The following guest post was written by Michelle Katics, CEO of BankersLab.
What regulatory risks are you facing in the next 12 to 18 months?
This question was posed to hundreds of FICO World attendees and colleagues in a recent regulation survey conducted by FICO and myself. Top concerns were consistent around the globe, with the two most frequent responses being increasing complexity of regulations (92% of respondents cited in their top three concerns) and increased velocity of changes in regulations (60% of respondents cited in their top three concerns). Similarly during the regulatory panel that I moderated at last month's FICO World, participants worldwide cited remarkably consistent regulatory concerns.
The survey highlighted a few regional differences. Primarily, lenders outside North America did not anticipate increased fines or regulatory mitigation, whereas this was a more frequent concern in North America.
Coming from Asia, I wasn’t sure if I’d find a significantly different situation in North America. Asia was not as severely affected by the economic crisis, and in fact, consumer credit has continued to expand in many markets. Banks have been busy implementing Basel II and revised Loan Loss Provision guidelines under IFRS. This is in contrast to the US market, which is more focused on the impact of new regulations such as Dodd-Frank.
Even with differences across markets, there were three commonly held views that surfaced during the FICO World panel discussion.
1. Be mindful of the phenomena of ‘boom and bust’ credit cycles. When capital markets search for investment opportunities during liquidity over-supply, growth targets are aggressive and can take precedence over other objectives. Further, in the pursuit of lower and middle class economic growth, policy makers may support this growth through credit expansion ‘enablers.’ However, this can lead to aggressive competitor practices, over-lending, and over-indebtedness. The cycle continues with rising delinquency and default, and often an overreaction from lenders, regulators and policy makers.
When shaping your regulatory engagement plans, be mindful of where you fall in this cycle in your market. Attitudes about policy are shaped by this backdrop. The most sensible debt relief, consumer protection, and bankruptcy regulations are typically hashed out by the industry well before a crisis occurs. Next time regulatory risk is not at the top of the agenda is actually the best time to think about increased advocacy!
2. Whether banker, regulator, consumer, or practitioner, we can all agree that proactive engagement to create sustainable, sensible regulatory policy is the way forward. This requires patience, diligence, and the willingness to articulate shared goals of sustainable economic and borrower growth. I encourage you to look across markets for regulatory guidelines that have been successful and use these as case studies. In the FICO World session, helpful references included:
3. The reality of increased complexity is here to stay. In the analytics world, this means that Basel II IRB modeling, shift to forward-looking loss reserves, increased model monitoring rigor, and increased model validation scrutiny are all in order. The tools are at your disposal—but increased dedication and focus will ensure ongoing compliance, and should provide a more solid backbone to your risk management strategy. A combination of strong analytic tools and a skilled team will serve you well internally, with added external focus on proactive industry engagement.
