Machine Learning has been one of the hot topics in finance over the last few years, with benefits observed in most areas – many large institutions have prototyped and implemented techniques across decisioning, strategy optimisation, and fraud. The other key area that Machine Learning can bring significant benefits to, is automation.
CECL may seem like just another regulatory burden, but the exercise of digging deep into your loan book can have big pay-offs far beyond 31 Dec 2019.
A recent Bank of England working paper highlights the link between banking market competition and financial system stability. Consistent with earlier work, it highlights that as competition increases, the banking system overall responds typically by moving to higher risk lending. However, in addition, it describes how individual banks tend to converge with the most-risky becoming more secure as competition increases.
Welcome to the first edition of RegRadar. With publication of Basel III reforms in December 2017, the ongoing EBA RWA harmonisation programme and both the BoE & the ECB consulting on the Definition of Default for credit risk, forward planning and timely implementation is key to understanding how reforms will impact capital and compliance costs of current and future business plans.
The financial services industry has recently undergone a major change due to the introduction of IFRS 9 impairment requirements. This has come generally at increased costs due to either the redirection of internal resource or engagement of third parties to develop compliant models.
This March marks 10 years since the fire sale of Bear Stearns in 2008, a significant moment in the global financial crisis. This moment offers us an appropriate time to reflect and assess how the banking industry has changed in that time and learned from the mistakes of the past – and to consider what the future holds for the sector.
The Bank of England has today published the latest outlook from the Financial Policy Committee and outlined the scenario for 2018’s bank stress tests, providing us with an indication of its likely areas of focus in assessing UK financial stability.
On 28th November, the Bank of England published the results from its 2017 stress tests, which provided an assessment of the stability of UK’s banking system.
The headlines show that the major UK banks have all passed the stress tests and are deemed strong enough to keep lending in a scenario more severe than that of the 2008 global financial crisis, which is good news for the sector.
On the 31st October 2016 the consultation period closed on new proposals by the Prudential Regulatory Authority (PRA), which are highly likely to alter the internal ratings based (IRB) approach that deposit institutions (banks and building societies) with residential mortgage lending portfolios will need to adopt when calculating their risk-weighted assets (RWA).
Yesterday the Bank of England kicked off the 2017 stress testing season with publication of two economic scenarios. While the second Annual Cyclical Scenario (ACS) looks at capital positions under stress and – given the economic assumptions are little different from last year, succeeds in its aim of making the exercise predictable – the first ever Bank Exploratory Scenario (BES) tests the banks’ ability to react to a world where the picture is one of compressed profit margins and competition for funding.
The final March budget didn’t spring any surprises. While the Chancellor presented a more optimistic picture for short-term growth, predications from the Office for Budget Responsibility’s (OBR) forecasts indicate that the improvement will likely not last long.
Right now, most organisations are well on their way to coming up with a compliant solution for IFRS 9. Management are starting to understand the direct impact to their P&L (profit and loss) although thought naturally moves to the other impacts of the implementation of this regulation.
Finance services regulation is difficult to get right – knee jerk reactions often lead to unintended consequences and potentially the roots of the next bubble or crisis.
A recent report has suggested that European MEPs want more scrutiny of accounting standards issued by the International Accounting Standards Board (IASB) with an emphasis less complex rules, in addition to calling for scrutiny of whether standards allow tax fraud as well as improved governance of the IFRS Foundation, which governs the IASB.
The FT covered a piece on a regulatory crackdown that it claims removes the key incentive for measuring risk – view the full article here https://next.ft.com/content/672e8d6a-1d63-11e6-b286-cddde55ca122 Here is our response - this certainly covers the impact for investment banks as rather than retail. What BCBS have announced is that they are potentially withdrawing IRB treatments for exposures against large corporates and other banks.
While Brexit may be dominating the headlines at the moment, some experts believe that a debt of €360bn in bad loans within a fragmented Italian banking sector, could be the biggest threat of all. The suggestion is that even a “small crisis” could trigger a chain of events that could potentially threaten the stability of the European Union, credit ratings agency Moody’s is reported to have said.
We’ve got quite used to hearing the misery and bad news associated with UK banks since the financial crisis, yet one of the positive sides to this debate has been the rise of the challenger banks. These secondary players have grown quickly, with several listing last year as the sector continues to attract both customer and investor interest. The challenger banks have also long been praised by some politicians as being responsible for injecting much-needed further competition into the UK banking sector.
Traditionally, the relationship between collections and impairment is one way under IAS39. Collections activity can influence the severity of the loss and in the best case, can return accounts to order. This impacts the impairment line in two ways, the amount recovered and the direct cost of collecting it.
Regulations that aim to increase understanding of risks for management, investors and the general public are effective, self-reinforcing and are likely to change emergent behaviour. Market wide stress testing initiatives have been particularly powerful in this regard – by requiring banks to consider explicitly the worst scenarios and publish the outcomes, the market has been driven to protect and plan for those events.