Risk and regulation cocktail for Australian financial institutions

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Australia’s authorised deposit-taking institutions (ADIs) will adapt their strategies to counter the increasingly challenging risk and regulatory environment, predicts a study published by Wolters Kluwer Financial Services.

This year will mark a heavier reliance on integrated data sets, a further integration between risk and finance, and a move to leverage new technologies in response to regulatory trends and market dynamics.

The group adds that Australian banks wishing to remain competitive will need to break down traditional silos, adopting a forward-looking approach, which is agile enough to counter new regulatory threats.

The study also suggests that the agendas of the chief risk officer (CRO) and chief financial officer (CFO) will be impacted by regulatory change, as The Australian Prudential Regulation Authority (APRA), driven by international standards, aims to ensure Australian ADI’s capital ratios are “unquestionably” strong by the end of 2016.

Key regulatory trends that the study expects to impact on banks in 2016 include The Fundamental Review of the Trading Book (FRTB) – a major overhaul of market risk capital requirements.

“The rules clearly require banks to rethink their risk architecture and will lead to an increase in capital requirements,” say the study’s authors. “It is therefore important for banks to make sure to have the right hedging and diversification strategies in place.”

Meanwhile, APRA’s stress testing exercise in 2014 revealed three key areas where there is still scope for improvement in the area: scenario development, modelling and data. Banks responded by focusing on methodologies and techniques, however, more progress is needed on infrastructure and processes. More integration of stress testing in strategic planning and capital allocation processes is needed to ensure sufficient time is allocated to interpretation and analysis.

Approaching deadlines

When it comes to financial reporting standard IFRS 9, Wolters Kluwer FS notes that banks need to be ready for the parallel run on January 1 2017 ahead of full implementation by January 1 2018. The move from an incurred loss model to a forward-looking model is boosting alignment between risk and finance functions.

Indeed, international supervisory committees, mainly the Basel Committee and International Accounting Standards Board (IASB), will continue to be an important driver of risk management and finance practices.

The agenda of the CRO and CFO will also be impacted by BCBS 239 (Principles for effective risk data aggregation and risk reporting), requirements for model risk, capital requirements for interest rate risk management, conduct risk, data management requirements and cyber risk.

Australian banks using interest rate, foreign exchange, credit, equity and commodity derivatives (both exchange traded and over-the-counter [OTC]) will also be impacted by the mandatory move to the standardised approach for measuring exposure at default (EAD) for counterparty credit risk (SA-CCR) in 2017. Banks will need to analyse how the new regulation is likely to affect their capital requirements, deciding whether they need to change their trading strategy or business model in order to minimise the impact.

Other regulatory changes on APRA’s agenda include the review of the nature and structure of liquidity requirements for foreign bank branches specifically, and NSFR requirements generally (the consultation process expected to start imminently). APRA will also begin discussions on an Australian framework for loss absorbing and recapitalisation capacity (TLAC) during the course of 2016, which will be important for the (domestic) systemically important banks.

Taking into account additional pressures on boards to demonstrate their strong governance over their risk management practices and risk culture and a move to invest in fully automated regulatory reporting, both for existing local requirements (e.g. ARF 320: financial position) as well as new global regimes (e.g. global tax reporting), it becomes clear that change is a must for Australia’s financial services industry, the Wolters Kluwer FS study concludes.

Wolters Kluwer contributors to the study include:
• Thomas Verlaet, product specialist, Australia
• Matthias Coessens, VP finance and performance Asia-Pacific
• Piet Mandeville, VP financial risk Asia-Pacific
• Matt Sullivan, general manager Asia-Pacific, audit, risk & compliance
• Michael Thomas, director North Asia & AML specialist
• Wouter Delbaere, VP regulatory reporting, Asia-Pacific

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