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MANAGING PROFITABILITY AND GROWTH IN AN INCREASED COMPLIANCE AND REGULATED ENVIRONMENT DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

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Page 1: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

MANAGING PROFITABILITY AND GROWTH IN AN INCREASED

COMPLIANCE AND REGULATED ENVIRONMENT

DR. RANEE JAYAMAHA CHAIRPERSON

HATTON NATIONAL BANK PLC 17TH OCTOBER 2014

Page 2: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Global Financial System -Regulatory Rethinking• Financial crises and adverse impacts on world economy

imprudent banking and laxed supervision

market rigging and scandals

inadequate capital despite Basel I and II

• Regulatory responsibilities

safeguard national and global financial systems

encourage to work within the global regulatory framework

safeguard interests of all stakeholders

• Tightening regulation is considered to be the solution

• Cost to banks, their growth and profitability are

disregarded

Page 3: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Global Financial System - Regulatory Rethinking

• Regulatory tower is rising - new floors are added

“Bailing in” instead of “Bailing out” is considered

• Regulators view global and systemically important banks are

too big to fail

too big to save

too big to fix

too big to jail

Page 4: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Assessment of Basel Capital Adequacy Framework

• Quantitative restrictions are like regulatory

commandments

Basel I – “thou shall not”- simple and limited to credit risks

Basel II–“thou shall provide the internal model is correct” –too

complicated - discretion with banks – DIY nature- non

compliance

banks grew and made profits

supportive elements are missing

• Due to simplicity, the Glass Stegall Act was far more effective

Page 5: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Basel Capital Adequacy Framework

Enhanced quantity and quality of capital under Basel III

Source: Basel Committee - BIS

Items of CapitalMain Components

 

Requirement as a percentage of risk weighted assets

Basel III requirements with capital

conversation Buffer of 2.5%

Basel II Basel III

Common Equity Share capital, retained profits and disclosed reserves

2.0% 4.5% 7.0%

Tier I Capital

Common equity plus other capital instruments which are subject to strict eligibility criteria and which encompass a loss absorption mechanism

4.0% 6.0% 8.5%

Counter Cyclical Buffer (Capital Conservation Buffer)

Common Equity   2.5%  

Total Capital

Tier I capital and capital instruments subordinated to depositors and general creditors of the bank subject to strict eligibility criteria

8.0% 8.0% 10.5%

Page 6: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Financial Regulatory Framework• National regulatory systems

USA - Basel plus Dodd-Frank regulation

UK - Basel plus Financial Policy Committee Regulations

Europe - Basel plus EU Directives

• Stress testing and restrictions on trading book /investment banking

• Profitability of banks is from:

reduction of branches / employees

selling /closing non profit earning units

reduced operations of investment arms

restructure overseas operations

Page 7: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Sri Lanka’s Financial Regulatory Framework

On Basel II, and moving on to Basel III

Flexible and banks behave well. No criminalization of

banking

Regulatory framework is tolerable and allows banks to

grow/profit

Mandatory Corporate Governance has saved

the banking industry

Need to avoid adhoc regulatory tightening

Inter-regulatory institutional coordination and internal

consultation need streamlining  

Page 8: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Impact of Policy and Regulatory Changes by Advanced Countries

USA: reversal of ultra - loose monetary policy

free loanable funds from the Fed, ECB, BOE

helped banks to grow and maintain profits

Emerging markets benefited due to inflow of funds

Tapering off of QE programmes (June/July 2013) had severe

impacts on global financial markets

Uncertainty and loss of business opportunities for banks in

emerging countries

 

Page 9: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Cost of Regulatory Reporting and Compliance

• Ever increasing regulatory costs (normal + cost of raising extra

capital)

• Cost of providing data/ information

data requests by multiple regulators /different units of a regulator

not making use of such information for analysis; agony/frustration

maintenance of an army of compliance officers

• Cost of compliance with FATF + , UN regulations , FATCA and

others

• Criminalization of banking business - USA

reprimanding /black listing of banks

unprecedentedly high penalties and non transparent

settlements

Page 10: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Overall Impact on Growth and Profitability of Banks

• Growth has suffered; costs have escalated and

profitability lowered

• Severe competition and industry wide impact

• M0vement of business to shadow and less regulated

markets /institutions

asset and property bubbles – potential risks

• Restrictions on investment banking and trading book

• Shareholder/ investor frustration

• Restructure / merge and consolidate

Page 11: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Managing Growth and Profitability

• Reduce other costs and conduct prudent banking

business restructuring

outsourcing of non-core functions

leaner organizations and use of technology

• Share infrastructure and common platforms

• Diversify and increase fee incomes where possible

• Seek joint operations to minimize risks and leverage on

expert knowledge

Page 12: DR. RANEE JAYAMAHA CHAIRPERSON HATTON NATIONAL BANK PLC 17 TH OCTOBER 2014

Observations and Remarks

• Financial system stability is a prime regulatory objective. Banks

are prime constituents of the financial system. Both should

survive

• Balance between regulations and banking business is

imperative

regulatory objectives should be clear

dangers of over-regulation should be understood

• Watch dog’s failures should be accepted (2007-2009)

• Regulation should not be a wining game

• Catching/avoiding a crisis is difficult but complexity aggravates

situation