In most of the discussion we see with bankers all over the world, one common sense is the combining element for all of them- it’s the deep belief, that banking supervision handicaps banker’s life. This is mostly directed to the governance issues of modern bank management and all the senseless but costly burdens a bank has to bear. But being for many years now in the business I wonder if this I really true.
Let’s have a look on the demands the authorities like European Central Bank or BaFin as well as Bundesbank and other institutions have. We will see these in the so called MaRisk, which should be for a second the basis for our analysis. The MaRisk give the framework how a good banking organization should work and be organized. Within the first general part (Modul AT) there are all the basically rules for the design of risk management and on the second part (Modul BT) there are specific needs for organization and processes for management and monitoring / controlling of credit risk, market risk, liquidity risk as well as operational risk. We also find here target pictures for internal audit or outsourcing and data protection. To put it in a nutshell, we found more or less clear rules for the business itself and also for the design of the organization.
So one would assume in the business rules the “not allowed” tremendous earnings are the problem and in the organization part it becomes costly due to this very theoretical approach the supervision wants to see.
Is there such a big gap between rules and best efficiency?
But is this really the case. I mean, in the evaluation of risk, there may be or even is some gap between the urgent need of risk management and the rules of calculation a supervision applies. But I doubt that the rules within MaRisk are much harder than a serious banker would apply. But here I would like to focus more on the organizational part. One fast given reason for the great rise of Fintechs is always the explanation, that they don’t need to stick to this rules, that’s why they can be faster or cheaper.
Here I say clearly no!
In my opinion, when a bank has a good governance motivated by itself, it is automatically in line with the rules of the supervision. Take the example outsourcing: this should be fast and cheap deliver the same service as before produced in-house. Despite the question if this is in a one-on-one relationship possible, the only thing what supervision demands is, that one has to manage and control this outsourced unit the same way as they would do it internally. So you need a reporting that gives explanations, a sufficient problem solution systems and the lever to change the way of service delivery. So this all must be codified in a contract and lived through outsourcing managers and the general management. But why do some have problems with this? I guess, some banks saw outsourcing as a chance to get rid of a lot of people, reduce costs without effort. But this is not the case, and now they have something outsourced that no one understands inside the bank any more. This was most astonishing for me, as Jon Cryan very openly stated, that Deutsche Bank has outsourced processes without knowing what they do and why they are needed, but now no one knows how to manage them. .
Freedom to do everything
Given this example, which should not be complete as I am missing a lot of insights, I bet, there were a lot of people stating that this rules are too much, but actually not knowing what to manage. And this is from my point of view the problem. It also happened within this traders, jeopardizing the whole bank only guided by the outlook of great bonus. There was also a race between trader and controller to keep up with the rules of risk management. You can bet who wins, the one with several hundred thousand dollars a year or the one with the controllers salary…..
For me, as I have been in several effciency projects as well as adaptions of suüervision rules, this can be done in smart ways. But in the second, the senior management believes, that they are cut in their freedom to decide, they start to work against rules. And what we see, this is not only in banking very costly, it’s everywhere costly, much more costly than it was profitable before. So it’s not only the Fintech, maybe it’s another source of competitor inside, that costs, just thing about Volkswagen today….
Yours K-Street6 team