2024 regulatory and technology challenges for banks and financial services

What will be the regulatory and technological challenges for financial services in 2024?

MHA takes a holistic approach to working with clients. We understand both the regulatory challenges that the financial services industry faces as well as other ‘real world’ risks, whether these are macroeconomic trends that could impact loans and other forms of debt, interest rates or geopolitical uncertainty, we consider all these factors in our work.

Our current regulatory and horizon scanning project work for clients has included the following:

1. ESG (environmental, social, and governance) reporting where we are supporting banks with investment appraisals focused on systems and processes.
2. Supporting clients from a risk perspective where they need to implement changes to meet the Open Banking reforms to give consumers more control over their financial data whilst balancing issues of data security and privacy.
3. Supporting clients who want to adapt their business models to meet the changing needs of customers and the rise of FinTech.
4. From an investment perspective, helping clients to consider the use of new technologies such as artificial intelligence, blockchain and cloud computing.

What do we see as the near-term challenges?

Meeting the increased capital requirements as outlined in the Basel III framework is likely to be a high priority for most banks. Basel III requires banks to hold a higher level of capital than under previous agreements. This includes a common equity tier 1 (CET1) capital ratio of 4.5%, a capital conservation buffer of 2.5% and a countercyclical capital buffer of up to 2.5%.

What other operational matters around credit risk and liquidity do we see?

1. There is a need to implement a standardized approach to credit risk (SA-CCR). The SA-CCR is a new method for calculating risk-weighted assets (RWAs) for credit risk that is designed to include more sensitivity analysis where risk assessment is concerned.
2. Banks will have to implement a credit valuation adjustment (CVA) risk charge. The CVA risk charge is a new charge for banks that are exposed to CVA risk, where the value of a derivative contract can change due to a change in the creditworthiness of the counterparty.
3. An output floor for operational risk will need to be calculated and established; in effect a minimum amount of capital that banks must hold for operational risk based on their gross income.
4. Where liquidity risk management is concerned, banks will need to address measures in Basel III that include several new requirements for liquidity risk management. These requirements are designed to ensure that banks have sufficient liquidity to meet their obligations under both normal and stressed conditions.
5. A more fulsome disclosure of a bank's capital position is required. Again, this is being driven by Basel III and will require banks to disclose more information about their capital positions, risk exposures and liquidity management practices.

Given the totality of preparatory work required to meet Basel III, MHA has advised clients to start making changes to their systems and processes to comply with the new requirements well in advance of the original deadline of the 1^st of January 2025 even though the PRA’s proposal is now to extend the deadline to the 1^st July 2025.

The proposal to extend the deadline for the implementation date of the final Basel 3.1 policies by six months to the 1st July 2025 was contained in a recent press release from the PRA. In the press release, the PRA announced that it intended to reduce the transitional period to 4.5 years to ensure full implementation by 1 January 2030 in line with the proposals set out in CP16/22. Secondly, the PRA wanted to allow appropriate time to fully consider the responses to the credit risk and output floor proposals in CP16/22 without delaying the publication of rules on the other parts of the package. The understanding is that the PRA will now split the publication of its near-final Basel 3.1 policy statements into two, as follows:

1. In Q4 2023, the PRA intends to publish the near-final policies on market risk, credit valuation adjustment risk, counterparty credit risk and operational risk.
2. In Q2 2024, the PRA intends to publish the near-final policies on the remaining elements from CP16/22: credit risk, the output floor, and reporting and disclosure requirements.