At present, on the one hand, affected by geopolitical factors such as Sino-US relations, the Russia-Ukraine conflict, and differences in the Middle East, the problem of fragmentation of global financial supervision has intensified. On the other hand, many countries regulate issues such as data, technology, and climate in line with national agendas, further complicating financial regulation. At the same time, the uncertain economic outlook, such as rising energy costs and persistent inflationary pressures in some countries, has cast a shadow over asset quality in the global banking sector in 2024. In addition, a series of recent events in the financial industry have forced regulators to pay more attention to the effectiveness of board and management oversight. The interweaving of these political and economic issues makes the outlook for global financial regulation uncertain in 2024.
Ernst & Young recently releasedGlobal Financial Regulatory Outlook 2024, analyze the key points of future supervision and put forward eight suggestions to help financial institutions cope with future challenges.
Recent international banking events have highlighted the need to reassess the risk contagion caused by the failure of non-systemically important institutions, and the importance of managing the operational and reputational risks that may arise. In fact, some liquidity regulatory measures and internal liquidity stress tests in the past have not fully reflected the impact of technological innovation on consumer behavior. In addition to the ongoing disclosure of liquidity and other regulatory metrics, we expect financial institutions to experience more complex and comprehensive stress testing on non-financial risks, covering more themes, risks and participants. At the same time, it is necessary for financial institutions to actively communicate with the regulatory authorities.
In the wake of the financial crisis, global regulators have continued to strengthen and refine capital and liquidity regulatory standards, setting minimum requirements to eliminate market expectations of support and protect public funds. In August 2023, U.S. regulators issued an Advance Notice of Proposed Rules[1] to refine the resolution plan, which is mainly applicable to large banks and regional banks. EU regulators have identified liquidity as a key factor in ensuring the resolvability of banks. According to recent guidance[2], banks' internal frameworks, governance systems, and management information systems are expected to lead to a net liquidity position over time in a short period of time. While most European banks will have sufficient capacity by the end of 2024, this may require specific improvements to IT systems and the ability to find and recruit people with the right experience.
Therefore, in 2024, financial institutions need to make recovery and resolution plan testing a top priority at the management and board level, and conduct dynamic simulations for business vulnerabilities. On the other hand, review the credibility of the crisis management approach to ensure that losses to the market and customers are minimized.
As digital transformation becomes more common, financial institutions are constantly updating legacy systems. According to the latest annual EY and IFC Global Risk Management survey, 94% of chief risk officers say they need "some" or "many" new skills and resources to meet the needs of the evolving risk management function, with data science and networking topping the list of "most in-demand skills". [3]
In 2024, financial institutions will seek to further strengthen their operational resilience to meet regulatory requirements and ensure that senior management accountability mechanisms operate effectively. In addition, financial institutions need to strengthen IT systems, IT outsourcing, and cybersecurity risk management, and form cross-functional teams to address risk and compliance.
The digital asset market is maturing, with asset classes ranging from stablecoins, crypto assets, central bank digital currencies, and more. While regulatory approaches vary across jurisdictions and timelines are unclear, the overall direction is to consolidate the regulatory framework.
As consumer payment habits shift from cash to credit cards, digital payments and services, financial institutions need to clarify their overall digital asset strategy, understand how digital assets fit into existing legal frameworks and financial market infrastructures, clarify what regulators expect under the current rules, and keep an eye on technological and regulatory developments.
Regulators in various countries require financial institutions to develop net-zero transition plans to manage risk exposures. As a result, financial institutions can leverage net-zero initiatives for organization-wide transformation. A robust plan addressing biodiversity and climate-related risks could be a roadmap for a successful business transition. Financial institutions can set clear targets, support sustainability disclosures, and provide ESG training to key personnel by adopting measures that encompass all aspects of business strategy, corporate governance, and risk management.
Regulators are expanding their regulatory focus from strict compliance with existing regulations to a broader and more proactive assessment of the impact of financial products, product pricing and the general environment on consumers. To ensure that consumer interests are maximized, central banks have revised consumer protection regulations to emphasize the need for financial institutions to make greater commitments and fully understand the ultimate impact of their products and services on consumers. In addition, in 2024, financial institutions will also face broader regulation, and competitors in the same field will have a more level playing field. At the same time, financial institutions will also have the opportunity to explore other marketing channels, such as social**.
While technology has brought new types of risks, it has also provided new tools for combating financial crime. There has been a recent rise in fraud and investment fraud in the retail banking sector, where the majority of payments are made through bank transfers, and banks need to strengthen their monitoring and analysis of their transfer operations.
In addition, regulators will further strengthen the prevention and review of cryptocrimes. For example, some regulators are working to expand the coverage of existing guidelines to include new players such as cryptoasset providers. As a result, data and AI solutions will increasingly be used in the field of financial crime compliance in the future, which will also include industries beyond financial services.
Operational resilience remains a key area of global financial regulation in 2024. The recent banking crisis has highlighted gaps in risk prevention and resilience for banks, and operational resilience is no longer simply a compliance exercise, but should be taken seriously from the perspective of consumer protection. Going forward, regulators will conduct further scrutiny of areas of weakness and corrective action plans, track down violations, share insights and issue industry-wide guidance to improve the overall resilience of the financial sector as a whole. Financial institutions also need to identify risk appetite, introduce a broader testing scenario, and adjust their processes accordingly.
The uncertain economic outlook and complex regulatory environment present both opportunities and challenges for financial institutions. Financial institutions need to fully understand the expectations of regulators under the existing rules and continue to track regulatory developments in areas such as digitalization and ESG. At the same time, financial institutions need to identify overall priorities and tailor business models that align with their people, processes, data, and technology.
Note: 1]."U.S. Regulators Propose Guidance to Enhance Resolution Planning at Large Banks," Federal Reserve, August 29, and "FDIC Board of Directors Issues Issues proposed rule to strengthen resolution planning for large banks), Federal Deposit Insurance Corporation (FDIC).
2].Operational Guidance for Banks on the Measurement and Reporting of the Liquidity Situation in Resolution, Single Resolution Board (SRB).
3].How Bank Cros Are Responding to Volatility and Shifting Risk Profiles, eyCom, Jan Bellens, Bill Hobbs, and Christopher Woolard
This article is prepared for general information purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please ask your advisor for specific advice.