What is Holding Banking Back?
Technology has allowed human civilisation to reap a level of shared prosperity never seen before while simultaneously enabling acute and potentially devastating risks. However, it is the future opportunities that come from technology and innovation that will drive underperforming markets such as Europe and Africa towards meaningful growth. But only if we can effectively embrace them.
This was one of the biggest challenges discussed at Europe’s most prestigious risk conference, RiskMinds International, sponsored and attended by Monocle. Each year the conference brings together over 1000 risk professionals who represent over 700 financial institutions from the UK, Europe and across the world. The conference is a critical event to discuss the biggest trends in risk, including the worrying findings from the Draghi Report that the EU economy is increasingly uncompetitive.
AI: Finding ROI
One of the most significant drivers of growth for the EU lies in its implementation and adoption of the latest technology boom – artificial intelligence (AI).
While the conference was taking place, the Bank of England released its report on AI in the UK financial services. In alignment with what was raised at many of the AI panels at RiskMinds, the Bank of England found considerable adoption of AI and machine learning. In its report, over 100% of internationally active banks are already using or planning to use AI. However, an important caveat for achieving success when using AI is to effectively identify relevant AI use cases.
Too often AI, such as the large language models that power OpenAI’s ChatGPT, is used as a hammer. This blunt approach leads to most problems being viewed as nails ready to be flattened. Rather, banks should take a holistic approach to reviewing AI use cases with considerations for their data, legacy infrastructure, governance, costs, and culture.
Regulation: Diverging Responsibilities
Regulation was another core topic at RiskMinds. Following the 2007/2008 Global Financial Crisis (GFC), banking industries across the globe and particularly in Europe have become heavily regulated with one CRO panellist declaring that their function had had to review over 7000 pages of new regulation this year alone across 40 different regulators in Europe. This has, in part, led to the general decline in European bank competitiveness. Before the GFC, European banks were eight of the biggest banks in the world by asset size; now, they occupy only three places in the top ten – HSBC, BNP Paribas and Crédit Argicole.
However, it is not only the volume of regulation that adversely impacts European banks but also the divergence of international regulatory standards across jurisdictions such as Basel IV/Basel Endgame – an international framework that sets out capital requirements to buffer banks against potential losses. The expected relaxing of the Basel Endgame capital requirements in the US will create a regulatory arbitrage between the US and Europe, where EU banks will be forced to hold higher amounts of capital, reduce risk taking and, in some cases, completely exit certain financial opportunities.
Concern over divergence is so strong that a poll during the conference found that 70% of participants were in favour of the Basel Committee on Banking Supervision (the supervisory body in charge of drafting the Basel framework) revising sections of major departure. Following several delays to implementation already, it is unlikely that banks have the appetite to revisit a standard that has been labelled the “finalised” framework.
Data: Fixing the Foundation
Finally, the issue of accurate, timely and complete data continues to remain an underlying challenge to the efficiency of banks. European banks are under renewed pressure by the European Central Bank to reach BCBS 239 compliance – a set of principles to improve the effectiveness of risk reporting and the quality of the data that ultimately makes up these reports.
Many European banks still do not have adequate data management capabilities and infrastructure to effectively support their current operations, let alone lay the foundation for the various AI business cases that create so much excitement. Having assisted our South African banking clients to reach BCBS 239 compliance over the last ten years and having brought this expertise to Europe, Monocle’s Consulting Director for the UK and Europe, Rheta Du Preez, hosted a round table discussion on achieving meaningful compliance. These deficiencies in Europe provides an exciting opportunity for Monocle to “export” our expertise and practical insights as we assist our European clients in navigating the requirements around effective risk data aggregation and risk reporting.
Risk and Opportunity
In many ways, the South African banking sector punches far above its weight class in the international market. However, the interconnectedness of financial services means that South Africa shares many of the risks that are emerging today. As specialist management consultants, we endeavour to assist our banking clients in preparing for the worst while also achieving their best. With everything discussed at the conference and the volatile international landscape, one thing is clear: the profession responsible for identifying, managing, and mitigating risk, as well as for holding the conferences that allow for robust discussions of these issues, is more important than ever.
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