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Recovery and Resolution Transformation

11 June 2014  |  1331 views  |  0

For financial institutions with vision and long term planning capabilities, there are real opportunities to turn a supremely tough regulatory compliance exercise into a key business driver.

In the first of a series of blogs on the scope and advantages of the Recovery and Resolution Transformation approach for European RRD (Recovery and Resolution Directive) cases, we take a look at the Big Picture and examine why a more visionary perspective than ‘compliance only’ is urgently needed.

There is no doubt that, in Europe, the Recovery and Resolution Directive’s (RRD) provision to produce (along with the balance sheet and financing provisions) a Recovery and Resolution Plan – RRP - presents the most rigorous compliance hurdle yet for the financial industry. This is a costly, time consuming, complex and risky exercise.

It demands that international operations comply with multiple frameworks, in a context of continuously and independently evolving regulation. The stated objective is the clear understanding and effective mitigation of systemic financial risk. “Too big to fail” is being consciously shifted - by regulatory intervention, in the form of RRD and other global regulation. The desired end state is sufficiently contained and pre-planned not to poison the whole system.

The objective is an understandable reaction to the post-Lehman scenario of expensive government bailout. (Also, factor in taxpayer and customer dissatisfaction with the idea of enforced support for flawed institutions). But as ever with sweeping legislation, there are unintended consequences waiting in the wings.

From bank customers’ and tax payers’ perspectives, the first of these consequences is risk concentration. Outsourcing of systemically significant processes could potentially create newly centralized dependencies on external providers – such as central clearing parties; a phenomenon that is being driven by EMIR legislation right now.

The second unintended consequence is increase of the cost base within financial institutions. Building internal, shared service centers for group operations might satisfy the demands of an RRP. However, the reality is that compliance is costly. Such an exercise will be expensive and the resulting cost has to be found somewhere – and is likely to translate into higher charges for customers.

There is however also a third potential consequence: business strangulation, in the face of complex and multi-regional legislation. RRP preparation and compliance is, emphatically, not an exclusively paper-based or accounting exercise. The thousands of pages of reporting typically required to satisfy the regulator, will also have a transformational impact on the institution concerned. This is an operational issue at heart. Affected institutions will find themselves transforming (whether they wish to or not). The real issue is how they transform.

The Recovery and Resolution Transformation – RRT – seeks to identify the practical target operating models and implementation styles that reduce re-working and cost associated with compliance tied to the European directive. At the same time, the approach will identify strategic, commercial and customer focus issues and directions that drive the business. It’s regulatory response for the real, commercial world. It goes ‘beyond compliance’. And in the tough environment of the financial industry, that is going to be crucial.

 

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