Preparing for economic recovery

The last year has been an incredibly volatile time in the world of risk management, however, it has also been the year when risk management was thrust firmly onto the agenda and became of crucial importance for global banks and commercial lenders. Looking forward to 2010, many banks are likely to be shifting their priorities in preparation for regulatory changes and the future economic recovery.

Liquidity will continue to be a high priority over the next year, as banks attempt to comply with the standards of new liquidity regime announced by the FSA in October 2009.

Banks and building societies are also likely to be subjected to far tougher stress-tests and risk analysis, putting pressure on them to ‘get their houses in order’.

The FSA plans to determine each lender’s “individual liquidity guidance”, which will dictate the size of the liquid asset pool and quality of assets held.

The burden of regulation and its impact on lending will also continue to cause debate across the industry. Commentators such as Simon Hills, executive director for prudential capital and risk at the British Bankers’ Association have already pointed to the risk of “choking off economic recovery by curtailing banks’ ability to lend”.

In the light of the recession and the low activity in the lending sector, financial institutions are operating under tighter profit margins, which have led to many banks cutting costs and slimming down their organisations. This will have an immediate effect on the bottom line.

“Banks have still not solved the underlying challenge to improve efficiency, quality and control of processes

However, at this stage many banks have still not solved the underlying challenge to improve efficiency, quality and control of processes. If the banks don’t use this low activity period to invest in building scalability into their lending processes in advance of the anticipated economic recovery, the effect on the bottom line will be short-lived.

The trend towards greater simplicity in banking, also known as a ‘back to basics’ approach, will continue to gain popularity in the banking sector. Online banks that have been set up around Europe using very simple products and processes have already achieved a great deal of success, and more banks will also look to meet the competition through their own direct banking channels.

Whilst the UK is officially still in recession, Alistair Darling has asserted that it has “at last turned a corner and is on the road to recovery”. Those banks and building societies that are fully prepared for the upturn, whenever it arrives, will be best placed to gain significant competitive advantage and profitable growth.

As Miguel De Cervantes said, “To be prepared is half the victory” and this still rings true, especially in the current uncertain economic conditions.

Mikael Krohn is vice president at EDB Business Partner

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