Cause and Effect: If you build it, will they come?

July 23, 2014
/   Spotlight

Many financial institutions assume that digital banking is lucrative because the most valuable customers happen to bank online. While there is certainly a correlation between online bankers and higher profitability, quantitative evidence suggests that...

Fast Facts: Student Loans

January 22, 2013
/   Insights

The Financial Services Roundtable recently released another iteration of its Fast Facts, reliable, bullet-point research about issues facing the financial services industry. Topics span TARP, Dodd-Frank, insurance, lending, retirement savings and more.  Below are some updated Fast...

Intuit 2020 Report: The Future of Financial Services

April 11, 2011
/   Insights

Today, Intuit released the latest edition of the Intuit 2020 report, Intuit 2020 Report: The Future of Financial Services, which identifies and examines four key trend areas that will  transform the financial services industry...

Small Business: Perception vs. Reality

November 21, 2012
/   Insights

In the most recent election cycle, like most others before it, the one sector of the economy that got the most attention was small business.  This is the future, we were told by every...

The Top 10 Trends in the Digital Banking Industry

December 18, 2013
/   Spotlight

2014 is rapidly approaching and as the year wraps, the Digital Insight team has pulled together the top 10 trends in the digital banking industry based on data and trends from studying financial institutions....

Mobile Banking Engagement: Data from Digital Insight

June 24, 2013
/   Spotlight

Intuit Financial Services has been conducting a comprehensive and ongoing study of financial institution customers. From these studies, the company has been able to provide a deeper view of banking customer behavior across several...

Industry Perception, Optical Delusion

January 14, 2013
/   Insights

In Washington, they talk a lot about ‘optics.’ This has nothing to do with regulatory scrutiny, or government mandates on eyeglasses. It has to do with perception—how something looks, the way a particular story...

Social Banking: Blessing or Curse?

August 1, 2012
/   Insights

While the topic of Facebook and banking has generated plenty of heat (though not necessarily a lot of light), the debate seems mostly focused on two broad issues: The much-maligned IPO, and the notion...

Is your financial institution systemically important?

Chances are that even many financial services professionals aren’t familiar with that phrase, but they soon will be. That’s because, according to the Financial Stability Board (FSB), corporations in this hallowed category are so integral to the international financial system that, if they go under, it could potentially affect large swaths of the global economy. In other words, they’ve been deemed too big to fail (and yes, we’re all very familiar with that phrase), and that’s why they were fortunate to received taxpayer-funded bailouts. And while at least some of those funds have been returned, many taxpayers are still understandably seething.

So now we have the FSB, the international body that monitors and makes recommendations about the global financial system, stepping forward with a ‘Consultative Document’ playfully titled “Adequacy of loss-absorbing capacity of global systemically important banks in resolution.”

Dryness aside, this is a big deal. The stated goal of the new recommendations is to prevent taxpayer bailouts of large banks, specifically by doubling the cash cushion they would be required to have for rainy days. That refers to the perfect storm that drenched the entire system faced in 2008, and the occasional downpours specific institutions have faced since then.

The proposal is a “watershed in ending ‘too big to fail’ for banks,” said Mark Carney, FSB chairman and governor of the Bank of England. It is a designed to enable “globally systemic banks to be resolved without recourse to public subsidy and without disruption to the wider financial system.”

Of course, to get to that happy place, there will have to be some serious restructuring, and that in turn carries a high price tag.  In Europe, it means certain banks—think Deutsche Bank and BNP Paribas—will have to sell off many junior bonds and/or discard some risky strategies. It’s hard to conceive any scenario in which these recommendations are put into effect without drastically changing the way many of these institutions do business.

The new rules don’t come as a surprise—they’ve been generating buzz for weeks, and were required by G20 mandates to be put forth by the end of the year. More to the point, U.S. regulators have already put in place similar strictures for the eight largest (you might say systemically important) banks.

Of course, it’s not like any of this is going to happen right away. Even the U.S. regulations don’t go into effect until 2018, and the new FSB proposal is essentially the start of a lengthy debate. All interested parties have until early February to file an initial response, and the industry is clearly gearing up to fight the proposed new rules.

Their argument will clearly be that such draconian measures will hamper lending, which is turn will have a crippling effect on the larger economy. (For the record, banks in emerging markets are at least initially exempt from the new rules.) Besides, FSB proposals are not binding on any particular nation—technically, banks can keep doing what they do without running afoul of international law.

But in this operating environment, that’s not in any way feasible. There is enormous pressure on these massive enterprises, and on the governments that oversee them, to make drastic changes that prevent calamities of the kind that need taxpayer-funded bailouts. Many institutions have already changed their practices to reduce risk, and they’ve done it without cutting off the financial oxygen their customers need. It would be nice if the industry as a whole was perceived to be similarly sensible.

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James W. Gabberty

Gabberty is a professor of information systems at Pace University in New York City. An alumnus of the Massachusetts Institute of Technology and New York University Polytechnic Institute, he has served as an expert witness in telecommunication and information security at the federal and state levels and holds numerous certifications from SANS & ISACA.

Marisa Mann

Marisa Mann brings over 15 years of experience in consulting and financial services industries to the Solstice team, working on large scale enterprise initiatives across many technologies, including specializing in the digital space – Internet and mobile. Mann is passionate about mobile and the endless possibilities for the enterprise, delivering business value through strong brand recognition and driving to excellence in the consumer experience. Prior to Solstice, Mann worked at JP Morgan Chase, Diamond Management and Technology Consultants, Washington Mutual, Inc, and Accenture.

Zachary Ehrlich

25-year-old writer, and as a native San Franciscan, I am unreasonably loyal to Bank of America, if only for their superhero-like origin story, involving the 1906 earthquake and Italian fruit vendors.

Brad Strothkamp

http://www.forrester.com/rb/analyst/brad_strothkamp