Rebuilding Credit Card Profitability post COVID-19
Rebuilding Credit Card Profitability post COVID-19
Mon 27 Apr 2020
The current pandemic is having far reaching consequences across all aspects of society. Compared to other industries the impact on the credit card industry is relatively mild and from a customer perspective the value of on-demand liquidity is now clearer than ever. However, there will be significant impacts on industry profitability. Reduced international travel will severely impact foreign currency fees, a major revenue driver for credit card issuers. Likewise, stresses on borrowers will drive marked increases in bad debt. Both issues are likely to be with us for some time so what steps should issuers take to adjust to the new normal?
Intelligent Cost Management
With customers in distress revenue levers are going to be hard to pull, so cost management strategies will need to come to the fore. No doubt tough decisions will need to be made, but care should be taken not to cut too deep and damage future prospects. Wherever possible sustainable efficiency savings should be prioritised over blunt “quick-fix” cuts in areas such as staffing and marketing.
Let’s be clear; efficiency savings are harder to achieve than quick-fix cuts, and may require expert advice. The upside is that they make the organisation fitter, more competitive and more robust on an ongoing basis. They are “no-regret” actions.
So how can these savings be obtained? Here we’ll focus on two of the industry’s largest variable cost lines:
Reward program costs.
Card scheme fees.
Points based reward programs are an important part of the overall credit card proposition. They are used to attract/retain customers and also to incentivise spend. Cost-reduction efforts in this area typically focus on reducing earn rates or increasing the number of points needed to redeem rewards. Whilst both aspects do need to be properly calibrated, these adjustments represent dis-investment in the customer proposition and risk a negative impact in the longer term.
Efficiency gains should be prioritised ahead of cuts and can be achieved in a number of areas including:
Better aligning reward program economics with underlying financial drivers.
Better targeting of incentives and offers.
Reducing customer gaming and other value destructive behavior.
Conducting cost-assurance and optimization exercises on program/system set-up.
A well-executed efficiency program can often reduce cost by 10-15% without impacting the customer proposition or market competitiveness. The chart below illustrates the sources of cost savings from a recent engagement with a major card issuer where savings worth circa 13% of total reward costs were identified.
Card Scheme Fees
Every time a credit, debit or prepaid card is used both the issuing bank and acquiring bank pay a small fee to the card scheme with which the card is associated (typically Visa or Mastercard). With huge numbers of transactions these fees quickly mount up to significant values and it is no surprise that both Visa and Mastercard are highly profitable organisations. So what can be done to contain or reduce these costs?
Leading banks in North America, Europe and Australia have taken steps to reduce these costs and have achieved significant savings. In general Asian and African banks have not been as active in managing this aspect of their businesses, so what can they learn from their Western counterparts?
Generally the banks that have made progress in this area have focused on the following:
Understand what you are paying forand identify quick-win savings. This is an area where expert help and forensic analysis can be invaluable. Billing arrangements are highly complex and often poorly understood. Typically clients find out that they are paying for services they do not need, or are shocked when they understand how much they are paying for certain items. Addressing these issues can create immediate savings.
Create an organisational centre-of-excellence. Scheme fees are paid by multiple business units including credit cards, current/transactional accounts and merchant acquiring. They also span consumer and business segments and may span multiple geographies. Pulling specific responsibilities into a single centre-of-excellence allows greater understanding and control – the first step to better management.
Negotiate improved terms. The largest savings have been achieved by banks negotiating enhanced terms with the card schemes. Negotiated outcomes can be improved through a series of steps:
Obtain an expert-level understanding of financial drivers and potential outcomes
Align the organisation across divisions and geographies.
Put in place a structured procurement process.
Be willing to enter into win-win agreements that offer value to both parties.
In summary, issuers can act now to increase cost efficiency in ways that do not involve reducing staffing levels. Doing so is a “no-regret” action and should be considered before reducing investment in growth or customer service initiatives. Both areas are highly technical and obtaining expert advice, especially at the start of an initiative is likely to yield better results.
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Recently released guidelines require institutions to adopt risk-based programs to monitor and filter transactions for potentially suspicious activity. Beginning January 1, 2017, financial institutions registered under the New York banking law are responsible for complying with anti-terrorism transaction monitoring and filtering program regulations, established by the New York Department of Financial Services (NYDFS). Last month, […]
The impact of Brexit on foreign banks, and especially the larger ones, has already been the subject of extensive media coverage and speculation. Discussions on the advantages and disadvantages of Brexit for larger overseas banks have been wide-ranging. Will the uncertainty over business models be solved in the short or mid-term? Would relocation bring cost […]
In 2018, the Bank of England (the “BoE”) set up a project called “Future of Finance” aimed at anticipating the upcoming changes in financial services for the next decade, and the impact of these changes for market participants, customers and regulators. This research was led by Huw van Steenis, Senior Adviser to the Governor, and […]
Persistant negative interest rates, the inherent risk of a trade war between China and the United States, fears of a recession… all worrying signs of an imminent new crisis. However, the real question is not if but when the next crisis will hit. More than ten years after the financial and sovereign debt crisis, it […]
With significant IBOR reform on the horizon, Mazars brought together industry experts, practitioners and regulators to discuss the challenges and opportunities they face. Speakers included the Bank of England Market Division’s Alastair Hughes, EFRAG’s Didier Andries and Mazars’ IBOR lead, Pauline Pelissier. From a comprehensive and illuminating session, Pauline sums up the key takeaways: “What […]
NPL secondary market may solve the increase in credit risk
The identification and management of non-performing loans or NPLs as early as possible by banks are among supervisors’ current high-level priorities. Indeed, when prudential, monetary, and fiscal crisis mitigation mechanisms are tapered, the weakening of borrowers’ creditworthiness could materialise, along with increasing credit risks and therefore NPLs. This expected rise of new NPLs in European […]
Positive behavioural and cultural change: the implementation of an accountability framework
As regulated entities execute their post-Brexit strategies and relocate their European Union (EU) operations from the UK to other EU states, a key issue to be addressed for those relocating to Ireland remain to be the impending legislative changes surrounding increased accountability standards for executives and non-executives. Not least, the breaking of the participation link, […]
The long road to proportionality in prudential regulation and supervision
The great financial crisis triggered a massive wave of bankruptcies in the worldwide banking sector, affected not only large international banks such as Lehman Brothers but also local ones such as Northern Rock in the UK. Basel prudential standards are designed to cope with financial risks stemming from the global banking system without taking into […]
Implications of Covid-19 for the LSIs and the supervisory focus: an interview with Patrick Amis, ECB
On 19 January 2022, Mr Patrick Amis, the head of ECB Directorate General Specialised Institutions and Less Significant Institutions (DG/SPL) had a formal meeting with Mazars to discuss the implications of the pandemic for the LSIs and the supervisory focus. The main risks outlined by Mr Amis, were in the areas of NPLs, digitalisation, IRRBB, […]
Quarterly SSM briefing: spotlight on supervisory priorities, banking union and liquidity ratio
Supervisory priorities 2022-2024 In December 2021, the European Central Bank (ECB) and the national supervisory authorities of the Eurozone countries published their supervisory priorities for 2022-2024. The three-year coverage enables the ECB banking supervision to achieve good progress in addressing the identified vulnerabilities while at the same time affording enough flexibility in any corresponding actions […]
Sustainability and climate risk: what can banks expect?
The growing importance of sustainability issues and the role of credit institutions in financing transformation places climate and environmental risks at the core of regulatory and supervisory scrutiny today. For some years now, the Network for Greening the Financial System (NGFS), comprising central banks and national supervisory authorities, has been working to enhance sustainability and […]
New European authority aims to strengthen framework to fight money laundering
The creation of a new Anti-Money Laundering Authority will transform the supervision of money laundering and financing terrorism (AML/CFT) in the EU. Proposed reforms also extend the AML/CFT rules to all crypto-asset service providers, as well as include specific rules concerning due diligence on customers and beneficial ownership. It is expected that some of these […]
As the PRA transitions from a “rule-taker” to a “rule-maker”, small and medium-sized banks operating in the UK can expect to benefit from a more “streamlined” regulatory regime that could be easier to interpret, implement and maintain; but at the same time, they can also expect the PRA to be progressively more involved in scrutinising […]
The road to implementing the final Basel agreements
The unveiling of the new banking package “CRR3 – CRD6” on 27 October 2021 presents a further landmark on the road to implementing the final Basel III agreements. The regulatory scheme will also focus on the revision of the market risk framework from January 2019, as well as the latest developments in pillar 3 requirements. […]
Prudential risks for banks with a Russian presence
The invasion of Ukraine by Russia on 24 February 2022 is considered the most significant geopolitical event since the Second World War. While there is no question of military intervention by the European Union (EU) at the moment, the EU has nevertheless decided on a major package of sanctions that will have a heavy impact […]
Banking consolidation in Europe: What can we expect?
The low level of banking consolidation in Europe compared to other countries is raising concerns among the supervisory community in Europe. It is a trend further reinforced after the financial crisis of 2007/2008 that produced a noticeable slowdown in consolidation operations in the EU. So what has been the impact, and what can we expect […]
First ACPR climate stress test pilot exercise results
Climate change introduces considerable economic challenges. On the one hand, financial institutions must contribute to the transition to a low-carbon and balanced economy to effectively combat global warming. On the other hand, the financial sector is exposed to climate-related and environmental risks and therefore needs to implement appropriate risk management practices within a financial stability […]
The Single Supervisory Mechanism: Post-pandemic actions and expectations
On 30 July, the European Central Bank unveiled the 2021 supervisory stress test results, which demonstrated that the region’s banking system is resilient in an unfavourable environment. The Common Equity Tier 1 (CET1) ratio has fallen 5.2% to 9.9% under the 3-year adverse scenario, while under the baseline scenario the CET1 ratio will reach 15.8% […]
Deep hedging: application of deep learning to hedge financial derivatives
The recent breakthrough of data science and deep learning make a model independent approach for hedging possible. This hedging approach known as deep hedging is a robust data-driven method able to consider market frictions as well as trading constraints without using model-computed greeks. This article gives the main theoretical tools to understand the methodology and […]
Local and international trends have transformed the way banks operate, affecting their capital positions and profitability. In particular, ongoing digitalisation programmes and technological innovation continue to add pressure on traditional banking models, including the supply chain. While management’s focus on capital preservation, profitability and growth for shareholders remains, risks from an operational perspective have intensified. […]
Five steps to transforming banking operating models
With the current ultra-low interest rate environment and market volatility having a negative impact on banks’ returns and, ultimately, their capital positions, operating models must quickly adapt and become more cost-efficient to maintain profitability. This drive for cost-efficiency has become more apparent as innovation in technology and ongoing digitalisation have further upended traditional banking systems […]
Brexit, or the UK’s departure from the European Union, became a reality on 1 January 2021. In terms of the regulatory impact for the financial sector, and the banking sector in particular, the UK being a third country, UK banks can no longer benefit from the European passport for their continental activities. Therefore, they can […]
A central database to strengthen the anti-money laundering and counter-terrorist financing (AML/CFT) framework was launched by the European Banking Authority (EBA) on 31 January 2022. Called EuReCA, the new database will be essential to coordinate efforts by national competent authorities and the EBA to prevent and fight money laundering and terrorist financing (ML/TF) risks throughout […]
Banks need to step up efforts on climate and environmental risk disclosures
In March 2022, the European Central Bank (ECB) published its second snapshot of climate-related and environmental risk disclosure levels among significant institutions under its direct supervision. In line with the results of the first snapshot published in November 2020 – regarded as the baseline measurement – none of the institutions in scope for this second […]
The digitalisation of banking processes and the introduction of AI-led technology impact the central and strategic role of information systems within the banking system. The growing use of information and communication technology (ICT) exposes all financial institutions to an increasing level of digital risk that could weaken their operational resilience, in particular, due to more […]
After two years marked by the Covid-19 crisis, the first half of 2022 offered the prospect of a return to a certain economic normality. However, the outbreak of war in Ukraine combined with a deteriorating economic environment have reshuffled the cards and once again brought banks into a zone of turbulence and uncertainty. So how […]
What lessons can be drawn from recent events in the banking sector?
In recent weeks, we have witnessed the successive bankruptcies of three banks in the United States, as well as the hasty takeover of Credit Suisse by UBS. This chain of events inevitably calls into question whether this trajectory echoes the leadup to the financial crisis of 2008. In reality, whilst these crises have stark similarities, […]
The rapid collapse of one of Switzerland’s most emblematic banks, following the demise of tech lenders on America’s west coast, has raised concern over banking stability. What are the consequences for the sector, the economy and for society? Gregory Marchat, Global Head of FS Advisory, and Emmanuel Dooseman, Global Head of Banking and Capital Markets, […]
Sustainable finance series: Why does sustainable finance matter?
The momentum towards a low-carbon economic system is only set to grow. Financial services firms are pivotal actors in the transition; consequently, increasing demands are being put on them to demonstrate their sustainable finance activities and credentials. This blog explains what sustainable finance is and why it matters to financial services firms. What is Sustainable […]
Implementing credible environmental, social and governance (ESG) actions requires successful enablers. So how can firms identify these enablers and, crucially, remove barriers to implementation? If we take our latest C-Suite Sustainability Barometer, we can see that out of the over 1,100 businesses accounted for in the survey, 75% are planning to increase their investment in […]
Governance, operational resilience, and business models remain crucial for banks in an environment of rising rates and digital banking
In an interview, Korbinian Ibel, Director General at the European Central Bank (ECB), shares insight on how bank-specific direct supervision works, what the current risks and challenges are, and priorities to look out for in the coming years. What does the Banking Supervision arm of the European Central Bank do? Find out about its policies, […]
“I see digital as the future of finance”. These are the words of the Executive Vice President of the European Commission (EC), Valdis Dombrovskis, voiced in the summer of 2020. He has undoubtedly been proven right as governments and central banks around the world have heightened their efforts to keep oversight of the digital transition […]
Climate change valuation adjustment: introducing a climate change scenario extrapolation to long dated CDS curve
The global climate crisis has triggered the financial sphere to address the way in which it conducts business. Climate risk consideration is currently growing in the banking industry but should also be considered by banks in the Credit Valuation Adjustment (CVA) when pricing derivatives. The credit risk for long dated derivatives (beyond 10 years), reflected […]
EBA considers bottom-up stress testing with top-down elements
The European Banking Authority (EBA) is tasked, in cooperation with the European Systematic Risk Board (ESRB), to initiate and coordinate biennial EU-wide stress testing exercises to assess the resilience of institutions to adverse market developments. The objective is to provide supervisors, banks, and other market participants with a common analytical framework to consistently compare and […]
Impacts and consequences of the war in Ukraine for banks and insurance companies
The war in Ukraine, as well as the unprecedented sanctions imposed by the European Union, the United States and their partners against Russia have had major consequences for financial services institutions. For foreign companies operating in Russia or Ukraine, the first concern was the safety of their staff. They had to make difficult choices to […]
Can BIS develop a cryptoasset regulatory framework without limiting the innovation process?
In summer 2022, the Bank for International Settlements (BIS) published its second consultation paper on the prudential treatment of cryptoasset exposures. The guidelines outlined in the proposed document follow an initial discussion paper released in 2019 and a first consultative document issued in 2021. The complete text is set up as a new standard to […]
The FED announced a pilot climate scenario analysis exercise for early 2023
The Federal Reserve Board (FED) will commence its first bottom-up climate scenario analysis exercise at the beginning of 2023, as announced on 29 September. The exercise will be exploratory in nature and will not result in extra capital requirements. The list of designated participants consists of six of the largest U.S. banks, i.e., Bank of […]
New pilot scheme opens pathway for blockchain technology
A new regulation introducing a pilot scheme based on blockchain technology is set to come into force on 23 March 2023. The new European regulation1 is an experiment to develop secondary markets for financial securities based on distributed ledger technology (DLT). Authorised participants in the scheme will be able to provide trading services and settlement-delivery […]
The first supervisory climate risk stress test (2022 CST) conducted by the European Central Bank (ECB) has concluded with official results and findings made public on 8 July 2022. The exercise has complemented the broader ECB’s agenda to assess the readiness of banks in Europe to manage climate-related and environmental risks. The 2022 CST was […]
How to address climate risk in the banking prudential framework
Climate change is now firmly in the focus of prudential regulators and supervisors across the globe. Against this background, the European Banking Authority (EBA) is mandated to assess whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and social objectives would be justified. Based on its findings, the […]
Quarterly SSM briefing: stable supervisory priorities and the ECB’s green agenda
The last few weeks have been marked by an ongoing review of the supervisory priorities initially listed by the Single Supervisory Mechanism (SSM) for 2022-24, and developments in the climate agenda outlined by the European Central Bank (ECB). ECB’s supervisory priorities for 2022-24 remain stable despite geopolitical instabilities and challenges At the beginning of 2022, […]
The return of inflation: what consequences for banks?
For several months now, we have been in an economic and financial environment that we have not seen for some years. In May, inflation in the Eurozone reached 8.1%, with six countries exceeding 10%, while the United States recorded an 8.6% year-on-year price increase. The short-term reasons for the return of inflation are well known, […]
Leveraged transactions: supervisory expectations in the Eurozone
The chair of the European Central Bank’s Supervisory Board, Andrea Enria, has voiced several times in the past months the supervisor’s concern with the increasing growth of the leveraged finance sector, which deals with loans to highly indebted borrowers. By mid-2021, the combination of a strong global loan moratoria policy and the long-standing low interest […]
EBA: draft technical standards on Pillar 3 disclosures of ESG risks
On 1 March 2021, the European Banking Authority (EBA) launched a public consultation on draft implementing technical standards (ITS) for Pillar 3 disclosures of environmental, social and governance (ESG) risks, under its capital requirements regulation (CRR) mandate. The consultation will end on 1 June 2021. Large banking institutions with securities traded on a regulated market […]
Key takeaways & industry challenges following the ECB TRIM project – a focus on credit risk (Part 2)
The Targeted Review of Internal Models (TRIM) was one of the largest projects by the European Central Bank (ECB) aimed at identifying potential sources of unwarranted or non-risk based variability in Significant Institutions (SIs) risk-weighted assets (RWA) from the use of Pillar 1 internal models such as Probability of Default (PD), Loss Given Default (LGD) […]
The Supervisory Answer to Hong Kong’s Worsening Economic Performance
Pierre Latrobe at Mazars discusses the measures the HKMA has taken so far to strengthen its macroprudential supervisory toolkit and address potential risks to the wider financial system. The Hong Kong economy is suffering from several lingering negative factors, the US-China trade war, the global economic slowdown and the ongoing protests, to name but a […]
The European Securities and Markets Authority (ESMA) has issued a public statement to announce the delay of the industry’s compliance with phase one of the Securities Financing Transactions Regulation (SFTR). This is in response to ESMA’s awareness of the financial industry’s struggle to devote resources to comply with the new reporting obligation, as firms face […]
Are more stringent gender diversity measures required?
Gender equality, while not systematically embedded in national laws, is clearly set in European law. The Capital Requirements Regulation (CRR) requires financial institutions to adopt a policy promoting diversity within their management bodies and, for the most significant ones, to set targets to reach gender-balanced boards. Despite these regulatory requirements, the conclusions of the European […]
The Risk-Free Rates Working Group (RFRWG) published an update on the impact of COVID-19 on the timeline for firm’s plans to transition away from GBP LIBOR on the 29th April. While the central assumption of LIBOR’s publication being ceased after the end of 2021 remains intact, the Working Group has amended the timeline for the […]
HKMA Support Measures and the Impact to the Banking Industry
Pierre Latrobe at Mazars discusses recent HKMA initiatives taken in response to Covid-19 and their implications for Hong Kong banks, highlighting credit risk as a growing threat. The Hong Kong economy has been confronted by several downside factors over the last two years. The first hit was the initiation of the US trade war with […]
The Alternative Reference Rates Committee (ARRC) continues to support market participants in their efforts to transition from USD London Interbank Offered Rate (LIBOR) towards the Securities Overnight Reference Rate (SOFR). Following the Financial Conduct Authority’s (FCA) March 2020 statement that the expected LIBOR cessation deadline remains unaltered – i.e. end of 2021 – ARRC published […]
Covid-19 disruption to the banking sector is widespread, including changes to working patterns, changes in customer behaviour, changes to partner-supplier dynamics and direct impacts on profit and loss accounts. The phase of immediate action to ensure business continuity is now largely complete. As infection curves flatten, restrictions are gradually eased and light starts to emerge […]
Regulatory flexibility gives banks the tools to support the economy during the Covid-19 pandemic
With banks no longer the weak link in the financial system, they now have a key role to play in supporting the real economy to survive the crisis caused by the Covid-19 pandemic. The significant strengthening of prudential regulation over the past decade since the 2008 financial crisis has enabled banking institutions to post solid levels […]
Covid-19: Major risk considerations for the banking sector
As we continue to feel the effects of the global pandemic, the banking sector, like many other sectors, now faces unprecedented uncertainty about the economic outlook ahead. While banks go into this pandemic in a stronger position than the global financial crisis of 2008, the current environment presents particular challenges and disruption to standard accounting […]
COVID-19, banks and regulation: the road ahead in the UK and Europe
The Covid-19 outbreak and the unprecedented emergency it presents has created a unique threat to the world’s economy. Like all sectors, banking has been impacted, and its stakeholders have felt excessive pressure over the last few weeks to get things right. Regulators in financial markets around the globe have all announced Covid-19 action plans, which […]
Covid-19 US policy changes: what banks need to know
Impacts from the COVID-19 pandemic have reverberated across every part of the global economy. Small businesses are struggling to pay their employees, banks are grappling with collapsing local economies, and many borrowers across the nation cannot meet their monthly mortgage payments. Banks will play a critical role in supporting their communities through this crisis, and […]
The expected 2021 disappearance of LIBOR requires robust fallback language for cash products and derivatives alike. Industry associations have taken initiatives to reform the historic fallback language of securities, with ISDA proactively leading the way on derivatives and national working groups proposing enhancements for cash products. While the derivatives market is expected to be harmonized […]
Do Asian market Libor preparations pose systemic risk to world markets?
Since Libor was first used in financial markets in 1986, it has become the foundation of the global interbank funding market. However, regulators ruled that Libor’s volatility during the last global financial crisis (GFC) and a rate-rigging crisis in 20121 involving the world’s largest banks exposed a fundamental weakness with the rate’s publication methodology. Yet, […]
New prudential regulation for investment firms in Europe
At the end of nearly two years of legislative work, the reform of the prudential regulation of investment firms completed its final phase with the publication in the Official Journal of the European Union of two new regulatory texts: Regulation 2019/2033 on the prudential requirements of investment firms (IFR), and Directive 2019/2034 on the prudential […]
With Libor’s cessation date at the end of 2021 looming, global regulators are hastening their IBOR fallback strategies. Yet while market momentum has increased for multiple published RFR indices, among them the GBP SONIA, the EUR €STR, and the USD SOFR, Asian economies, some of which rank among the world’s largest, continue to lag. While […]
Financial market participants – at least the largest ones – are actively preparing for the expected discontinuation of the London Inter-Bank Offered Rate (LIBOR) after 2021. Transitioning towards a LIBOR-free world is a challenge that requires the involvement and coordination of the whole industry in order to find appropriate solutions to replace the 35 different […]
EBA’s Stress Test 2020 Methodology – What’s new for the banks?
The methodology for an exercise to assess the resilience of EU banks to adverse market conditions and test the state of their capital allocations has been released by the European Banking Authority (EBA). The exercise – part of EU-wide stress testing – will apply to broadly 70% of the European banking sector. Some 52 banks […]
European Commission to strengthen regulatory framework for bank crisis management
The European Commission published on 18 April 2023 a new legislative package aiming to adapt and strengthen the framework for crisis management and deposit insurance (CMDI), with an acute focus on small and medium-sized banks. This proposal, which follows the announcement of the Eurogroup finance ministers inviting the Commission and the European co-legislators to review […]
Conduct Risk should not be underestimated during IBOR Transition
With little more than two years to go, Libor’s cessation date continues to near. The voluntary agreement of panel banks submitting to Libor will conclude at the end of 2021, from which risk-free rates (RFR) are expected to replace Libor and similar indices. Are corporates paying enough attention to Libor updates? Libor’s cessation should be […]
Are banks underestimating the risks of Covid Emergency Loans?
During the last few weeks, the volume of loans issued by banks has snowballed as governments release programmes to bail out businesses affected by Covid-19. As a result of these higher volumes, the exceptional increase in underwriting activity raises several issues for banks. Most notably, banks, like all commercial institutions, are also having to cope […]
With COVID-19, being declared a pandemic on March 11, 2020, financial institutions have had to shift most of their resources to mitigate the risks that have arisen. This has adversely affected important activities, one of which is market participants’ efforts to detach from LIBOR before its cessation at the end of 2021. As a result, […]
The Basel Committee: updated guidance on the external audit of banks
Against the background of a new year still severely affected by the persistence of the pandemic throughout the world and economies facing an unprecedented global macro-economic shock, the Basel Committee has felt it necessary to address the audit of the expected credit loss (ECL) accounting estimate within the overall financial statement audit. With IFRS 9 […]
2021 Stress testing the UK banking system: the Bank of England’s approach
March 2020 marked the first time – since its inception in 2014 – that the Bank of England (BoE) cancelled its annual stress tests for the UK’s biggest lenders. Instead, they undertook a desktop analysis of the UK banking sector resilience. In late 2020, the Financial Policy Committee (FPC) judged that most banks have capital […]
While 2020 went relatively smoothly for the banking sector, uncertainties remain on the potential effects of Covid-19 on the real economy. Any negative impact could lead to heavy losses for the sector, especially when support measures are gradually phased out. These measures have not only contained the anticipated increase in credit risks, but have also […]
On 13 November 2020, the EBA published the final methodological note for the 2021 EU-wide stress-testing exercise. The aim of the stress tests is to assess the resilience of financial institutions to adverse economic and financial developments, in particular in the event of an increase in credit risk due to the default of the borrower. […]
2021 stress tests planned as banks face worsening crisis
The publication on 29 January of baseline and adverse scenarios, output templates, instructions and market assumptions required to carry out stress tests signals the go-ahead by the European Banking Association (EBA) for the 2021 regulatory exercise. Because of the Covid-19 pandemic, these tests, originally planned for 2020, will take place between now and 31 July […]
With the economic repercussions of the Covid-19 crisis yet to be fully assessed, a robust resolution framework is essential to ensure the stability of the banking system. While the banks were given leave to postpone the reporting of some less urgent information in spring 2020, the Single Resolution Board (SRB) has reiterated the importance of […]
EBA discussion paper on the management and supervision of ESG risks
European sustainable finance regulations evolved considerably in 2020, and the European Banking Authority (EBA) is continuing this trend into 2021. It recently published a discussion paper assessing the potential inclusion of Environmental, Social and Governance (ESG) risks in the supervisory review and evaluation process (SREP) performed by national competent authorities (NCAs). What firms need to […]
Can Africa’s banking sector maintain its growth momentum?
With more than half of the world’s fastest-growing economies located in Africa1, the continent’s economic outlook is a positive one. Average annual GDP growth since 2000 is over 5%, placing Africa as the second-fastest growing economy behind Latin America. Real GDP growth, estimated at 3.4% for 2019, is projected to accelerate to 4.1% in 2021. […]
In this edition of our Banking Regulatory Radar, we cover the key regulatory developments in the banking sector for 2020-2025. The latest version of the Mazars’ Regulatory Radar has been updated with all the Level 2 legislation published in 2020, as well as the measures that were taken in the context of the Covid-19 pandemic. […]
Around one-fifth of global banking activity is undertaken in the UK. Almost half of the UK’s banking assets are held by international banks. The PRA currently supervises approximately 250 international banks, both branches and subsidiaries, which are part of around 180 international groups. Background On 11 January 2021, the PRA shared in a Consultation Paper […]
New measures by the European Central Bank aim to improve gender diversity
American entrepreneur, Malcolm Forbes, once described diversity as “the art of thinking independently together”. Today, diversity is beginning to emerge as a quintessential workforce norm and institutions have started to acknowledge the differences in their staff compositions that are deeply ingrained in the fabric of their organisational culture. With many challenges remaining, the independent think […]
IBOR Transition: Modelling RFR term rates to price IR derivatives
One of the anticipated challenges in the transition from IBOR rates to risk-free rates (RFRs) is the management of its impact on quantitative models. The ones currently used for pricing IBOR-linked financial instruments account for term rates which are “forward-looking”. The RFRs replacing the IBORs are all overnight rates. This means that a term rate […]
Reducing reporting burden for European banks while increasing data quality: a challenge for the EBA
Under article 430c of the updated Capital Requirements Regulation (CRR 2), the European Parliament and the Council of the European Union mandate that the European Banking Authority (EBA) perform a feasibility study on reducing the reporting burden for the European banking sector while ensuring data collection for monetary policy, resolution and supervisory purposes and take […]
IBOR transition: impacts of the SOFR discounting switch
An important milestone in the IBOR transition is the change in rates used by LCH and CME for discounting and Price Alignment Interest (PAI) calculations for USD OTC cleared swaps. Indeed, on October 16, 2020, they moved from using the daily Effective Federal Funds Rate (Fed Funds) to the Secured Overnight Funding Rate (SOFR) for […]
In the early 1990s, stress tests became a popular internal tool for international banks to examine risks and gain a better understanding of threats to the institutions’ balance sheet. From there, the Basel Accord was amended in the mid- ’90s and required banks and investment firms to conduct stress tests. However, these were more internal […]
IBOR transition and FRTB cross dependencies highlighted
The revised market risk framework – also known as the Fundamental Review of the Trading Book (‘FRTB’) – not only impacts an institution’s regulatory capital charge calculation for market risk, but also affects operational, governance and business strategies. FRTB brings significant change. With the aim of harmonising capital standards for market risks across jurisdictions and […]
One of the major challenges of IBOR transition is the availability of historical data on alternative risk-free rates (RFRs) required to implement interest rate model changes or re-calibration. With the Secured Overnight Financing Rate (SOFR) only published since April 2018, the available time series do not provide enough observations for risk modelling. Adding to that, […]
Acceleration in changing the prudential treatment for Software Assets: Covid-19 impact
Over recent years, technology and software have become strategic assets for competitiveness and resilience in the banking sector. Institutions have no choice but to invest to develop and deliver innovative services whilst managing ever greater IT and cybersecurity risks. The pandemic and announcement of lockdown measures posed a significant challenge for banks’ technology teams as […]
Federal reserve board publishes 2020 stress testing results and additional sensitivity analysis
The Federal Reserve Board released stress test results for DFAST 2020 including additional sensitivity analysis, considering the COVID19 outbreak, to assess the resiliency of large banks under three hypothetical recessions, or downside scenarios, that could result from the coronavirus event. Furthermore, the Board provides guidance for large banks to maintain resiliency during economic uncertainties from […]
Looking ahead – ECB and NCA focus 2016, and what does it mean for the market participants?
The last five years have been a time of much challenge and change for the Central Banking Fraternity in Europe. Crisis, both economic and political, has been followed by much adjustment and change, including both practical economic and policy interventions, structural change in the form of Banking Union, much new regulation and most recently the […]