Q&A with MRV Associates: Banking relationships and the adequacy of regulation

As financial institutions continue to struggle with compliance to regulations, it questions whether banks and corporates will ever be able to work together and pursue the same strategy and achieve success. GTNews speaks to Mayra Rodriguez Valladares, managing principal at consultancy MRV Associates about how organisations should implement regulations such as Basel III, BCBS239 and the Dodd Frank Act to ensure a safe future.

In your opinion, what is the role of the treasurer?

The role of the treasurer is absolutely a critical role and one that is becoming even more challenging now because of multiple bank and financial sector reforms that have been happening since 2009. Treasurers have a lot of work to do right now. Their job is to figure out where the revenue is going to come from, how the stability of revenue can be managed and where that money will be spent.

What is the biggest risk that treasurers are facing today?

The biggest risk for treasurers is trying to figure out where the next uncertain point coming from. At this stage, the rules for most of the Dodd Frank, EMIR and Basel regulation have been written. Yes, we can argue that there’s still a number that have not been finalised or implemented, but we’re much further along than we were before. For the treasurer, risk could be found in an unexpected problem arising from an emerging market or it could be a geopolitical risk, like the Middle East or Ukraine. At the moment, what you need from a treasurer is someone that is able to live with uncertainty but in my opinion, there’s always been uncertainty but it is more pronounced now because markets and banks are more interconnected. In regard to learning how to cope with uncertainty – geopolitical or currency – I don’t think it’s regulatory anymore because a lot of those rules have been written. Other challenges that treasurers face are to do with how to make processes more automated or how to attain risk data aggregation.

Do you see a risk in treasury departments moving to a TMS rather than using spreadsheets?

All treasurers need reams and reams of data and they need this data to calculate credit risk, market risk, operational risk and liquidity risk, but unfortunately there are huge problems in how this data can be obtained and the quality of the data. A lot still has to be done manually as a lot of people are using spreadsheets. I think treasury departments do need to move to different solutions that are more automated. On the other hand, the risk with this is that you can become too dependent on technology. Earlier this year, when the Swiss National bank unexpectedly removed its peg between the Swiss Re and the Euro, there were a lot of traders under the age of 35 that didn’t know what to do because they were used to having everything automated. In addition to these challenges of automation, cyber security also poses a problem.

What advice would you give CFOs on dealing with cyber security risks?

You can’t go a single day in the US, Europe or Asia without talking about cybersecurity. It’s a huge deal and it’s all about control. It really is about operational risk and CFOs need to make it a priority to document when these attempts happen and detail how these hacks get through. Unfortunately until recently, operational risk has always been neglected and that is where cyber security fits in.

Recent reports state that treasury departments are not fully aware of the regulations in place. Could you give a brief explanation of why this is?

It really depends on the kind of treasurer you are talking about. I think bank treasurers are pretty switched on as to what regulations are not only in place, but also about those that are coming. Banks know that regulations are here because it’s taken seriously when they break them. In my experience, corporates are a little slower. It also depends on what the regulation is: if it’s a financial regulation, they’re a little slower because corporations are not regulated like banks, but are regulated by an equivalent like an exchange commission. They are regulated from the perspective of what kind of financial disclosures they have, whereas in a bank, you’re supervised by risk based supervision which means that examiners will check risk. However, because almost every corporation has to interact with a bank as it is lending money or has a derivative with the bank, it pushes corporates to understand about risk management and what risks are present in the regulatory landscape.

Do you think banking regulations already in place can be effectively used for emerging cryptocurrencies?

I don’t think banking regulations can be used effectively for cryptocurrencies and I think you’re going to need a lot more as this is such a nascent field. Regulators need to understand how they work and what the risks are when considering money laundering and terrorism financing.

What impact will compliance to Basel III make on treasurers?

I think Basel III has definitely changed the world for treasurers because with this regulation, more capital of high quality is required and there are stricter requirements of how to measure credit risk, market risk and liquidity risk. There are also restrictions of how leveraged you can be, but obviously that’s an incredibly brief summary. Treasurers that were not fully attuned to this, will have to be now and concentrate on how money can be made and how money can be spent. This cannot be done without being attuned to Basel III and that has changed the world.

What countries do you think are more likely to take on BCBS239?

BCBS239 is one of the most important guidelines that the Basel committee has ever come up with. BCBS239 questions whether banks are good at risk data aggregation, which takes into account if you know how to define risk and handle the data that you need to calculate each risk. Alongside this, how data is gathered and how it is validated is considered as if banks do not have good processes, standards such as the liquidity coverage ratio is garbage. At the moment, the only banks that are supposed to comply with BCBS239 are those 31 banks that are part of the Global Systemically Important Banks (G-SIB). This includes eight banks in the US, four in France, three in the UK and a few across Japan, China, Spain, Germany and Switzerland. However, even in the literature of the BCBS239 standard, it explains that national regulators should decide whether they want other local banks to implement the regulation. This is forcing banks to think a lot more about whether their systems are good enough. Recent surveys have shown that none of these banks will be able to comply by January 2016 and some will need one or two years before they are able to. According to a Basel survey about bank readiness to comply, 50% believed that their IT architecture would not give them good risk data aggregation in periods of stress. That is very damning and even though the financial crisis was in 2007, here we are in 2015 and banks still cannot measuring their risk efficiently.

How is the Dodd-Frank Act helping the treasury department in 2015?

The purpose of Dodd Frank is to make the banks and the financial sector safer but also try to protect the consumers. Treasurers at the moment feel completely overwhelmed with intersecting regulations and are trying to understand Dodd Frank. Eventually, this will be good for treasurers because if they’re abiding by the rules, this should help banks be safer.

How do you see the treasury landscape evolving?

You either adjust or you’re out of business. Regulations are not going away and despite there being varying degrees of compliance, there isn’t a lot of appetite to weaken rules amongst between politicians or lobbyists. Savvy treasurers will adjust because that is the personality of a treasurer – they will figure it out as they are focused on new opportunities and of course, the risks. There used to be a lot of uncertainty around the rules but now treasurers can plan for this.

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