IT and data geeks have launched a quiet coup in the City and Wall Street in recent years.
Over dozens pitch meetings for Euromoney’s awards for excellence, traders, heads of market businesses and CEOs waxed lyrical about the challenges and opportunities in deploying their large internal stockpiles of data, as well as their IT capabilities, to maximise market share, fulfil regulatory requirements and meet evolving client needs.
As capital requirements increase, asset classes become more transparent and standardized and liquidity migrates to electronic trading platforms, bankers are now in the data-mining and information-providing business, as much as the balance-sheet and risk-transformation business.
This newfound mission sounds unglamorous, at first blush, and a world away from the stereotype of red-blooded investment bankers deploying capital to win outsized market share.
In short, data is the new capital – and ideas are the new risk.
Accordingly, this year’s award winners for digital banking, emerging markets, bank transformation, and regulatory adaption shared one key attribute: their smart use of regulatory technology to manage market, liquidity and operational risk. Indeed, even before bankers make good on their dreams of deploying funky fintech solutions – from white-labelling FX platforms to revolutionising their payments infrastructure – regtech is helping to ensure the stability of their franchises while optimizing capital ratios and winning market share.
Examples are legion. Lloyds has transformed itself into a leaner institution focused on UK retail and commercial banking, in part, because of its hard graft in reshaping its IT networks to address operational and liquidity risks while streamlining payments processes to facilitate the sale of its TSB stake.
BBVA is making inroads in its digital banking platform across Latin America by deploying smart technology in keeping with the changing regulatory winds.
Meanwhile, Citi’s unrivalled cross-border footprint from retail, corporate to investment banking, and need to comply with onerous Federal Reserve stress-testing that penalises geographic complexity, has required an enormous internal effort to bolster data and IT processes.
In other words, Euromoney awards bestow accolades for banks that don’t just engage in headline-grabbing moves to win market share or transform business models. Instead, the behind-the-scenes and day-to-day effort in meeting compliance, operational and strategic goals, aided through best practice in IT and data, is cheered – and all-too-often feared.
The stakes of failure are high. In the industry’s most recent example of compliance lapses, Deutsche Bank in March fell foul of the Financial Conduct Authority’s review of its anti-money laundering and sanctions systems, which cited out-of-date software and inadequate reviews before on-boarding clients. The development underscores how the need to track in real-time payments transactions requires quality and comparable transaction metadata.
The sales and trading business is an even more complex enterprise, requiring data on margins, trading venue, choice of central counterparty and risk-positioning limits – an expensive and labour-intensive exercise.
All credit, therefore, to UBS, which in recent years has made big strides in winding down capital-intensive positioning for complex products, such as long-term derivative positions that typically involve principal risk. Since February 2014, UBS has engaged in agency-style execution for interest rate swaps routed to the Swap Execution Facility (SEF). This is an innovative, capital-light model to broker trades while providing non-traditional dealer liquidity.
It’s also a prescient move as regulatory efforts such as Mifid II – which encourages multilateral trading facilities for a slew of asset classes – increase the allure of agency desk execution and the all-to-all trading model. The latter could trigger a revolution in the fixed income, rates and credit markets if banks and non-banks source, rather than simply provide, liquidity in anonymous pools in spot FX, for example. Once again, regtech will be the key differentiator between dealers, venues and electronic trading platforms.
Running a markets business, therefore, requires onerous reporting for the purposes of stress-testing and capital planning across the financial group. Whether it’s stress-testing a lender against rate hikes, Brexit, plunging real estate prices or fraud, investment bankers and compliance staff fear data protection, internal silos or localization rules might mask risks.
After all, aggregating, sharing and automating risk data across businesses is no mean feat. One investment banker at a US firm says there are up to 3,000 macro-economic and market variables in the stress-testing model for the markets business across the group.
For some, the ascendance of big data is engineering a new start-up culture where bankers innovate by using new technology to grab market share and hedge risks. For others, the compliance burden, the geeky nature of the enterprise and the intrusive power of regtech, more generally, given its ability to monitor internal culture and behaviour, is reshaping the job of banking for the worse.
Amid the rise of marketplace lenders and competition with the buy side for market-making activities, banks must attract the right talent to ride this data revolution, or they risk an untimely death.