creating challenges and questions for the industry. This BGLN ViewPoints discusses this new era of conduct supervision, practical approaches for addressing conduct, and opportunities for increased cooperation between banks and regulators.
Toward global standards for group supervision
For the largest insurers, the focus of regulation has expanded beyond policyholder protection and insurer solvency to promoting and protecting global financial stability. To enhance stability, supervisors need a truly global view of firms’ activities and are developing new requirements, including group supervision standards, ComFrame, global capital standards, and recovery and resolution planning, to achieve these ends. This ViewPoints captures practical insights related to how boards and supervisors are addressing the changing nature of group supervision.
Addressing systemic regulation and macroprudential supervision
The regulatory community has not focused much on the reform agenda beyond traditional banking and short-term funding. Macroprudential and systemic supervision remain to be seen, as does the regulation of shadow banking and non-bank competitors. The new systemic risk in town – CCPs – need stronger risk management, and an effective mechanism to resolve them, and banks’ need to more effectively evaluate counterparty risks associated with CCPs.
Enabling more effective risk appetite frameworks
A major area of focus in the BGLN for improving risk governance has been the adoption of formalized risk appetite frameworks (RAFs), where discussions have revealed a lack of clarity on the objectives, expectations, and core elements of RAFs between supervisors and banks. In order to bridge these gaps, the BGLN conducted a year-long set of one-on-one and group discussions with banks and regulators. The findings include: attributes of mature RAFs, common challenges in implementation, and approaches for evaluating effectiveness.
Cross-border supervision: the next big challenge
Insurers and supervisors alike remain concerned about disparate regulatory standards and fragmented supervision. Large insurers face the largest hurdles, with some insurers interacting with hundreds of different entities. Industry leaders and supervisors are pushing for a global supervisory framework, recognizing the many challenges they face in creating more effective cross-border supervision.