Coping With the 2009 Regulatory Challenges

By Ralph Baxter, ClusterSeven

As the financial industry enters an extremely uncertain 2009, banks are faced with a variety of challenges and there are a lot of questions as to how they will cope. These challenges revolve around the uncertain regulatory climate and the fact that there is an increasing demand for enhancing compliance and risk management capabilities during a time of decreased revenues. How will most banks react?Currently, banks are waiting to see what regulations will be passed by Congress in 2009 and how dramatically they will need to change the way they do business as a result of new laws. Banks accept that the regulatory environment will become stricter but they desperately need Congress to move quickly and assertively to pass new requirements. This would enable them to complete their planning for the next two years and begin to complete the development of their business strategies that will take them to the eventual recovery of the economy. Delaying the passage of new regulations is breeding uncertainty and delays a recovery.

Another issue that determines the banking industry's future is the specificity of any new laws. Regulations are often "general" or "specific" and each type has its own pros and cons. General regulations are easier for regulators to write and leave less scope for loopholes, but because they lack specific requirements, they are interpreted differently by parties, leaving room for confusion. Specific regulations offer more details and can be harder for banks to follow at first but offer no uncertainty about whether banks are in compliance. However, loopholes may emerge. Ideally, Congress will strike a balance between general and specific when new regulations are passed. For the most part, regulations become more defined with precedent-setting cases determined through the court system. But with the demand for greater oversight in these uncertain times, consumers will lack the patience for this long, drawn out process.

What can banks do to deal with new regulations as they come under increased pressure to enhance their compliance and risk management capabilities with shrinking revenues? As banks try to make sense of this unbalanced equation, they recognize the need for improved compliance and risk management trumps any opposition to additional spending. The wounds of the recent economic crisis and pending new regulations demand it.

If they have not already done so, banks will consider their purchase prioritization approach, and focus on patching up what they already have versus procuring expensive, new systems. Money that banks invest in IT will be carefully distributed, and every line item will be scrutinized on a zero-sum basis.

With banks being forced to postpone big system upgrades and major revisions until 2010 or 2011, they will focus on getting the most IT value out of every stretched dollar. Banks will look to invest in more agile IT infrastructures that deliver risk management and compliance alongside innovation, rather than as a secondary process, so that they are better able to adapt to changing market conditions. For example, IT spending in 2009 will largely focus on providing greater responsiveness so that banks can sustain themselves during these hard times and yet still remain flexible enough to grab market share and boost growth as soon as the economy starts to turn.

There will also be a big move towards automating many of the manual systems and processes, particularly when it comes to compliance and risk management. Typically these functions require large and expensive staffs and are extremely error prone. The ability to run more efficient risk management and compliance processes using a fraction of the staff and cost will help speed up the adoption of these systems among banks.

The two trends for bankers to watch in 2009 are the speed with which Congress passes new regulations and their specificity, as well as the move towards automated compliance and risk management systems among banks to help cost-effectively deal with these new regulations. Both are critical to the banking industry and play a key role in determining how soon the economy recovers.

Ralph Baxter is CEO of ClusterSeven, (London and New York) an international provider of enterprisewide, strategic spreadsheet and data management software to financial institutions and Fortune 500 financial reporting divisions.