R&C: The financial services (FS) industry has recently had to react to several seismic revisions in regulation, technology and innovation. Could you outline how these changes are creating a new environment? What is some of the macroeconomic and geopolitical context for this transformation?

Hein: Especially in the last decade, we have seen many trends influencing financial institutions (FIs), leading to a need for an integrated approach to risk and finance. First, there is the macroeconomic and political environment. Banking industry margins are tight and return on equity in many cases remains below the cost of capital. Banks, particularly in Europe, report persistently high operating costs, and low interest and fee income. And insurance companies are dealing with similar issues, such as the low interest rates affecting life insurers especially. Another challenge is the unknown quantity of one-off events. Brexit and the US-China trade war are prime examples of this. Then there is the persistent challenge of regulation. Banks and insurance companies face an array of new rules and guidelines relating to capital, liquidity and risk. Among these, both the new accounting standards IFRS 9/CECL and BCBS 239 – the principles for risk data aggregation and reporting – are notable for their potential impact. The same applies to the European Banking Authority (EBA) stress testing initiative, comprehensive capital analysis and review (CCAR), and Financial Reporting Standards (FINRTEP) and the Common Reporting Framework (COREP), which are heading in the same direction. And again, for insurers, the situation is comparable, especially with IFRS 9 and IFRS 17, which are causing sleepless nights for many insurers these days. In addition, Solvency II is still an operational issue for many insurers in the EU and Insurance Capital Standard (ICS)/ComFrame is also appearing on the horizon. FIs prefer a certain amount of stability for their planning processes, especially when it comes to their short- and mid-term strategies. Disruptions and uncertainties on several front lines at the same time make it more challenging to find the best way to navigate through such stormy seas.

Jul-Sep 2019 Issue