The third in the series of Evolving Banking Regulation reports from KPMG, analyses the regulatory landscape confronting European banks.

Key points:

  • Banks need to be sustainable at lower return on equity than in boom years.
  • Second tier consolidation is likely to occur.
  • Billions to be invested in technology to build tighter relationships with customers.

The report concludes that the strategic, operational and change agenda challenges are at its greatest and banks are now in the midst of a multi-year transition. Evolving Banking Regulation assesses the main issues attached to each area of regulation (for example capital, liquidity, systemic risk, recovery and resolution planning, and structural reform) and looks at the scale of the task facing the industry.

Jeremy Anderson, global chairman of KPMG's Financial Services practice, says: "Banks are re-designing themselves for the new world – although expecting a lower return on equity than in the boom years. Europe's banking industry is likely to see significant consolidation, with the second tier likely to shrink in both breadth and number, as complexity, higher capital and optimal threshold bite. We believe the main brand names will continue in the market, but with fewer challenger banks emerging than might have been expected."

"They will need to convince investors that lower returns will be compensated by lower risk to earnings over the long term. Doing this well will be a key factor in driving shareholder value in the world after 2008."

The report highlights recent figures showing that the return on equity amongst European global systemically important financial institutions (G-SIFIs) has fallen from a peak of 16 percent in pre-crisis 2006, to less than six percent in 2011, though with an upward trend in 2012.

KPMG's report identifies a number of key challenges:

  • Regulatory complexity and uncertainty – Multiple new regulations and reporting requirements face banks, complicated by compliance with many different regulators. Even the regulators are worried about the volume and complexity of the current regulatory landscape. There are conflicting rules and requirements across borders and jurisdictions.
  • Diminished returns – Revenues are under severe pressure, while bank costs are rising as a result of regulatory implementation.
  • Big data, little use – With reporting requirements to comply with new regulations growing so rapidly, many banks are drowning in data and not necessarily using it very effectively.
  • Culture – Banks recognise that culture and behaviours need to change but this cannot be achieved simply by writing new regulations. It requires significant re-plumbing. Banks will need to take difficult decisions and then implement them effectively.

In the face of such difficult conditions, KPMG concludes that banks who can manage the complexity inherent in the regulatory agenda should be best placed at this major inflection point.

Giles Williams, leader of KPMG's Regulatory Centre of Excellence for the Europe, Middle East and Africa, comments: "It is not enough to simply respond to each regulation as it unfolds. Institutions with sufficient resources and foresight are now progressing from responding to individual regulatory reforms, to designing the major transformation programmes needed to effect efficient change and position themselves to gain competitive advantage.

"Single-point solutions, dealing with each regulation on an issue-by-issue basis just will not work. Those firms with a core, strategic office, capable of identifying both the consequences and unintended consequences of regulatory change, will be the ones to succeed in these challenging times."

Bill Michael, KPMG's Head of Financial Services in the United Kingdom, highlights technology as one of the key tools in this process: "Banks run the real risk of becoming dinosaurs when it comes to their relationships with customers. It's ironic that organisations that never physically meet their customers, such as Facebook and Google, are developing more intimate relationships than banks that have had loyal customers over many years. It's clear that technology is a game changer. Using technology to transform banking relationships with customers is rapidly changing the financial services landscape. Financial institutions need to change their DNA and the way they use technology to stay relevant."

John Martin, Head of Financial Risk Services, KPMG in South Africa, notes that South African banks will be hard pressed to keep up with the multi-faceted regulatory challenges facing them. "Local banks, whilst not as severely affected as European and American institutions by the global meltdown of a few years back (the effects of which continue today), will still be expected to meet the significantly more stringent regulatory rules being implemented by the South African Reserve Bank, as it keeps pace with international best practice".

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