Page 14 - Banking Outlook 2014 - An Industry at a Pivot Point

12 | Banking Outlook 2014: An Industry at a Pivot Point

To do all those things, banks will need to rethink their approach in four distinct areas:
• Core platform transformation. The scope of regulation is straining the technology platforms
on which banks operate, and will continue to do so in the years ahead. This is being driven by
many factors, including the requirements imposed by changing regulation, such as the data
aggregation and reporting capabilities required by early 2016 under recent guidance from the
Basel Committee. More than a few banks will find that making patches to existing IT systems
will not work in trying to meet regulatory mandates, never mind the demands of a more
aggressive approach to building and supporting new revenue-generating products and services.
For them, an enterprise-wide upgrade to their core systems may be warranted. Many banks are
also likely to rethink which systems should be outsourced, cosourced, and shifted to managed-
service options.
• Risk modeling. Despite the considerable work done on risk models in the wake of the credit
crisis, banks must continue to refine them. Regulators have been uniformly skeptical of the
work done so far. In 2012, the Federal Reserve criticized some of the nation’s largest banks for
the quality of their stress-test submissions, and in 2013, the chair of the Financial Stability
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Board said the risk models banks use to calculate their capital needs were still showing
“worryingly large differences.” While these comments were aimed at the industry’s largest
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banks, and while one can legitimately argue the merits of current risk-based standards, the
need for better risk modeling is disputed by few and relevant across the banking sector. There
have been a number of notable and widely reported reminders in recent months that some
banks have work to do to master their risk controls.
This isn’t entirely a technology issue, either. During the housing bubble, for example, some
banks had a better appreciation than others for how poorly loan originations were being handled
because they sent employees into the field to check on them. Banks must invest not only in
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improving their risk models, but also in the abilities of their people to use them.
• Analytical tools. According to a recent Gartner Group survey, chief information officers
estimate that their organizations realize only 43 percent of technology’s business potential. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. NDPPS 227982
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That speaks to an enormous opportunity to do better, but only when banks have the ability to © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A.
make sense of the data their IT systems are generating. Some are turning to technology here,
too. In a recent interview with American Banker, for example, analytics software executive Jim
Goodnight observed that leading banks are taking advantage of high-performance computing
systems to engage in high-performance analytics, running, for example, as many 100,000
market-risk simulations in a matter of 15 to 20 minutes rather than the 15 to 16 hours it might
have taken in the past. On the retail side of the business, the emphasis in analytics must be
on using customer intelligence to drive revenues. This also requires a change in mind-set, with
efforts focusing on discovering relationships and correlations in large amounts of data rather
than determining their causes—moving from the “how” and “why” to the “what”.

10 “Fed Said to Criticize Banks on Risk Models in Stress Test,” by 12 “The Trouble with Banks’ Risk Models: Q&A with the Chief of SAS,” by
Craig Torres, Dakin Campbell and Dawn Kopecki, Bloomberg, 5/1/12 – Penny Crosman, American Banker, 3/28/13
http://www.bloomberg.com/news/2012-05-01/fed-said-to-criticize-banks- 13 “Hunting and Harvesting in a Digital World: The 2013 CIO Agenda,”
on-risk-models-in-stress-test.html Gartner Group – http://www.gartner.com/technology/cio/cioagenda.jsp
11 “Carney Calls for Bank Risk-Model Clampdown to Repair Trust,” by 14 “Three Top Cybersecurity Risks for Banks,” by Victoria Finkle, American
Jim Brundsden, Bloomberg, 9/6/13 – http://www.bloomberg.com/ Banker, 9/23/13 – http://www.americanbanker.com/issues/178_184/
news/2013-09-05/fsb-s-carney-calls-for-bank-risk-model-clampdown-to- three-top-cybersecurity-risks-for-banks-1062339-1.html
repair-trust.html
15 “Three Top Cybersecurity Risks for Banks,” by Victoria Finkle, American
Banker, 9/23/13 – http://www.americanbanker.com/issues/178_184/
three-top-cybersecurity-risks-for-banks-1062339-1.html