There are three pillars of operational maturity, believes Richard Chapman, and unsurprisingly he thinks his company SunGard can help financial institutions (FIs) and their treasury partners to adopt them.
The first pillar is to develop and use a strategy for managing the growth of the business, from an operations viewpoint. There should be a single strategy for the business, and it should include practices to achieve efficiencies.
The second pillar is consolidation. Many FIs have separate tools for treasury, credit cards and other functions, explains Chapman, while speaking to gtnews at the Sibos 2012 trade show in Osaka, Japan, so institutions end up with processes like reconciliation on separate systems. This inefficient and non-standard environment becomes costly because the footprint and administration is expensive, and control can disappear.
FIs are using several practices to move towards consolidation. One is infrastructure consolidation, around resources and technology. A second is software, which includes consolidating multiple systems to support functions such as reconciliation into a single software solution. FIs are also looking to consolidate by forming strong alliances with a small number of vendors rather than supporting hundreds of vendors. Additionally, they are striving to ensure that processes are as identical as possible. Functions such as exception escalation and reporting, for example, need to be similar across units so there can be greater transparency.
The third pillar is optimisation, which is a newer area. While most of the Tier 1 banks have a strategy and are working on consolidation, said Chapman, optimisation is a challenge as many banks have a mindset around project delivery rather than optimisation. “To optimise their processes,” he says, “banks are looking at moving either towards the highest possible automation from the beginning or automating how they deal with problems. Optimisation is how you measure the success or failure of the process.”
To help FIs evaluate their operational maturity, Chapman believes his company, SunGard, has several useful initiatives underway. One is benchmarking, where customers can contribute to statistics about processes and see how they rate. Another is sophisticated analytics to analyse operational areas, using huge reams of data across different processes and presenting it in a digestible manner.
Opportunities in the Back Office
As FIs seek to move towards operational maturity, Chapman believes operations and the back office have gone from a dull area focused on reducing costs or automating solutions to a much more innovative area focused on growth. Operations also have the potential to offer more by contributing to regulatory reporting, internal compliance, process transparency and governance.
The shift towards improved operations, Chapman said results from three factors that date back to the financial crisis and that have changed financial institutions. The first is a wave of regulation, from Dodd-Frank to the Basel III capital adequacy rules. For the banking community, the key impacts are on Tier 1 capital, liquidity reporting and collateral management, with subsequent funding issues for treasurers later on down the line.
The second shift is a mindset change needed in banks and brokers, to go beyond regulation. “They’re now taking responsibility to look at all of their business processes and how they do business, for controls and transparency,” says Chapman, who also highlights cost management in traditional operations. Return on equity (ROE) at banks is down to a low level and for securities it has shrunk, he says, so FIs are looking at every way they can to bolster profitability.
“One area of emphasis is the explosion in reconciliation and transaction processing in the back office. There is also a focus on operations processes that support liquidity, cash management, collateral management and trade processing.”
In this new regulation-heavy banking environment where operational maturity is essential, Chapman thinks that FIs are balancing risk reporting and assessment duties, transparency drivers, cost pressures on software and the need for automation and efficiency. There is also a need for new processes with a systematic approach, to replace some of the current manual steps. The coming technological and procedural overhaul will have ‘down the line’ consequences for treasurers – not to mention vendors such as SunGard as they strive to meet the demand.
“We’re starting to come up with collaborative solutions around business processes,” says Chapman. One example is in liquidity management, where treasury and risk are moving from a disparate approach towards operational maturity using a combination of automation and new controls. Risk managers want enterprise-integrated risk management, and treasury similarly wants integration, as well as stress testing and real-time liquidity. At one FI he worked with, the treasury group ended up with a system for intraday liquidity management that used snapshots and forecasting and analysis to satisfy their requirements for real-time models and information. The risk group also used a real-time model for stress testing and Basel III capital adequacy management.
To achieve solutions like these, Chapman says that FIs are using a powerful central processing engine to do validation and matching. A layer on top can consolidate and track real-time balances against projected balances for risk and treasury. Cash managers can then do real-time monitoring, track balances throughout the day, and respond to discrepancies or unanticipated credits or debits.
Chapman says that banks are also now using real-time liquidity tools to satisfy the needs of central banks, which are starting to look at new liquidity requirements for Basel III. The central banks want to monitor usage of credit lines and how much of their credit lines banks are consuming. While banks may settle at zero, he says, they can be at the limit in the middle of the day. If there’s an event, there can be a drain on liquidity. Banks that track in real time can start to track where liquidity consumption is occurring throughout the day.
Amid the continuing pressures on FIs to improve processes, reduce costs, optimise risk and comply with myriad regulatory requirements, improving operations is an imperative rather than an option, believes Chapman.
Focusing on and reaching operational maturity can enable FIs to move up to a new level of performance and increase their level of competitiveness significantly using technological and procedural improvements. These benefits should work their way through to the treasury in terms of better, more connected reporting systems and enhanced efficiency.
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