Vincent Kilcoyne, EVP and Head for Product Management at SmartStream sees multiple challenges from Basel Committee on Banking Supervision 248 (BCBS 248) and other regulations as rising interest rates continue impacting intra-day liquidity and cash positions of banks.
Here is the transcript:
Siddharth: Regulations still remain a hot-button issue, a decade after the Global Financial Crisis. We are familiar with pre- trade regulations, especially around KYC and AML. What are some of the new regulations that are challenging the post-trade environment?
Vincent: One of the biggest challenges that you have right now from an industry perspective would be the Basel Committee on Banking Supervision 248 (BCBS 248) on the cash and liquidity. It is trying to provide the regulators with the reassurance that the banks are in control of the cash and liquidity, the way in which they behave. It is a big challenge for banks to be able to manage their liquidity on an intraday basis. Now, we have been working with a number of organizations to focus on that, but also, the challenge that you have is to make sure that you demonstrate and have control and take the opportunity to exert control over how your market behaves and how you create stress scenarios that reflect the way in which your bank operates. For example, if you have an organization that is very much wealth-based, that will create different set of stress behaviors to one that is very much heavily retail-customer-based, or one that maybe corporate-customer-based. Being able to control intraday liquidity across the DNA of your market, organization and customer base is a very interesting challenge. If you really sit down and speak with a lot of banks right now, for the last probably ten years, they have been in a compliance and regulatory programs. There has been a massive shortage of paucity of innovation. Now that the banks are kind of coming out of regulations, they had BCBS 239, which was risk data aggregation, then there is FRTB, which is still going on, so that is another big regulation coming down the line. So, there are a lot of conflicting pressures for the same budget, and this is one of the biggest challenges they have is how do I embrace innovation, facilitate it, and at the same time remain compliant? But then, also the fact that the competitive world is evolving very quickly. The banks were traditionally competing with other banks and now they are competing with the digital emerging banks, non-banks and fintech payment service providers. Banks have also got to be able to respond to the changing technology requirements, for example, am I doing traditional fiat currencies versus cryptos? I have got to be able to then embrace other emerging payment methodologies, for example, using bitcoin and blockchain. So, we have a very interesting set of challenges facing the banks, some of which are regulatory, but some of which are structural. Fundamentally, anything that a bank does will always ultimately land on the balance sheet, and as such, the banks have to be able to ensure that they have total control of their balance sheet from the point of view of volatility, also ensuring that they have total control of their industry reputation, and their ability to service their customers profitably, and very cleanly compliant. As one of state attorney said, if you think that compliance is expensive, have you tried noncompliance? So, this is a very interesting challenge. Banks are recognizing that the cost of not only monitoring noncompliance is substantially higher than the cost of compliance, but the challenge of compliance is fairly substantial because I have got to be able to demonstrate in an evolving world – both regulatory and structural, that I retain that level of control from an operational perspective, from a financial perspective, and from a regulatory perspective.
We recognize that organizations need to be agile enough to participate in that (digital payments) community, but also have enough automation and control to be able to embrace it and service it profitably within a controlled fashion. This is something that we realize we’re doing, and this is what Aurora has been released specifically to provide that. It gives organizations the ability and the agility to embrace new market behaviors with the control and the discipline that ensures that when you do embark on new business initiatives, you are not doing it to the detriment of, fundamentally, your balance sheet.
Siddharth: While interest rates have started to pick up in some regions, others are still running loose monetary conditions. Margins have been under pressure, impacting banks to manage their cash flows effectively. What are some of the key challenges that your corporate banking clients face on the cash business side?
Vincent: Control and the optimization of how they manage their end-of-day positions because ultimately, if the bank has money sat on a nostro account overnight, it is efficient. So, it is making sure that you truly have an understanding of your cost of doing nothing because fundamentally, that is exactly what it was, and it was less of an issue when you had very low interest rates. Now as interest rates become an issue, then the cost of doing nothing is actually a genuine cost. Some people saw it as being a cost of doing business. Now, increasingly, it’s a substantial cost. So, really, we are finding that organizations want to have an improved level of understanding of their intraday cash positions, the cash utilization, from a bank’s perspective, an understanding of what the cash demands of their customers are and how do I service those, what the cash behavior the liquidity demands and the behavior in terms of my relationship with servicing my customers. So from a cash and liquidity perspective, we are releasing a solution that addresses the intraday liquidity requirements and the stress-testing requirements of an increasingly broad set of users and clients.