As oil-rich countries look to diversify their economies, the financial services sector has the potential to step in and stimulate economic growth.
But at the same time, banks must intensify efforts to rebuild trust and resolve the cultural challenges they face.
The role of the financial services sector in the diversification of any economy cannot be taken lightly. The sector can promote jobs and economic growth.
A report by KPMG ahead of November’s G20 summit in Brisbane, Australia, emphasised that growth strategies such as increasing investment in infrastructure can all be accelerated by the financial sector. For example, adjusting the capital and liquidity rules on banks undertaking long-term financing could boost investment.
For this to be tapped fully, there is a need for a financial regulatory reform agenda.
Reforms are often implemented inconsistently across jurisdictions, and this has led to higher regulatory costs, greater uncertainty and reduced availability of financial products to help fuel economic growth. There is also the concern that the current environment has reduced the number of market participants, which reduces choice and does not help to sustain competitive and innovative markets.
Everyone agrees that the financial industry globally has made significant progress on the capital front, but still faces numerous challenges with governance and culture. Expectations around risk culture can be opaque. In many cases, management has yet to develop a culture for its organisation.
There is an urgent need for banks to intensify their efforts to introduce culture and behavioural change so that regulators can more comfortably step back. The current environment, in which regulators believe they need to tackle everything because a portion of the sector cannot be trusted to play its part in improving standards, is unproductive.
Board reporting should include clear evidence, which can be shared with supervisors, that appropriate action is taking place. Getting this right and creating some constraints will rebuild trust with society more widely and allow banks to support the economy.
The regulatory reform agenda is perhaps the biggest driver of strategic and operational change. Managing it is a key challenge for the banking industry. Banks have to contend with a multitude of new rules – global, regional and national – with each jurisdiction moving at its own pace and applying its own interpretation to commonly agreed high-level principles.
There is a need to reduce regulatory disincentives and encourage banks to lend to small businesses, infrastructure and trade finance – for example, adjusting regulation to put the same capital and liquidity requirements on high-quality securitisation of bank lending as there are on covered bonds.
Further, insurers and other long-term investors should be encouraged to lend to infrastructure and small businesses, creating a regulatory regime and business environment that encourages lending to long-term capital projects.
Current and pending regulatory revisions have diverse effects on bank structures, requiring sweeping structural changes. Banks are now adapting their structures, refocusing their activities and pursuing cost reductions. Such changes may ultimately prove costly for bank clients and dampen overall economic growth.
Banks in several jurisdictions are further responding by spinning off holding companies, operating subsidiaries, revising their internal governance and control structures, creating regional hubs or localising their operations to decentralise services previously performed by the group.
Many banks are focusing on core activities, either retreating from entire international markets or exiting certain business lines, and are assessing their capital and liquidity positions against Basel 3 and cash reserve requirements. They are adjusting their balance sheets in terms of capital, risk-weighted assets, capital and leverage ratios, and funding sources.
Finally, supervisors have begun to focus more on the culture of banks. There is a growing recognition that one key driver of poor decision-making ahead of the financial crisis, and of successive mis-selling episodes and other scandals in both retail and wholesale banking, was poor cultural standards in many banks.
Ian Gomes is the head of advisory at KPMG Lower Gulf
Follow The National's Business section on Twitter
