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Global Risk 2020 It’s Time for Banks to Self-Disrupt
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact. To succeed, organizations must blend digital and human capabilities. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change. BCG delivers solutions through leading-edge management consulting along with technology and design, corporate and digital ventures—and business purpose. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, generating results that allow our clients to thrive.
Global Risk 2020
IT’S TIME FOR BANKS
TO SELF-DISRUPT
GEROLD GRASSHOFF
MATTEO COPPOLA
THOMAS PFUHLER
STEFAN BOCHTLER
NORBERT GITTFRIED
PASCAL VOGT
CARSTEN WIEGAND
April 2020 | Boston Consulting GroupCONTENTS
3 OVERVIEW
Reinforce Essential Activities
Anticipate Downstream Impacts
Accelerate Digitization
6 FIVE YEARS OF DECLINING PROFITABILITY
Regional Returns Highlight Shared Challenges
COVID-19 Injects New Uncertainty
The Crisis Will Accelerate the Need for Deeper Changes
11 RESPONDING TO THE COVID-19 CRISIS
Safeguarding Liquidity and Funding
Applying a New Lens to Credit Risk Management
Adapting Compliance to the New Environment
Putting These Changes into Action
15 UNDERSTANDING THE ART OF THE POSSIBLE
Digitizing the Risk Function
Digitizing Market Risk Management
Digitizing Credit Processes
Digitizing Balance Sheet Management
Digitizing Regulation and Compliance
22 HOW TO MAKE DEEP CHANGES THAT LAST
Prioritize High-Value Opportunities
Optimize Core Processes
Create the Right Enablers
Employ Agile Ways of Working
25 FOR FURTHER READING
26 NOTE TO THE READER
2 | It’s Time for Banks to Self-DisruptOVERVIEW
D isruption does the most damage when it meets resistance.
Although banks have risen admirably to the surge of demands
imposed upon them in the aftermath of the 2007–2009 financial crisis,
most have continued to fight back within the bounds of their existing
business and operating models rather than yield and adapt to the
systemic shifts underway.
As this year’s report makes plain, that approach hasn’t worked. Eco-
nomic profitability is down globally, with returns shrinking in nearly
every market. Income growth is lackluster, and despite continued
efforts to rein in costs, most banks still have not been able to sustain
the performance gains needed to secure their future. The current
COVID-19 crisis, the strongest test that the global financial system
has faced since 2007–2009—and whose long-term effects are still
unknown—may make the challenges that much more difficult.
In addition to the sobering public health repercussions, the swiftness
and severity of the outbreak have shuttered businesses the world
over—for weeks and, in some cases, months, at a time. On a sectoral
basis, we expect widespread and heterogeneous impacts. Banks will
likely see margin and volume compression owing to lower interest
rates and a dampening of client activity and investment. Credit risk is
a particular threat as clients come under increased liquidity pressures.
Deteriorating credit quality among counterparties could result in rat-
ings downgrades, greater default rates, and increased pressure on prof-
itability and regulatory capital. Banks are pivotal in helping companies
to bridge liquidity shortages. Thanks to massive central bank interven-
tion, volatility in the short-term funding market for banks is starting to
subside. In the long run, however, banks might face higher funding
spreads and might need to adjust their funding strategies.
Most analysts think we’ll see some form of recession, though the sever-
ity is uncertain. What’s clear is that the more prolonged the crisis, the
greater the economic risk. Between the first few weeks of “firefighting”
and the long-term new normal, we will experience a hybrid stage that
will last for at least three to six months, potentially much longer. To
manage this transition effectively, here’s what banks need to do now.
Reinforce Essential Activities
Effective crisis response will require banks to:
•• Maintain strong liquidity and funding mechanisms. This step is
clearly crucial—both for banks and for the broader economy. The
Boston Consulting Group | 3support measures from governments and central banks will help a
lot with this, but banks need to ensure that these measures reach
affected functions and clients efficiently.
•• Shore up credit risk management. Although all industries will
be impacted by the COVID-19 crisis, the effects will vary by sector
and client. Risk drivers specifically related to the COVID-19
outbreak are not currently captured by credit-ratings systems.
Banks, therefore, need to ensure that they understand their
positions and can mitigate issues quickly.
•• Update compliance priorities. Compliance teams should assess
projects on the basis of the bank’s risks and commitments and
determine what effort will be required to deliver appropriate
compliance. Compliance officers must also assess the resilience
and adaptability of their operating models and understand how
COVID-19 may impact the delivery of different processes. For
example, as regulatory bodies like the European Banking Authori-
ty have stressed, banks should pay close attention to how the shift
to remote working and the potential pressure for banks to make
up for lost volumes could test a bank’s anti-money-laundering
(AML) and market conduct practices.
Anticipate Downstream Impacts
We currently see a supply shock, demand shock, and oil price shock
at the same time, and for the first time all regions worldwide are
affected. The impacts will be different across industries. Gauging
those effects will require banks to invest in detailed scenario plan-
ning, differentiated by industry sector.
Banks must also revisit their business continuity plans—looking not
just at near-term impacts but at the wider ripple effects over the next
12 to 18 months. That planning must also extend to the operating
model to ensure that banks have sufficient controls around processes
like cybersecurity, anti-money-laundering, payments and liquidity,
and credit.
Accelerate Digitization
Arguably, one of the most pernicious risks facing banks globally is not
external volatility as much as it is a reluctance to shake up institution-
al practices and norms at their core. The tactical improvement efforts
that banks have made haven’t delivered the transformation needed.
Last year, we wrote that digitization is the key to resilience in the
banking segment. This year, the unprecedented challenges posed by
the COVID-19 outbreak make the digitization imperative all the more
urgent.
Risk, treasury, and compliance functions can help banks respond to
the present crisis and lay the groundwork for banks’ long-term suc-
cess. By using AI, machine learning, and other advanced technologies
and practices, they can improve bank steering; deliver predictive,
real-time insights; and execute faster and more efficiently. Yet suc-
4 | It’s Time for Banks to Self-Disruptcess requires a willingness to see disruption not as a threat, but as a
lifeline.
Our thesis is straightforward: banks interested in reducing the risks to
their business, enabling integrated balance sheet management, and
modernizing compliance must develop a clear digital strategy, rede-
sign core processes, and establish the right digital enablers. This re-
port lays out the path to digitization and presents concrete examples
of what that transformation looks like and the results it can achieve.
Boston Consulting Group | 5FIVE YEARS OF DECLINING
PROFITABILITY
E ven before COVID-19, bank profitability
was on the wane. Since 2014, total eco-
nomic profit, which adjusts for both risk and
Although European banks saw EP gain some
ground from 2017 to 2018, the overall re-
sults have been mired in negative territory.
capital costs, has fallen by over half, from Meanwhile, the soaring growth that many
15 bps to just 6 bps in 2018. (See Exhibit 1.) banks in Asia-Pacific, South America, and
the Middle East and Africa region enjoyed
Only banks in North American countries during the middle part of the last decade
had been building a sustainable recovery. has foundered.
Exhibit 1 | North America and Europe Show Growth in Economic Profit, but APAC Slides Further
ECONOMIC PROFIT GENERATED BY GLOBAL BANKS, RELATIVE TO TOTAL ASSETS, 2014–2018
Economic profit
(basis points) North South Middle East Global
Europe America1 Asia-Pacific America1 and Africa average
200 –384 232 537 72 49 506
100
94 91
70 62
52 43 52 45 50 47 44
31 27 25 35 31 19 33
20 7 15 16 11 7 6
0
–26 –24 –26 –22 –14
–100
–200
Signs of recovery Back on track Declining Declining Steady
–94 –90 –48 32 47 60 171 117 26 13 24 10 8 10 9 130 108 57
2014 2016 2018 2014 2016 2018 2014 2016 2018 2014 2016 2018 2014 2016 2018 2014 2016 2018
–81 –71 52 41 155 68 7 18 10 12 143 68
2015 2017 2015 2017 2015 2017 2015 2017 2015 2017 2015 2017
Cumulative economic profit, 2014-2018 (€billions) Economic profit (€billions)
Sources: BankFocus; annual reports; BCG Risk Team database; Bloomberg; BCG analysis.
Note: Exchange rates from 2018 are used for comparability.
1Total assets are lower than in Europe because of local and US generally accepted accounting principles.
6 | It’s Time for Banks to Self-DisruptEroding returns combined with the deep un- Inconsistent regulatory standards are yet
certainty around the long-term impacts of the another issue. Differing rules and reporting
COVID-19 outbreak heighten banks’ vulnera- requirements across jurisdictions saddle
bility. Although other sectors prospered over European banks with additional compliance
the past decade, most banks have struggled complexity as well as cost. The creation of
to reset. Few have been able to adapt their a European banking union and capital mar-
business and operating models sufficiently to kets union would help to provide a more
address the cumulative impact of risk, capital, level playing field for institutions in the
and compliance costs. region.
These are among the findings of BCG’s tenth North America, by contrast, saw EP leap to a
annual study of the overall health and perfor- five-year high of 35 bps in 2018. The 10-point
mance of the global banking industry. The rise from the year before was buoyed by
study assessed the EP generated from 2014 lower capital costs as well as a drop in loan
through 2018 by more than 350 retail, com- loss provisions and operating costs across
mercial, and investment banks, covering banks in North America. Refinancing char-
over 80% of the global banking market. Be- ges took some of the edge off this growth,
cause EP weighs refinancing, operating, and however. Despite higher gross income and
risk costs against income, it provides a com- dividends, net interest and dividend income
prehensive measure of a bank’s financial fell from 210 bps in 2017 to 198 bps in 2018.
health and serves as a useful gauge to deter- Fees, commissions, and trading income also
mine the impact of ongoing regulatory, tech- softened.
nological, and competitive pressures on bank
performance.1 Elsewhere, regions once synonymous with
rapid growth faced challenges. Banks across
Asia-Pacific faced the fourth straight year of
Regional Returns Highlight major declines. Since 2014, EP has collapsed,
Shared Challenges shedding 45 bps to rest at just 7 bps in 2018.
Banking may still be a multispeed world, Although trading revenues notched modest
but the global engine is slowing down. Look- advances, banks saw their two largest income
ing regionally, we see a few bright spots, streams drop to five-year lows. Cost pressures
though also some areas of concern. (See also grew more acute. Across the region, oper-
Exhibit 2.) ating costs jumped 7 bps year on year. The
EP gap between top-performing banks in
On the plus side, banks in European coun- China and those in other countries narrowed
tries gained a bit of breathing room in 2018. in 2018, with institutions in Japan and India
A slight improvement in trading income benefiting from lower capital costs and loan
combined with a reduction in provisioning loss provisions.
requirements and average capital costs ele-
vated EP by 8 bps over the prior year to –14. The falling EP theme was also repeated in
These gains were not enough to overcome a South America and in the Middle East and
rise in refinancing costs, however. As a result, Africa. In South America, EP fell from 91 bps
net interest and dividend income dropped in 2017 to 52 bps to 2018, ending what had
4 bps from 2017 to 2018.2 Operating costs been a period of strong recovery. Net interest
also spiked. These factors depressed average and dividend income fell by 113 bps year on
EP, keeping totals underwater for most Euro- year. Although cost performance improved,
pean banks. with notable reductions in refinancing and
operating expenditures, these savings were
High nonperforming-loan (NPL) ratios contin- not enough to offset the steep declines in in-
ue to be a problem. Whereas banks in the US come. In the Middle East and Africa, banks
lowered NPL ratios from an average of 5.0% faced a parallel hit as revenues fell in every
in 2009 to just 0.9% in 2018, NPL ratios in the income category while capital and risk costs
Euro area were more than three times higher rose. As a result, EP sank to a five-year low of
in 2018 (2.9%). 44 bps.
Boston Consulting Group | 7Exhibit 2 | Economic Profit Varied by Region in 2018
COMPONENTS OF ECONOMIC PROFIT GENERATED BY GLOBAL BANKS,
RELATIVE TO TOTAL ASSETS, 2014–2018
North South Middle East
Europe America1 Asia-Pacific America1 and Africa
1,386
1,161
1,122 1,139
1,024
1,025
750
930
952
858 569 544
496 499
464 466
449 443 437 450
398 391 387
347 347 385 371
336 336 343 280 296 429
238 235 421
241 161 323 339
180 321
250 253 240 242 234 328 313 284 311 309
112 113 136 126 140
120 228
57 141 137 181 82 79 79 86 75
55 58 53 59 47 50 44
98 95 76 81 77 49 51 91 59
31 36 43 46 53 21 21 41 31 35 25 33 51 48 54 48
–51 –47 –50 –70
–127 –125 –115 –114 –108 –98 –107 –104 –130
–152 –144 –126 –145 –146 –172 –177
–138 –148 –149 –147 –151 –270 –252 –240 –267 –99 –95 –108 –96 –103 –410 –167 –156 –156
–248
–502 –505 –183 –163
–94 –103 –106 –132 –132 –604 –572
–97 –99 –98 –108 –98
–108 –113 –121 –144 –140 –133
–346 –341 –340
–362 –371 –362 –369 –358 –134 –119 –373 –381
–400 –153 –160
–429 –412 –411 –419 –419
–471 –464
–507 –500
–288 –455
–358
–300
–512
–164
–954 –186 –203 –222
–1,067 –1,087
–1,089
–222
–1,305
–26 –26 –14 20 27 35 52 31 7 70 94 52 45 47 44
2014 2016 2018 2014 2016 2018 2014 2016 2018 2014 2016 2018 2014 2016 2018
–24 –22 31 25 43 19 33 91 50 62
2015 2017 2015 2017 2015 2017 2015 2017 2015 2017
Income components per asset Interest and dividends Fees and commissions Trading and other sources
(basis points)
Cost components per asset Risk costs Operating cost Refinancing
(basis points)
Economic profit per asset (basis points)
Sources: BankFocus; annual reports; BCG Risk Team database; Bloomberg; BCG analysis.
Note: All values are per asset—that is, the total value in euros divided by the total assets in euros, then expressed in basis points. Because
of rounding, some values do not add up to the totals shown. The order of the regions reflects a focus on Europe and North America; the
remaining regions are sorted according to total assets. Exchange rates from 2018 are used for comparability.
1Total assets are lower than in Europe and Asia-Pacific because of local and US generally accepted accounting principles.
8 | It’s Time for Banks to Self-DisruptCOVID-19 Injects New capital instruments that do not qualify as
Uncertainty common equity tier 1 (CET1) capital, such as
Although banking leaders are familiar with the additional tier 1 or tier 2 instruments to meet
vagaries of the business cycle, none have seen Pillar 2 requirements that are set to come
economic productivity come to a crashing halt into effect starting in January 2021.
as it has in response to the COVID-19 crisis. As
the outbreak has accelerated, markets have The US Federal Reserve has also stepped in
started to price in epidemic-related risks. Equi- to backstop banks, purchase commercial pa-
ty markets have posted some of the biggest per, and shore up financial markets more gen-
daily declines since the financial crisis. Valua- erally. As part of these interventions, the Fed-
tions of less risky assets, meanwhile, have eral Reserve has announced that it will offer
reached record levels, amid significant uncer- a new Primary Dealers Credit Facility, which
tainty. It will take time for the full effects of the will allow banks to get the short-term loans
pandemic to be fully understood. they need to buy and hold securities includ-
ing corporate bonds.
While the disruption is serious, it may not be
permanent, however. The majority of past To respond effectively to the crisis, banks and
epidemics saw a temporary shock to the other essential sectors must do their part.
economy followed by a rebound. If that pat-
tern holds, we might see a similar V-shaped
recovery once the COVID crisis stabilizes. But The Crisis Will Accelerate the
more pessimistic scenarios could result, de- Need for Deeper Changes
pending on the length and severity of the Global banking is a large arena with diverse
outbreak and the effectiveness of govern- players. Individual market characteristics also
ment and market interventions. vary. But while some institutions are prosper-
ing, many more have proved unable to gener-
Crucially, several central banks have taken ac- ate the cost and efficiency gains needed to
tion to instill continued confidence in the fi- offset sluggish revenue performance. Banking
nancial system and help offset an economic consolidation has been on the rise for the
slowdown. For example, the European Cen- past ten years, with the US leading the way.
tral Bank (ECB) announced that banks can (See Exhibit 3.) The absolute number of
make full use of their liquidity buffers and banks in the EU is still 2.5 times higher than
operate temporarily below the minimum lev- in the US. This suggests that we’re likely to
el of the liquidity coverage ratio. Banks can see consolidation pick up pace in Europe over
also get relief on their capital requirements— the next several years, especially given the
for example, they can make use of hybrid intensifying margin pressures.
Exhibit 3 | Banking Consolidation in the US Is Further Advanced Than in the EU
TOTAL NUMBER OF COMMERCIAL TOTAL NUMBER OF MONETARY FINANCIAL
BANKS IN THE US INSTITUTIONS IN THE EU
20,000 20,000
18,268
17,749
17,120
16,135
15,463
14,834 14,484
15,000 15,000 13,534
12,821 12,292
11,948
10,000 10,000
6,978 6,719
6,402 6,208 5,984
5,743 5,502 5,260
5,033 4,853 4,653
5,000 5,000
0 0
2009 2014 2019 2009 2014 2019
Sources: Statista; St. Louis FRED; ECB.
Boston Consulting Group | 9Improving EP—and sustaining those gains— •• Manual Analyses and Reports. A lack
will require risk, treasury, and compliance to of interoperability and disparate flows
operate faster and more incisively, backed by of data force many risk, treasury, and
real-time data, predictive analytics, and end- compliance teams to input and manipu-
to-end automation. But these functions often late data manually. For example, market
do not have the data and analytics needed to risk teams often have to create the spe-
advance business and customer outcomes. cialized analyses they need by hand in
Common challenges include: order to address supervisory findings.
•• Outdated Modeling Tools. Most banks Responding to these challenges requires more
lack the simulation and analytics tools than surface-level fixes. Banks need to antici-
that are required to maintain a stable net pate how their market is likely to change over
interest income (NII) over time. A lack of the next three to five years, pinpoint areas
computational power leaves teams to rely where they have the permission and exper-
on preliminary and approximated values tise to lead, and highlight areas where they
instead of more accurate pricing and risk are most vulnerable to disruption. Risk, trea-
management models. sury, and compliance can help drive that
change. But that starts with putting aside the
•• Unwieldy Legacy Architectures. Patches traditional playbook and imagining how digi-
and workarounds made to accommodate tization can reinvent bank steering.
bank growth over the years have strained
many legacy IT systems, making them
harder and more costly to maintain.
•• Visibility Gaps. Inefficient data manage- Notes
ment often results in blind spots that can 1. A bank’s EP equals its gross income minus refinanc-
ing and operating costs, loan loss provisions (LLPs), and
prevent banks from making the necessary capital charges (common equity multiplied by the cost
risk management decisions at the right of capital). LLPs and capital charges are barometers of
time—for example, only 50% of bank macroeconomic and regulatory conditions that, taken
together, represent the risk costs that banks incur.
treasurers have daily insight into their
2. Net interest and dividend income equals gross
entire banking book. Redundant data, interest and dividend income minus refinancing costs.
nonstandardized risk calculations, and
decentralized end-user applications gen-
erate inconsistent results and increase
time, cost, and errors.
10 | It’s Time for Banks to Self-DisruptRESPONDING TO THE
COVID-19 CRISIS
C OVID-19 may be indiscriminate, but
the most effective risk mitigations are
not. Banking institutions that take a struc-
In addition to cataloguing these changes,
banks also assessed the risks they pose;
for example, fragmented teams could
tured, targeted approach can minimize their hinder communication and interfere with
near-term exposures, plan for downstream the smooth running of the trading desk.
volatility, and respond with swift and or- Similarly, most banks have reprioritized
derly precision during an otherwise disor- or descoped noncritical activities to free
dered time. resources and minimize complexity—al-
though banks will need to review these
We have prepared the following recommen- changes in due course given the potential
dations to assist risk, treasury, and compli- regulatory implications.
ance leaders in marshaling an effective
response to the challenges and uncertainties •• Scenario Design. In addition to the
posed by the COVID-19 outbreak. Our focus tactical measures that banks have imple-
is threefold: safeguarding liquidity and fund- mented to sustain day-to-day activities,
ing, applying a new lens to credit risk man- institutions now need to assess the
agement, and adapting compliance to the potential medium- to long-term impacts
new environment. of the COVID-19 crisis. Scenario model-
ing can help leaders gauge potential risks
to the operating model and the bank’s
Safeguarding Liquidity and liquidity and funding positions. Given
Funding the importance of speed, we recommend
CFOs, treasurers, and CROs need a clear that banks start with a limited number
understanding of how liquidity management of high-level scenarios, then translate
and the treasury operating model may be these into treasury-specific subscenarios,
impacted. Using this four-step approach can such as modeling what would happen to
help executives take crucial near-term actions the liquidity buffer if credit portfolios
and anticipate longer-term needs: deteriorated and loan defaults rose or
if the interbank and repo markets dried
•• Vulnerability Analysis. As an immediate up and quality collateral became scarce—
crisis response, most banks assessed how and indeed, what would happen to
changes resulting from the COVID-19 the bank’s own credit quality, rating,
crisis, such as remote working, would and funding structure if conditions
impact liquidity and funding operations. worsened.
Boston Consulting Group | 11•• Impact Assessment. On the basis of this deteriorating credit, ratings downgrades, and
modeling, banks then need to identify the higher default rates for some bank clients.
potential repercussions. Under business
activity, banks can use deterministic or To understand which clients are likely to be
stochastic simulations and stress testing most affected, banks need to take a new ap-
to estimate the revenue and earnings proach to credit risk management in order to
disruption from a potential decline in anticipate declining credit quality more
sales or trading volumes. Under the quickly and intervene proactively.
treasury operating model, banks should
gauge what it will take to sustain opera- The revised approach requires banks to con-
tions in the short term and how critical duct granular analysis on an industry basis to
functions could be affected during the understand how the COVID-19 crisis could
crisis. Banks need to ensure that they have impact a sector’s supply- and demand-side
sufficient controls around processes like economics. Stress testing can allow banks to
cybersecurity, anti-money-laundering, model potential liquidity impacts and gauge
payments and liquidity, and credit. which industries are likely to be hardest hit.
•• Trigger-Based Actions. After weighting Banks then need to review their portfolios to
the probability and severity of these see which clients in affected industries are
impacts, banks need to prepare appropri- most at risk. Analyzing the EBITDA margin,
ate contingency actions. This should free cash flow, and cost structure can help
include identifying clear performance banks assess the intrinsic “fragility” of a
indicator thresholds that would serve as company’s balance sheet. They should also
triggers, to be monitored daily. Operat- review leading financial and liquidity indica-
ing-model stability actions could include tors, such as cash conversion cycle, days
diversifying key treasury activities (includ- payable and days sales outstanding, net
ing on a geographic basis and within financial position, and interest coverage
buildings), tracking contact among em- ratio.
ployees responsible for critical functions,
governance changes (like bringing money
market and repo desks fully under trea-
sury control), and—if not already done—
Banks need to assess which
purchase and deployment of technologies clients are most at risk
to support remote working. Structural-
funding stability actions could include a
during this crisis.
strategic review of risk appetite limits to
weather market volatility, as well as
reviewing liquidity buffer size and liability Examining a client’s transaction history can
structure to cover short-term and structur- be an additional lens to spot deteriorating li-
al liquidity under all relevant scenarios. quidity conditions. Studying changes in in-
Potential triggers for increasing spread flows and outflows and shifts in traditional
levels would also lead to market timing transaction patterns by geographic area could
questions around management of the help credit risk teams get an early view on
liquid asset buffer (beyond central bank potential supply chain risks. Scenario and
support) and issuance of longer-term debt. sensitivity analyses can help banks simulate
how client risk rankings would shift under
different conditions, such as whether they
Applying a New Lens to Credit would move from a stage 1 risk level to stage
Risk Management 2 or 3. Being proactive can also help banks
Although governments and central banks look for ways to help clients mitigate their li-
around the world have taken aggressive mea- quidity pressures—for example, by leveraging
sures to provide individuals and businesses government measures intended to support fi-
with needed liquidity, the economic impacts nancial institutions, banks may be able to
of the COVID-19 crisis will invariably result in provide greater lending support.
12 | It’s Time for Banks to Self-DisruptTaking a new lens to credit risk management to project postponement or cancellation, com-
would allow banks to do the following: mitments to the ECB or other authorities and
to internal stakeholders such as the board of
•• Gain a forward-looking view on the directors, risk committee, or internal audit.
creditworthiness of each customer to
support IFRS9 provisioning decisions such Given the delicate nature of compliance proj-
as staging and expected credit loss (ECL). ects, which usually entail mandatory regula-
Predictive analyses would also help banks tion and close interaction with regulatory
avoid unnecessary reclassification of authorities, banks should implement robust
exposures, such as in cases where clients risk assessment with clear and objective per-
are experiencing only temporary distress formance indicators, rating scales, and other
(in keeping with the suggested regulatory information that can be used and referred to
and supervisory flexibility on the IFRS9 later to explain any change of plans.
requirements application).
•• Quantify the degree and gauge the timing
Crucially, banks must ensure
of impacts on the bank’s provisioning and
capital levels under each scenario. that their credit origination
•• Fine tune credit actions on the basis of
process is fully industrialized.
identified client vulnerabilities and the
quantification and timing of impacts.
Credit actions could combine levers such We see four main actions as a result of such a
as moratoria, government-backed financ- risk assessment:
ing (for new or expiring lines), and new
credit lines to clients facing short-term •• Maintain current activities and dead-
cash shortages. They can also include lines if risk/commitment and maturity/
other forms of debt restructuring, such as flexibility are high (for example, an ECB
maturity revision, interest-only payments, remediation plan on governance that can
and the conversion of short-term debt into be delivered remotely).
long-term. In addition, banks should con-
sider sharing the results of this exercise •• Extend deadlines if maturity/flexibility
with their clients to aid discussions and is high and risk/commitment is low (for
enhance the client experience. example, a new set of GDPR controls that
can be delivered over a longer time-
Finally, banks need to revise their credit poli- frame).
cies to align with their updated credit risk
approach. Crucially, banks must ensure that •• Reshape and potentially postpone
their credit origination process is fully indus- initiatives if risk/commitment is high but
trialized (capable of managing fast-track re- maturity/flexibility is low (for example, a
views, with dedicated committees in place, new IT tool deployment).
and predefined credit assessment criteria) in
order to accommodate a likely increase in •• Put initiatives on standby if risk/
credit application volumes. commitment and maturity/flexibility are
both low (for example, an efficiency
project on compliance activities within
Adapting Compliance to the New the function).
Environment
In the short term, chief compliance officers Some actions require a proactive dialogue
(CCOs) should reprioritize projects according with authorities, as well as the board and au-
to the bank’s risks and commitments and de- dit function. From our experience, regulatory
termine what effort will be required to deliver and banking authorities are usually ready to
appropriate compliance. Risks and commit- start a dialogue, even during significant reme-
ments may include the bank’s risk exposure diation cases. But being proactive is key.
Boston Consulting Group | 13Some banks have already started to imple- •• The feasibility of shifting a critical mass
ment this kind of approach to managing the of compliance personnel to remote
project portfolio: working
•• Following the COVID-19 travel ban in •• Where remote working is not possible,
Europe, a large EU-based bank initiated the feasibility of concentrating full-time
a dialogue with authorities to review employees in one physical space
upcoming onsite visits, developing a
variety of contingency options in terms •• The ability to cluster (rather than frag-
of timing, location, and working ment) activities across geographic areas,
modalities. which can reduce operational risk
•• Another large EU bank discussed its •• The reliability of backup plans, such
remediation plan with the ECB fol- as alternative methods for screening
lowing the Supervisory Review and payments
Evaluation Process (SREP) and the
onsite inspections, with a view to •• The degree of dependence on specific
adapting deadlines and action points suppliers and suppliers’ ability to react
to reflect the impact of remote to the COVID-19 crisis
working.
Beyond optimizing their project portfolio, in Putting These Changes into Action
the medium and long term, CCOs need to Banks are dealing with massive complexity
understand the implications that COVID-19 and worried clients. To help streamline exe-
might have on their operating model and cution, institutions should consider creating
respond appropriately. To streamline that two types of teams: rapid-response teams
review, we recommend that banks sort pro- charged with overseeing crisis management
cesses into three categories according to their activities, and business continuity teams
importance and relative risk: those critical for focused on helping banks carry out their
the compliance function and the business essential activities over the medium and
(such as financial-sanctions screening on longer terms.
names and payments), those critical for com-
pliance (such as risk assessment and compli- In addition, the crisis will require banks to
ance planning), and those that are useful but increase investment in certain areas. These
not critical (such as general advisory or include tools to enable remote working, dash-
training). boards and enablers to help facilitate client
communications, and perhaps even digital
For example, within the first category, CCOs branches that allow clients to conduct their
should consider that pressure to make up for banking activities virtually or “touchless”
lost client activity and volumes could height- kiosks that can help them feel more comfort-
en the risk of business shortcuts, such as able accessing ATM machines and other
expediting account openings, that could in- services.
crease the bank’s exposure to financial-crime
violations. Anticipating such increases in risk At the same time, disruption can also create
exposures and adapting processes and con- opportunities. Firms with strong cash flow
trols would allow compliance officers to could use this period to accelerate their
continue to safeguard banks with a forward- growth through strategic mergers and acquisi-
looking perspective. tions. Others could use the recommendations
laid out here to innovate their operating mod-
In addition, CCOs need to assess the resil- el, introducing such things as a new perma-
ience of their operating model and how nent virtual working model that could give
COVID-19-related shifts could impact execu- banks and their employees greater flexibility.
tion. To make that assessment, CCOs should
consider the following:
14 | It’s Time for Banks to Self-DisruptUNDERSTANDING THE ART
OF THE POSSIBLE
E ven before the COVID-19 outbreak,
banks were facing a different type of
disruption, as digitization and fast-moving
insights that they need to protect the bank’s
interests, boost performance, and generate
value.
digital natives threatened to upturn long-
standing business and operational norms. But BCG’s experience shows that digitization can
while some institutions have adapted, many remake risk, treasury, and compliance activi-
more have been slow to make the root-level ties in profound ways. Here’s how.
changes needed. They can no longer wait.
Committing to a full digital transformation
now will allow banks to become significantly Digitizing the Risk Function
more responsive, lean, and adaptive—precise- A truly digital chief risk officer (CRO) could
ly the qualities they need to overcome current become both a nucleus and a force multipli-
system shocks and future competitive ones. er for bankwide digital transformation. Data
visualization, big data analytics, and AI will
Digitizing the risk, treasury, and compliance dramatically improve model performance,
function will enable banks to anticipate dis- allowing teams to run source data through
ruptive events and their potential implica- concurrent simulations, select the most accu-
tions earlier and act on those insights faster. rate ones, and use the time saved to address
To get a sense of what that future look likes, other important business questions. Report-
consider that in ten years, leading banks will ing tasks will become highly automated, giv-
have entirely different capabilities at their ing personnel more time to devote to special-
fingertips. Big data analytics, machine learn- ized analyses. Machine-learning algorithms
ing, AI, service-based IT architectures, appli- and centralized incident libraries will help
cation programming interface (API) layers, teams predict and prevent operational risk
and centralized data storage will provide risk, (OpRisk) events. Instead of traditional unit-
treasury, and other functions with transpar- based self-assessments, data-driven, risk-
ency into the banking and trading book, based classifications can aid the bank in
allowing teams to anticipate changes in the determining the most appropriate preventive
broader markets in real time. Productivity measures and surveillance to employ across
will improve as digitally redesigned process- the bank in order to avoid costly incidents.
es automate work cycles, improve compli-
ance, cut manually induced errors, and free As regulatory reporting becomes largely auto-
up resource capacity. Sophisticated modeling mated, the CRO will be able to focus more
will give managers the confidence-weighted time on risk management decision making,
Boston Consulting Group | 15providing predictive insights to guide C-level as XVA) becoming standard, banks are also
discussions and assist other stakeholders. being pushed to develop more sophisticated
Using advanced modeling techniques, for and computationally intensive risk and pric-
example, the CRO could create an early- ing models.
warning system. Pattern analysis tools would
comb customer transaction data and external The problem for many market risk profes-
information, such as online ratings or satellite sionals, however, is that they are stuck trying
data, looking for signals and triggers that to generate state-of-the-art analytics from an
would allow risk managers to take effective aging and outmoded IT infrastructure. Banks
countermeasures. BCG’s experience suggests and market risk leaders can begin to address
that a fully automated system could predict these issues by embracing platform models.
a negative event in time to send an early- Built on modular architectures that take ad-
warning signal as much as 18 months in vantage of the cloud, platforms simplify the
advance. task of data management. A centralized data
layer gathers, cleans, and validates data from
multiple sources and houses it in one loca-
Digitizing Market Risk tion. Tools embedded in the platform allow
Management teams to generate ad hoc analytics, with dy-
In many respects, the market risk department namic reporting that makes it easy to share
is a bank’s nerve center. It manages risk to the results. Instead of spending hours scrub-
the bank’s trading book from changes in equi- bing and manipulating data, they can spend
ty prices, interest rates, credit spreads, and their time modeling and using the results to
other financial indicators. Fulfilling those re- improve trading-book performance. (See the
sponsibilities successfully requires the team to sidebar, “Build a Next-Generation Market
make sense of enormous amounts of data—a Risk Platform.”)
task that has become considerably more chal-
lenging in recent years. Although market risk
professionals are well versed in applying Digitizing Credit Processes
mathematical and statistical techniques to Numerous digital solutions lend themselves
calculate risk, many are reaching the limits of to more efficient credit processes, from APIs
what they can do with the tools they have that help banks collect data to custom appli-
today. cations that can price risk more accurately all
the way to programs that can be integrated
directly into client systems.
Many market risk profession- In the front office, digital customer interfaces
als are stuck trying to gener- and document exchanges can enable a more
responsive and informed sales funnel. Shared
ate state-of-the-art analytics platforms can ensure that customers, rela-
from an aging, outmoded IT tionship managers, and risk functions can
access the same loan application information
infrastructure. and communicate across a single interface.
Workflow tools such as digital workbenches
can help relationship managers spend less
As trading products become more sophisticat- time on paperwork and more time on cus-
ed and the number of risk factors that em- tomer relationship management.
ployees need to manage grows, valuation
models have become increasingly complex. Digitization can also transform risk manage-
Regulatory requirements have ratcheted up ment, allowing banks to automate risk
the pressure further, forcing market risk reviews for lower-risk clients and projects
teams to develop multiple simulation ap- (about 80% of the typical bank portfolio),
proaches and analyses, an exercise that often freeing risk management personnel to con-
requires significant manual effort to com- centrate on higher-risk clients and more com-
plete. With new valuation adjustments (such plex deals.
16 | It’s Time for Banks to Self-DisruptBUILD A NEXT-GENERATION MARKET RISK PLATFORM
Most risk, treasury, and compliance specialized modeling in hours or minutes
functions lack a comprehensive and instead of days.
centralized data model that can support
relevant underwriting, disbursement, and Getting the data model right can allow
booking activities. Modern analytics plat- banks to automate at scale, feeding credit
forms that take advantage of cloud com- process activities from preapprovals to
puting and microservices are becoming early-warning systems with the information
a core requirement. These platforms are and insights needed. In addition, the
capable of ingesting structured and un- modern infrastructure can help organiza-
structured data from a variety of sources. tions reduce their run costs for IT systems.
Housing data in a centralized location By enabling teams to get the information
creates a single point of truth, increasing they need more quickly in one platform,
the accuracy of the resulting analytics. banks can see a 20% to 40% reduction in
Calculation tools embedded in platforms cloud use, lowering their total IT costs.
allow teams to run routine and complex
scenarios quickly. The most effective data platforms have four
independent layers. (See the exhibit.)
Within a market risk context, advanced
data platforms can pool information from The Data Sourcing and Data Storage
commercial data providers and publicly Layer. Reusability and data integrity are
available repositories—as well from across core design principles. By centralizing data
the bank’s own internal sources, including and permitting one instance of each data
customer, transaction, account, and online set, banks can establish a single point of
data—and allow analysts to conduct truth and reduce redundancy and error.
The Optimal Market Risk Platform Has Four Independent Layers
1 Position data Market data Counterparties Portfolios Accounting and balance sheet data
2 Data quality management (quality and product mapping)
3
functions
Valuation Scenarios
Basic
Sensitivities Simulated PVs Expected cash flow
Capital requirements (Stress-)VaR DVA/XVA Actual P&L Market conformity
Spread risk IRC CVA-IMA Hypoth. P&L MC f. subsidiaries
Back-testing CVA-SA Risk theor. P&L
Stress test P&L explain
Risk functions
Risk and Event EQ Market
capital Market risk XVA P&L conformity
FRTB-SA IRRBB EVE SA-CCR EMIR reconciliation RR/ER/EmR/GER
FRTB-SA DRC IRRBB NII CCR-IMA ISDA-SIMM Predeal limit check
FRTB-SA RRA CSRBB
FRTB IRRBB/CSRBB CCR Margining Exposure/Limit
functions
Control
Conduct Position control Further controls
4 Analyses and reports Ad hoc analyses Data export
Source: BCG analysis.
Boston Consulting Group | 17BUILD A NEXT-GENERATION MARKET RISK PLATFORM
(continued)
Changes in applied data sets for down- allows basic functions to be applied and
stream calculations are guided solely by reused to feed downstream calculation
functional reasons to reduce fragmenta- processes and reduce redundancy.
tion, and all old data is preserved so that it
can be retrieved whenever required. •• Risk Functions. Grouping similar risk
functions together (such as the Stan-
The Data Quality Management Layer. The dard Approach of the Fundamental
DQM layer enables rules and procedures Review of the Trading Book [SA-FRTB]
for data collection and management to be and ISDA Standard Initial Margin
standardized and maintained. A highly Model [ISDA-SIMM]) fosters consisten-
automated data validation function pre- cy and enables calculations from the
serves data stability, reduces the need for basic functions layer to be reused and
manual checks, and speeds downstream functions and calculations to be
calculation processes. These capabilities maintained independently.
help banks satisfy regulatory compliance
requirements for adherence to prudent •• Governance and Control Functions.
DQM (for example, “principles for effective Clustering prudent operations functions
risk data aggregation and risk reporting,” (stale position identification, for ex-
as summarized under the Basel Commit- ample) promotes consistency and
tee on Banking Supervision 239). reuse.
The Calculation and Risk Evaluation The Analytics and Reporting Layer.
Layer. This layer gives banks the ability to Automating frequently used inputs in
run routine and complex analyses. For reporting, such as notes and references on
maximum efficiency, companies should a profit and loss statement, can improve
structure calculation and risk evaluations process stability and accuracy.
into three sublayers:
•• Basic Functions. Defining and bundl-
ing core calculations into one sublayer
In the back office, digitization can enable suites that are overly complicated and
straight-through processing in areas such as inconsistent. Regulatory supervisors are
contract drafting, loan administration, and now asking banks to simplify these
collateral management (for example, interest models and the processes that support
rate fixing). them. To address that requirement, banks
should start by harmonizing their models.
Banks also need to improve their analytical Then they can deploy a model “factory”
credit risk capabilities. To address these is- that allows tasks to be conducted in a
sues, banks need to do two things. They need consistent, predefined manner. Building
to rationalize for efficiency and innovate for these capabilities is a significant, multi-
competitive advantage: year exercise.
•• Rationalize. Banks have a core set of •• Innovate. There are numerous opportuni-
scoring or rating models that address ties to measure and manage credit risk
supervisory expectations and support more effectively using alternative data
lending decisions. These models can sources and advanced analytics. Some
follow known industry-standard approach- banks have chosen to use advanced and
es. But many banks struggle with model traditional analytics in a “champion and
18 | It’s Time for Banks to Self-Disruptchallenger” setup. Existing models and We have identified more than a dozen digital
the related governance and decision use cases that can help treasuries address
making are retained, but analytical longstanding pain points. (See Exhibit 4.)
alternatives are deployed alongside them, Three of these have the ability to deliver im-
without significant governance as a test. mediate, near-term impact.
Differences in prediction are analyzed in
order to understand what they imply for Enhanced Forecasting. Data analytics allow
existing and alternative models. This treasuries to anticipate daily cash flow
helps to build experience rapidly while volumes and optimize intraday and end-of-
insulating the bank from many of the day liquidity reserves. Rather than relying on
model risk issues described above (there historical data, treasuries can take advantage
is no risk to the bank if the alternative of the dynamic pattern recognition capabili-
models are wrong). We encourage this ties that come with machine-learning en-
approach. gines. Predictive analytics can tease out
monthly cash flow patterns, identify seasonal
Beyond the champion-and-challenger variations, and anticipate the downstream
setup, we recommend that banks consider impact of macroeconomic fluctuations and
advanced analytics for credit issues where market stresses, giving treasuries improved
models currently do not exist or where visibility and deeper real-time insights into
the bank’s model risk framework does not the bank’s intraday and end-of-day positions.
apply. Examples include application Enhanced forecasting capabilities could also
assessment, gray-area scoring, decision help treasurers anticipate downstream
routing, and pattern recognition. funding demands from new business—a
capability that would overcome a longstand-
ing pain point between treasuries and
Digitizing Balance Sheet business units and help optimize the overall
Management funding strategy.
The treasury function is responsible for man-
aging the balance sheet and the correspond- Superior Decision Support. Treasuries can
ing risks, yet BCG survey data shows that 70% use a variety of proven decision support
of treasury functions lack the data, modeling, systems to determine the most effective
and analytical tools to address balance sheet hedges, purchase the best liquid assets, and
and risk management in a meaningful way. pledge the most useful collateral. Liquidity
Closing these gaps can reduce treasury oper- buffer “switch tools” can help treasury CIOs
ating costs by an average of 20% to 30% and optimize the treasury portfolio for risk,
increase the NII contribution by 10% to 15%. return, and resource consumption within
Exhibit 4 | Digital Treasury Use Cases Can Address Longstanding Pain Points
ASSET
SHORT-TERM INTEREST LIABILITY
FUNDING PROCESS
LIQUIDITY RATE MANAGE-
MENT
• Cash management • Business forecasting • Interest rate cash • Tokenization of the • Manual process
forecasting for funding planning flow forecasting balance sheet automation
• Collateral • Advanced investor • IRRBB hedging • Funds transfer • Smart workflow
optimization analytics decision support pricing tool for large tools
• Liquidity buffer • Funding decision • Trade execution transactions • Digital treasury
decision support support support • Enhanced asset dashboard
liability
management
modeling
Source: BCG analysis.
Boston Consulting Group | 19regulatory and accounting guidelines—an function. Institutions continue to face steep
important capability since those portfolios fines, however. From 2018 to 2019 alone,
can account for roughly 20% of a bank’s total total penalties grew by $10 billion, reaching
assets. Tools that use optical character $381 billion. (See Exhibit 5.) Supervisory
recognition and rules-based expert systems bodies are also becoming more active in
can allow treasuries to scan documentation pursuing incidents of financial crime and
and quickly determine the optimal (least misconduct. Civil penalties for such actions
expensive to deliver) collateral to post. nearly tripled in the US during the past 12
months, rising from $7 billion in 2018 to
Improved Cycle Times and Consistency. $24 billion in 2019.
Greater automation and process integration
allow treasuries to improve coordination Banks can improve efficiency and lower their
across stakeholders. Robotic process automa- risk of infraction in several ways.
tion (RPA) can help automate repetitive
manual processes, thus speeding response Enhancing Know Your Customer (KYC)
times, lowering error rates, and freeing Outcomes. KYC is a time-consuming and
treasury personnel to focus on strategic, heavily manual process at most banks.
high-value activities. As a bridge technology, Digitizing the various steps can relieve
RPA can also help treasuries overcome legacy significant capacity and cost pressures in
IT constraints until the bank is ready to fully four key ways.
automate its core processes.
The first is the efficient collection of client in-
formation. Mobile apps, web-based portals,
Digitizing Regulation and and video tools, for instance, make it easier
Compliance for retail banks to collect KYC-relevant au-
Compliance continues to drive a substantial thentication information from customers.
share of costs for banks and has forced Likewise, automation technologies can help
institutions to expend significant resources corporate institutions integrate public regis-
over the past decade to keep up with an ters, external data providers, and KYC utilities
onslaught of regulatory requirements. With into their KYC workflows.
most major new regulations now final, banks
have a chance to catch their breath and focus Second, enhanced KYC workflow tools can
on bringing renewed efficiency to their boost efficiency by providing user guidance
Exhibit 5 | Financial Penalties for Noncompliance Continue but at a Slower Pace
PENALTIES PAID BY BANKS, BY REGION PENALTY RECIPIENTS
Penalties ($billions) Penalties ($billions)
27 10 381 27 10 381
22 22 30
42 42 (8%)
153
25 (40%) 25
78 78
215
(56%)
73 73
52 228 52
(60%)
23 23 137
22 8 22 8 (36%)
2009 2011 2013 2015 2017 2019 2009 2011 2013 2015 2017 2019
2010 2012 2014 2016 2018 Total 2010 2012 2014 2016 2018 Total
European banks North American banks European regulators North American regulators Customers
Source: Annual reports; press reports; BCG analysis.
Note: The sample covers the 50 largest European and North American banks. Data through 2015 includes only the penalties, fines, and
settlements that surpass $50 million; data since 2015 includes only the penalties, fines, and settlements that surpass $20 million. Values may
not add up to totals shown because of rounding.
20 | It’s Time for Banks to Self-Disrupton policies and procedures, pooling transac- preclassifying detected alerts and generating
tion and product usage reports, archiving files notes that detail why a false positive can be
from previous reviews, and highlighting disregarded.
relevant performance indicators in a manage-
ment dashboard. Enhancing Transaction Monitoring. Transac-
tion-monitoring alert systems also generate
Third, advanced screening tools capable of fil- many false positives that must be followed
tering news articles can cut down on the num- up with lengthy investigations where inves-
ber of alerts generated. Language-processing tigators need to gather new information,
skills embedded in these systems can reduce understand the context, and investigate the
the rate of false positives in name screening. entities involved. An AI-based transaction-
monitoring system can reduce false-positive
Finally, digitization would help banks move rates in four ways: by improving data quality
from periodic to event-based KYC reviews, es- and enhancing detection rules, detecting
pecially for low-risk customer segments. Be- behavioral patterns that improve segmenta-
cause at least 70% of customers typically fall tion, identifying direct and indirect connec-
into this segment, a more efficient digital way tions between customers and other entities
of screening can reduce costs significantly using network analysis, and streamlining
while decreasing risk. reporting by incorporating evidence into a
single document.
Taking advantage of these digital KYC use
cases requires banks to harmonize KYC stan- Automating Alert Handling. RPA can enable
dards across locations. Institutions must also more efficient alert handling. Analytics
identify clients with an elevated risk profile. embedded in the software can help improve
To manage this regulatory requirement, filtering and can facilitate documentation and
banks need to apply dynamic client risk rat- reporting, reducing manual work.
ing (CRR) methods that take deviations be-
tween actual and expected product use and
transactional behavior into consideration.
Expediting Screening. Most screening activi-
ties suffer from high rates of false positives,
requiring heavy additional staff time to
review and validate. AI-based tools can
sharply reduce the rate of false positives by
Boston Consulting Group | 21You can also read
