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As regulatory changes continue to impact on profitability in the global banking sector, it is imperative that banks re-evaluate their business models and get off the regulatory treadmill in order to weather the ever-shifting operational landscape, says Bertrand Lavayssiere, managing partner at international financial management consultancy, zeb. Here heexplores the impact of regulations on the sector and the potential for banks to turn greater efficiency into a competitive advantage.

Bertrand Lavayssiere

Bertrand Lavayssiere

European banks have been affected by a rising tide of complex regulations in recent years. The number of regulatory initiatives has increased tremendously, reaching a total of 368 last year alone. And the trend shows no sign of abating. The regulatory landscape is facing significant change over the coming months with the implementation of major European initiatives impacting the payment services, anti-money laundering, investment and data protection regimes. Financial services operators across the EU have only a few months left to prepare for the implementation of the open API regulation, PSD2, which is set to revolutionise use of customer data in payment transactions. Any company handling customer data will also need to comply with new GDPR regulations, requiring further work for compliance professionals.

The consequences of increasing regulation for the banking industry have been severe, with institutions spending an average of 70% of their total annual project budgets on the implementation of new regulations (see Figure 1).

Figure 1: Regulatory development—Source: zeb.research

Figure 1: Regulatory development—Source: zeb.research

To cope with this regulatory flood, banks have become more and more focused on fulfilling regulatory requirements and considering compliance aspects of their operations. Implementing the continuing stream of regulatory initiatives one after another has blown budgets and started many institutions off on a seemingly endless regulatory treadmill cycle.

Banks need to follow the example of other industries which have accepted a heavy regulatory burden as a natural part of their operations, and start to view regulatory compliance as a core part of their business model. Banking organisations must rethink their approach for the coming years and seek a more efficient regulatory response to minimise the cost to their business. However, there is a long way to go to achieve this goal. According to a zeb survey of domestic systemically important banks (D-SIBs) from the DACH region, only 7% of banks have implemented the idea of regulatory efficiency (see Figure 2).

Figure 2: Aims of regulatory management

Figure 2: Aims of regulatory management

zeb believes that increasing regulatory efficiency can reduce the overall costs of regulation by approximately 20% in the short term, with the potential for up to 40% reduction in the long term. Given these numbers, banks should view regulatory efficiency as an opportunity to achieve potential competitive advantage.

To get off the regulatory treadmill, banks have to find answers to three key questions:

  • Do the right things: How do I stay on top of the flood of regulations?
  • Do things right: How do I make sure that regulatory changes are implemented efficiently?
  • Support doing the right things right: How can the organisation and governance be optimised?

Ten steps to improve regulatory efficiency

Improve regulatory analytics

Step 1: Achieve true senior management buy-in

Regulatory efficiency should not only be part of the CFO / CRO agenda but must also be understood and strongly communicated across the whole bank by the CEO and other board members. To achieve true management buy-in, regulatory impacts on the business, operating, finance and risk models of the bank must be holistically transparent. Best market practice in this field shows that management buy-in is substantially higher in banks where this responsibility is assigned to the CEO.

Step 2: Centralise monitoring

As an essential part of regulatory management, the flood of regulations has to be monitored and prioritised in an efficient way. To achieve a holistic view of regulatory change and to improve the timing of CtB (Change the Business) activities, a monitoring system should compile all changes coming from different supervisory and legislative bodies. The most advanced banks have set up a monitoring system lead by a centralised regulatory office intended to support the entire organisation (including business as well as compliance and legal departments) in developing a holistic regulatory roadmap. As a starting point for efficient monitoring, the screening of upcoming regulations could rely on comprehensive regulatory content from external providers. For this purpose, tools such as zeb’s regulatory hub help banks with monitoring and summarising upcoming initiatives to remain on top of regulations (see Figure 3).

Figure 3: zeb.regulatory monitoring framework

Figure 3: zeb.regulatory monitoring framework

Step 3: Think in different regulatory scenarios

Regulatory impact analyses typically suffer from three weaknesses:

  • they are performed on a stand alone basis
  • they are based on a single scenario


  • they assume “business as usual”.

Best performing banks overcome these weaknesses by analysing different regulatory scenarios, understanding the dependencies across the regulatory landscape and the impact on the organisation. There are two key success factors in this direction: a professional simulation tool is needed which goes beyond an Excel-based solution, and a clear process has to be defined to involve the right skills at the right time.

Challenge regulatory change

Step 4: Identify synergies in the projects

When setting up regulatory implementation projects, their idiosyncracies must be taken into account. Regulatory projects are usually characterised by a fixed timeline set by the regulator, require a specific set of skills and knowledge, and impact several business units. Banks often struggle in setting up adequate project/programme management structures; the identification of synergies between different initiatives seems to be especially hard to achieve. The best performing banks follow a three-step approach:

  • First, they analyse the impact of every single initiative on time, people, IT infrastructure and business requirements
  • Second, they identify overlaps and synergy potentials in the overall project portfolio


  • Third, they evaluate different options to realise these synergies.

Step 5: Challenge budgets

Project budgets are often overstated when derived as a simple sum of estimated business and IT efforts and, therefore, leave room for improvement and potential for reduction. In order to increase regulatory efficiency, the project budgeting process should be based on two key aspects:

  • project sponsors should always demand alternative implementation scenarios to reveal cost drivers and to understand the impact on the RtB (Run the Business) organisation.
  • zeb experience shows that efficiency can be increased when budgets are regularly reviewed by a neutral/independent team. As there are only limited opportunities for project managers to balance implementation costs and risks, they tend to include buffers and overestimate budget requirements. Therefore, a neutral function (e.g. a controlling or programme management function) needs to be involved early on in the budgeting process.

Step 6: Go beyond traditional programme management

Traditional programme management often focuses on formal standards and high-level tracking of milestones via traffic lights – a system with limited scope to add value to regulatory projects. To actively steer the quality, time and budget of regulatory projects, a content-driven approach is needed. This requires a project management team which is able to quickly understand the key aspects, success factors and dependencies of regulatory projects. One key challenge in this area is that requirements are typically not fully clear at the beginning of the project and can change over time. In this context, an agile approach to IT development can help to handle changing requirements.

Rethink the regulatory target operating model

Step 7: Renew your sourcing strategy

By setting up an effective sourcing strategy, banks can reduce costs while focusing on value-adding processes. A robust sourcing strategy requires the identification and analysis of alternatives across the entire organisation. For example, regulatory activities that can be provided at lower costs by a third-party vendor are typical candidates for outsourcing. According to zeb experience, there is a lot of potential for improvements in the regulatory area as the systematic analysis of outsourcing opportunities (e.g. in the field of regulatory reporting) has not yet been fully explored.

Step 8: Create centres of competence and overcome traditional silos

Most regulatory reports, requests and recent initiatives require information from different departments and rely on close collaboration of the various functions involved. Hence, a traditional silo-oriented organisational structure – which is still very commonplace among banks – often struggles to handle regulatory requirements, leading to process complexity. The creation of centres of competence, which go beyond traditional silos, can help reduce this complexity and improve coordination efforts. The best performing banks have implemented central regulatory affairs offices, which bundle together all regulatory analytical functions and serve as a single point of contact to the supervisors and internal departments.

Step 9: Use digitalisation for regulatory process optimisation

Digitalisation has become one of the key drivers of change in the banking industry. As substantial potential has been easily identified in customer-driven business, digitalisation can also play a key role in optimising regulatory processes at the same time. With the help of RegTech solutions, the most advanced banks have already started to use technology to automate repetitive and low value-adding processes as far as possible. Even where full automation is not feasible, technology can still support single phases of the overall process (e.g. data quality checks) in order to save time, resources and, ultimately, costs.

Step 10: Measure and continuously improve efficiency

Defining a clear baseline and ambition level for regulatory efficiency is an important starting point. To achieve the targeted ambition level step by step, continuous tracking of the achieved progress is needed. For this purpose, zeb has developed a self-assessment tool to measure the regulatory efficiency level in banks and to identify potential weaknesses and strengths.

Although the overall situation of UK and European banks has improved in terms of profitability over recent, there is still a lot to be done in order to increase return on equity and address cost to income ratios. The next five years will pose significant new challenges to global banking institutions as the international political picture unfolds. Given the impacts of the regulations coming into force and those currently being implemented, banks are forced into seriously rethinking their business models in order to succeed in the emerging brave new world. Regulatory efficiency will stay on top of the management agenda in many banks as huge potentials can be explored in this field. Banks will thus not only save money in the short term, but will also be better prepared for the challenges ahead.

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