Impact of regulation and emerging challenges on the Banking and Financial industry landscape

Pune, November 3^rd 2012

The volunteers of IAIP Pune organized their first Speaker Event in the city on November 3^rd, wherein Anil Agarwal, Executive Managing Consultant at IBM’s Banking and Financial Markets Centre of Competence and the guest speaker provided insights into the challenges and the changing dynamics of the banking and financial industry post the global financial crisis. The discussion mainly focused on how government regulation, technology and social media were redrawing this industry’s future.

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The discussion started with the practices prevalent in this industry before the crisis which eventually led to the systemic failure and the near financial meltdown worldwide leading to the biggest financial crisis since the Great Depression of 1930s. The discussion then delved further into the sub-prime mortgages which are considered to be the epicenter of this crisis and how it became a popular belief that investment banking industry was the invisible hand behind this crisis though in reality seeds of this crisis were sown much earlier with the easy money policies of Alan Greenspan and repealing of the Glass–Steagall Act permitting investment banking to access the ‘cheap’ funding of their commercial banking division.

After elaborating this painful crisis following some of the biggest bankruptcies of modern times, Agarwal turned the discussion towards the latest set of regulatory guidelines being drafted worldwide in the form of Dodd-Frank Act in USA and similar ones in EU namely, EMIR, MiFID II and MiFIR which have vowed to avert such a crisis in future.

Dodd-Frank Act was delved in to provide a background as to how this act will make changes in the American financial regulatory environment affecting all federal financial regulatory agencies and almost every part of the financial services industry to ensure that ‘sound practices’ are followed and roots of the previous crisis are weeded out. Some of the key points of this act are:

1. Creation of new regulatory oversight agency to consolidate the working of other regulatory bodies;
2. Sensible reforms in practices of the housing mortgage industry;
3. Comprehensive regulation of financial markets, including increased transparency of derivative transactions by ensuring they are cleared through exchanges;
4. Consumer protection reforms including a new consumer protection agency and uniform standards for “plain vanilla” products as well as strengthened investor protection;
5. Tools for financial crises, including a “resolution regime” complementing the existing Federal Deposit Insurance Corporation (FDIC) authority to allow for orderly winding down of bankrupt firms, and including a proposal that the Federal Reserve (the “Fed”) receive authorization from the Treasury for extensions of credit in “unusual or exigent circumstances”;
6. Various measures aimed at increasing international standards and cooperation including proposals related to improved accounting and tightened regulation of credit rating agencies.
7. Volcker Rule- ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts.
8. Cap on bonuses and variable pay to bankers and no more bailouts to ‘Too big to fail” banks at the expense of tax payers money.

After this focus on regulatory regimes the discussion next focused on how technology and social media are beginning to impact this industry with special emphasis on the ‘state of play’ with regards to these in India.

A robust infrastructure for telephony and internet has led to the next logical development-introduction of mobile banking globally. The attendants were surprised to learn that Kenya is ranked 4^’th in terms of mobile payment readiness index- despite lack of smart phones in the country- while India is placed 22^nd in the same ranking. This highlighted to the audience that mobile banking infrastructure and penetration is still very low within India and this can be used by the government as an effective tool to increase banking penetration within the far flung areas of the country and realize the goal of ‘financial inclusion’.

The final section of the presentation focused on how ‘unstructured’ data available on social media like Facebook, LinkedIn, and Twitter is being tapped by analytics and data mining firms to provide useful consumer specific information related to their buying preferences and needs especially for the future. If this information is accessed and used by the banking community then this can act as a powerful tool for focused and customer-specific marketing of financial products. Though this data is being provided by firms the banking and financial industry is still not consuming this to enhance their reach to customers and promote their brands effectively.

About the speaker:  Anil Agarwal is a Senior IT professional with over 28 years of technology and capital markets experience working with global IT and consulting organizations and providing services to leading investment banks and financial institutions worldwide.

Anil is Executive Managing Consultant in IBM’s Banking and Financial Markets Center of Competence. He has been associated with CapGemini, Citicorp Software and Tata Unisys. He was also a member of Technical Advisory Committee of SEBI, capital markets regulator in India.

Anil holds a MBA in Finance from Indian Institute of Management, Calcutta and a Bachelor’s Degree in Electronics Engineering from Indian Institute of Technology, Kanpur in India.
Contributions from: Vibhor Gupta and Gaurav Nagori, both IAIP Volunteers

Photographs by:  Gaurav Aggarwal, IAIP Volunteer