Global bank booking models
Making a success of structural reform
International banking is undergoing profound change, as banking groups comply with new regulatory requirements and supervisory expectations, overhauling business models, and transforming how they operate. At the center of this are booking models, which set out how and where banking groups transact and how the resulting risks are managed. Booking models are increasingly under scrutiny, with regulation and supervision replacing other factors (such as optimization of market risk management) as they are key driver of cross-border practices.
- Booking models and bank structures
- Business needs—Efficiency and simplicity
- Meet the authors
Booking models and bank structures
In the past, banking group structures and booking models were typically driven by factors such as the optimization of market risk, specific regulatory or legal considerations, mergers and acquisition activities, or tax. For instance, banking groups often sought to concentrate market risk into a few legal entities as possible to optimize hedging efficiency and market risk capital consumption, driving back-to-back trades and remote booking.
'Fragmentation', 'balkanization', and 'de-globalization' are now terms frequently used to describe the pressures of global banking groups to devolve more autonomy to local units. In some cases, local operations are being push to have the capacity to act and operate independently, and to be capitalized locally with constraints on the fungibility of capital, funding, and liquidity.
Understanding regulatory requirements and the perspective of the prudential supervisor is key to enabling banking groups to ensure their approaches are aligned with supervisory and regulatory expectations.
There are several important components including:
- The supervisory perspective
- The prudential framework
- Derivatives regulation
- Market access
Business needs—Efficiency and simplicity
All major banking groups have significant programs of regulatory reform in train, but regulatory and supervisory pressures are often being addressed tactically and piecemeal, and are not sufficiently integrated end-to-end across business and control functions. Booking model change is often seen as a side effect of other regulatory reform, whereas it could be a powerful strategic tool for reconciling the competing demands of regulation, strategy, and business efficiency. Adopting a group-wide strategic booking model perspective is one way to work through some of the complexities of regulatory change, which also enables banking groups to address other longstanding issues such as operational efficiency.
What this means for banking groups
The strategic challenge comes down to a question of how to satisfy all of a banking group's stakeholders:
- Customers: Provide the services customers want in the way they want them
- Regulatory, supervisory, and resolution authorities: Meet requirements and align with expectations
- Investors: Deliver attractive returns by optimising business model and operating efficiently in terms of capital/risk allocation, tax, and cost management
All global banking groups have for some time been reassessing what they do, where and how they generate return on equity in excess of their cost of equity, and how they can manage costs more efficiently. Decisions have been taken to exit or shrink business lines, most notably investment banking services. These decisions have tended to be driven by regulatory capital and liquidity considerations which have changed the economic attractiveness of certain activities. But the regulatory picture continues to evolve, and other factors should to be brought into the equation. The booking model and its connections to structural reform should be a core consideration in any ongoing strategic decisions about what the banking group does, and where and how it does it.
The new regulatory environment penalizes complexity and puts a premium on legal entity rationalization. We are seeing supervisors asking direct and challenging questions of banking groups' booking practices, and we expect them to become more systematic in their scrutiny. The authorities are in turn empowered by structural reform regulations and resolution requirements to mandate changes to banking groups' legal entity, financial and operational structures, including their booking practices.
Learn more about booking models and what regulators are trying to achieve in the new environment in our new report.