Chromatique N°2, January 2014

A look at
Transformations in the Banking Model

The resolution provision of the Banking Act, EMIR, the European Banking Union, AQR, and the French law on the separation and regulation of banking, etc. are all regulatory requirements that banks faced in 2014.
Since the 2008 crisis, the banking model has been put under considerable constraints to which it continues to adapt. Banks are doing this, in particular, by reducing the size of their balance sheets in light of four main constraints: leverage ratio, solvency ratio, short-term liquidity (LCR: liquidity coverage ratio), and long-term liquidity (NSFR: net stable funding ratio) while at the same time working on the strategic implications. On the one hand, institutions are once again nearing profitability margins of 10% in terms of Return on Equity (ROE) and on the other hand ensuring that all measures inherent to the development of the Digital Bank and “Big Data”, foundations of the bank of tomorrow, are well underway.
These developments combined with the current economic environment –a policy of low rates, quantitative easing, etc.– involve fundamental changes in the model of universal banks, whether in terms of distribution capacity, operational functions or business portfolio. Although under constraints, banks are nevertheless adapting quickly and have proven their strength in terms of both available capital and liquidity. Stress tests conducted by the ECB and published in October 2014 bear witness to this and found a large majority of institutions to be on track. In this context, 2015 will be an extension of the 2014 setting with the implementation of regulatory obligations: MIF 2, Basel 3, IFRS 9, Common Reporting Standard, and the Anti-Money Laundering Directive, etc. This is an opportunity for us in this second issue of Chromatique to introduce two topics: the « Bail in» and TLAC, both stemming from the resolution measure of the Banking Act and comprising two major steps for the regulatory calendar in 2015-2016. Thus, through our decryption section, we will explore the main impacts envisioned on the business model of banks in comparison with the current model based essentially on the external bailout. In our first interview, Mr.Philippe Jeanne, Head of Asset and Liability Management for Natixis, explains the major changes due to the crisis in the ALM processes, the business models of the banks and in their organization. Finally, you will discover in these pages our conversation with Mr.Joel Bessis, Professor of Finance at HEC, concerning the application of regulatory requirements to ALM with regard to leveraging, solvency and liquidity, as well as to the processing of the fund transfer pricing.