For whom the bell tolls:
Lessons learnt from crisis history of global financial institutions
The global financial crisis since 2007 has significantly rattled the international financial system, and caused wide concern of the enormous negative externalities and moral hazard of the Global Systemically Important Financial Institutions (G-SIFIs). Therefore, international regulators including BCBS, FSB and financial regulatory authorities of major market economy countries such as US and UK issued a series of regulatory policies, among which is the requirement of formulating the "Living Will".
With the promotion of interest rate liberalization and the downturn of China's economy, banks are facing continuous decreasing of interest spread and increasing of NPL rates. In April 2015, the State Council officially issued the Deposit Insurance Act, which has made bank bankruptcy possible in China. Furthermore, the Guidelines for Comprehensive Risk Management of Banking Financial Institutions issued by CBRC clearly stated the requirement of developing and periodically updating the Recovery Plan. Therefore, how to respond effectively to the changes of market and regulator has become an important issue in financial institutions' future operation and management. Through analysing the crisis history of global financial institutions and development of prudential regulation, the Deloitte brochure For whom the bell tolls: Lessons learnt from crisis history of global financial institutions points out that in this context, formulating the Living Will will benefit financial institutions from multiple perspectives, which include:
- Strategic development: promote clear self-evaluating and strategic positioning.
- Business development: improve corporate governance and operational efficiency.
- Market development: enhance market reputation and brand value.
- Risk management: improve risk awareness and ability to respond to crisis.
- Global vision: meet international requirements and enhance international reputation.
For the majority of domestic financial institutions, the Living Will is still a relatively unfamiliar area. As a result, there are many difficulties and challenges in practices, including:
- Highly regulatory requirements and intense schedule of compliance.
- Difficulties in data collection and procession.
- Highly communication costs as many departments are involved
- Normalization of the working mechanism is needed.
Therefore, Deloitte has established a complete set of effective Living Will methodology based on thorough study of regulatory requirements and implementation experiences, forming the Living Will solution suitable for domestic financial institutions. Based on this solution, Deloitte has successfully assisted three G-SIBs and several commercial banks in China with developing their Living Wills and reporting regulatory data, which can ensure compliance with both domestic and international regulatory requirements as well as promote the comprehensive management of financial institutions.