Since the global financial crisis, banks have been busy cleaning up their balance sheets – selling off non-core activities and non-performing loans, strengthening their capital positions and increasing their margins. They have also been busy managing and responding to the increased regulatory requirements of ECB supervision resulting from the Single Supervisory Mechanism (SSM). Among the ECB’s supervisory priorities for 2016 are business model and profitability risk, credit risk, capital and liquidity adequacy, risk governance and data quality. These issues, combined with increased competitive pressure on the traditional banking model from innovative new entrants that can meet new customer demands free from legacy issues, make for some heated discussions among many boardroom executives.

How should banks respond to these new challenging circumstances? They should leverage the capabilities that are built up in the process of becoming compliant with the new regulations. This requires significant investments in data architecture, IT infrastructure in the near future, and will ensure proper execution of the stress tests, ad hoc analyses, etcetera. 

The capabilities that are required for the execution of a stress test, and reporting LCR and ICLAAP, i.e. being able to project cash flows of all products now and in the future, can be used by the business to offer clients additional services. Further, various initiatives to improve the data quality within banks (e.g. BCBS 239) should not be seen as a burden, but as an opportunity to transition towards a more data driven business model that allows banks to meet the increasing consumer demands for digital products. 

With these challenges facing the sector, banks who seek to understand regulation, actively engage in dialogue across divisions and departments of the bank, react to consultation papers and embrace the chance to digitalise their bank, are likely to find new ways of interacting with their clients and may see regulation and supervision not as a burden but as a blessing. There will still be banks that just seek to comply, or worse to sit out the storm, protect what was, and fail to adapt to the changing market. For these banks, effective and potent ECB supervision is perhaps even more necessary. The good thing is that for both types regulation is a blessing in disguise.