Opening the second SWIFT Nordics Regional Conference, Erica Åhman, Head of SWIFT Nordics, SWIFT and Göran Fors, Head of Asset Servicing, Transaction Banking, SEB and SWIFT NMG chairperson for Sweden welcomed the over 210 delegates from across the Nordic region to Stockholm.
In his opening remarks, Fors praised the progress made by SWIFT over its 40 years and stated that the securities industry would not be what it is today without SWIFT. He added that he once thought that SWIFT was “boring”, but that today, “boring” is the new “exciting,” and the company has come a very long way over the past four decades.
Looking at the economic state of the Nordics region, Åhman noted that there is still some uncertainty and growth is still fragile. Using SWIFT figures to give some insights into how the region is doing, she made the point that the Nordics still pay and trade mostly with one another, as demonstrated by FIN traffic to/from Nordic countries which stands at 35% vs. 32% in 2012. Signs of economic recovery can be seen in the 8% growth in payments sent, up 4% from 2012. Also interesting, she stated, is the number of reporting messages received, which is up 74% vs. 2007, before the financial crisis, and also up significantly from last year’s figure of 55%. These figures are far higher than most other countries and clearly demonstrate how market participants in the Nordics want to know where their money is and what the status of their transactions is at any given moment time.
Making the most of "Life after Lehman"
Calibration is needed, so that regulation does not hamper the upturn of the economy that we need so badly.
Keynote speaker Thomas Östros, Chief Executive Officer, Swedish Bankers Association, offered a view of how the current wave of regulation is likely to impact the financial landscape and what the banking community can do to be prepared and to "optimize impact" as much as possible. Östros talked about the never ending march of digital on the consumer economy, citing that 80% of Swedes pay their bills on the internet and 17% are using e-invoices for household bills. He also expressed the view that the US economy will be "the train to pull the world out of recession," but that the Nordics are tied to the European economy. One of the reasons why Swedish banks have been stable during the past few years, explained Östros, is that they've always been adequately capitalized. He went on to say that we used to believe that having low inflation was the key to stability, however, prior to the demise of Lehman Brothers we had low inflation, but a bubble was growing. During that time deregulation was prioritised in the capital markets. Today, all of that is being reversed and the focus is on being better capitalised, more transparent and better managing liquidity risks.
On the topic of the Financial Transaction Tax (FTT), Östros warned that depending on the outcomes of elections in Germany, it may be strongly back on the agenda, which is not good news for the many who hoped that it would slowly fade away into a stream of endless negotiations. He expressed the view that the FTT is not the solution to paying for the crisis and that the banking crisis should be paid for by the shareholders and lenders in the banking industry, and not by the tax payer, although unfortunately, ultimately, the tax payer is still likely to pay in one way or another. He highlighted the greatly increased power and responsibilities of the ECB as the ultimate supervisory authority for the European banking industry. Drawing to a close, he commented that that tighter regulation will increase costs for banks, but it may result in safer banks. Given the vast amount of regulation imposed in very little time though, it is inevitable that there will be policy mistakes and unintended consequences. To counter this, he concluded “calibration is needed, so that regulation does not hamper the upturn of the economy that we need so badly.”
Regulation - are we there yet?
Today, to be a central banker is exciting – it wasn’t always.
Having completed his presentation, Östros was joined on stage by Piia Noora Kauppi, Managing Director, Federation for Finnish Financial Services, Luciana Pacor Hygrell, Head of Compliance, Handelsbanken, Mikael Stenström, Head of Division, Directorate General Legal Services, European Central Bank and Richard Young, Regulatory Affairs, SWIFT, who moderated a panel discussion on the regulatory landscape and the effects of regulation on the industry. In his opening statement, Stenström, keeping with the theme of boring being the new exciting, said that “today, to be a central banker is exciting – it wasn’t always.” Talking about the future supervisory role of the ECB, he explained that one of the greatest challenges for the ECB is managing how banks interact and are influenced by each other - including banks that are in and are not in the banking union. Price stability is the ECB's main goal but it is now concerned with wider financial stability within Europe. Explaining the first actions that will be taken by the ECB, he mentioned that they will start with a supervisory risk assessment, a “point in time” asset quality review and stress tests run with the EBA. Results will be published prior to when the ECB takes up its new supervisory role in Europe. Kauppi was of the view that the Banking and Resolution Recovery Directive is the missing link. “Banks should be allowed to go into bankruptcy without causing a systemic crisis. Shareholders should bail out the banks not the taxpayers,” she stated. She also stressed that there is a 'new normal' and that regulators should not regulate the old crisis as the battles on that have that have already been fought in the market. A Single Rule Book and a Single Market is very important. “Where is the level playing field? What happened to the single rule book and one single market? Are banks safer?” she went on to ask.
The panel agreed that the 'single market' seems to have, in some ways, created a more fragmented market in Europe. Stenström fought back against the insinuation that the regulators have been slow to adequately respond to the fall-out from the financial crisis. “The crisis was a huge upheaval,” he said, “and the response from the regulators and the speed has been impressive. Certainly, fragmentation is the last thing we want to see. But there are banks inside and outside the Single Supervisory Mechanism and that is a huge challenge." The panel had strong view on the Liikanen proposal. Kauppi and Hygrell agreed that splitting up the banks is a poor idea and that the reasoning behind the proposal is very weak and Hygrell in particular stated that she saw no reason why, if you are a strong bank and have control of your market risk and adequate capitalising, there should be any need to split it up.
Asked how much concern there is in the Nordics about extra-territoriality and the implications of regulation such as FATCA, Östros replied that the Nordics are very concerned with FATCA, but also the threat of the financial transaction tax. Hygrell added that to all intents and purposes, European banks are now unpaid agents of the US IRS. In their closing remarks, each panellist was asked what advice they would give to colleagues on how to deal with a changing regulatory dynamic. “If you know how to run your business, you know what is wrong and what is right,” said Kauppi. “Keep to principle-based thinking. I trust that if we keep doing this, the Nordic banking sector will fare well.” Östros focused on the role of banks in the economy and in society. “What we need,” he stated, “is a future-oriented discussion on the role that banks need to take. People need to see how important that is“. Hygrell encouraged colleagues to have a non-hierarchical view. “The whole organisation needs to be encouraged to think clearly,” she stressed. “When a bank introduces a new way of thinking you need the whole organisation working with you. I should not be a box-ticking exercise.” Lastly, Stenström explained that balance sheet assessment and stress tests are aimed at building stability and trust. “This is an opportunity. We need to enter this era with a clean slate,” he concluded.
SWIFT update – growing the collaborative space
Next on the agenda was a session that focused on SWIFT, its strategy and how SWIFT is evolving to adapt to changing customer requirements and a shifting financial landscape. On stage to discuss the topic were Finn Otto Hansen, SWIFT Board member, Delia Howser, SWIFT Services / Relationship Management, Arion banki, Gottfried Leibbrandt, Chief Executive Officer, SWIFT and KG Rickhamre, Chief Executive Officer and Founder, Coast Communications who moderated the discussion. Responding to a question about why SWIFT is in a good position to support banks with compliance, Leibbrandt explained that SWIFT is in a very good position since our members are looking for standards and utilities, we are a cooperative and we have a global footprint. He went on to explain that following the success of both the Sanctions Screening and Sanctions Testing products, a KYC registry is the third big initiative that SWIFT is working on to help relieve the burden of compliance. Moving on to standards, the panellists touched on the cost of implementing and maintaining standards and discussed the obvious benefits of moving from local and regional standards to global standards –a move that can already be seen in the adoption of ISO 20022 by initiatives such as SEPA and T2S. It remains a fact though, the panel agreed, that some domestic standards will continue to exist and need to be maintained. It is for this reason, and others, that SWIFT has developed MyStandards, a collaboration platform to help reduce time, cost, effort and risk in the management and implementation of standards.
The next topic up was that of the “shift from West to East” and the implications of this for SWIFT’s strategy and business. Howser explained that European banks, especially in smaller markets like Iceland, are concerned, because they fear that their voice will not be heard. Leibbrandt explained that the fact that there is a shift, or a balancing, of economic power between the West and The East is a fact and that SWIFT, just like the banks, needs to adapt to that. He pointed out, however, that the West is still very much in the mind and priorities of SWIFT and a significant number of major projects that the company has been working on relate to major regional initiatives in Europe, such as SEPA and T2S. When it comes to SWIFT traffic, growth in 2013 has been pretty consistent across regions and rather than catering for and adapting to a “shift”, what SWIFT is doing is ensuring that it is able to capture growth and opportunities in the East and make sure that we keep up with the business of our customers, which is also growing in the East.
Discussing lessons learned by SWIFT from the development of new products over the years, Leibbrandt stated that “network products are hard, and starting a chicken and egg cycle with a product that requires critical mass in order to deliver benefits can be very difficult.” He quoted products such as TSU and Proxy Voting as examples of network products. “On the other hand”, we went on to say, “if you do something that addresses a real need, such as a regulatory requirement, it works much better because take-up is much quicker when one is not reliant on other using a product to be able to benefit from it. Lite2 is a good example here.” Howser stated that she would like to see more enforcement from SWIFT and more forced migrations. Leibbrandt countered that effective as that would be, there are many who do not want forced migrations and there is little support for SWIFT imposing them. Hansen added that “there is a fine line between competition and cooperation. In the Nordics we tend to be more collaborative. But that’s not the same everywhere.” The panel agreed that views on what belongs in the collaborative space vs. the competitive space also shift over time. This has been seen very clearly when discussing compliance, an area that just a few years ago, was seen as belonging in the competitive space but that today clearly falls in the collaborative space. Drawing the session to a close, Hansen stated that network effects are rare and hard to achieve so the community needs to pick its battles and, with SWIFT as a partner, go for the low hanging fruits rather than always trying to grasp the whole tree.
In the afternoon, participants split into two groups, choosing to participate in either the payments stream or the securities stream. See the wrap up reports for the streams.
Harnessing 'big data' for compliance and growth
Kicking off the second day of the conference, was the Innovation Plenary that looked at “big data” and the uses that can be made of data for compliance and growth. To talk about the topic were Noam Perski, International Cultivator, Palantir, Kimmo Soramaki, Founder and Chief Executive Officer, Financial Network Analytics and Brigitte De Wilde, Head of AML and Sanctions initiatives, SWIFT. De Wilde walked through Swift's Financial Crime Compliance Roadmap and explained the success that SWIFT has had to date with its Sanctions Screening and Sanctions Testing products. The next phase of the roadmap, she explained, will look at Business Intelligence for Compliance, FATF 16 Quality, a Sanctions List Service, AML testing services and a KYC Registry. Work on the KYC Registry is already well underway and current plans are that it will be going live before the end of 2014. Soramaki gave a demo of a real time analytics map, simulating stress tests on a group of banks in the same region for events such as a reduction in capital and operational failures. “Intraday liquidity management was once a qualitative exercise,” he stated, “ but banks now have to move to a more quantitative exercise as directed by Basel III.” Perski, on the other hand demonstrated how trading-related data can be used, behavioural patterns identified and unauthorised trading prevented more effectively by feeding all data into a dedicated application rather than developing trading reports in Excel spreadsheets that do not allow one to take into account of a wider context and lead to numerous false positives. If used correctly, explained Perski, such monitoring mechanisms can lead to an increase in trust amongst staff and within the company and save significant time with multiple departments investigating an alleged unauthorised trade situation.
How about a T2S for collateral?
Next up was a panel discussion on the collateral and liquidity squeeze that the industry is likely to face as Basel III comes into force. Joining the moderator Dominic Hobson, Founder, COO Connect on stage were Reidar Bolme, Head of Group Treasury, DnB, Heiko Cassens, Director Germany, Nordics, SwapClear Sales & Marketing, LCH.Clearnet Limited, Gabriela Caracciolo, Head of Strategic Development Market, SEB and Kristian Kjeldsen, Head of Payment Systems and Collateral Management, Central Bank of Denmark. The panellists agreed that handling the upcoming changes are going to be a challenge and that whilst the region has pan-regional banks, there is no pan-regional system for handling collateral and that to build such a system would be a massive project. There is not the expectation that there will be a shortage but the optimisation and use of collateral is certainly a major challenge that all banks will have to reckon with, they went on to say. The market is currently very fragmented, explained Caracciolo and in order to achieve collateral optimisation, you need consolidated markets and critical mass. There are many initiatives being worked on, she went on to say, but the expectation is that not everyone will survive.
Asked whether there will be a necessity for a “T2S for collateral management”, Kjeldsen was of the view was that with T2S, it will be possible to have a single pool of collateral and that from an infrastructure point of view, there will be a very strong infrastructure for collateral in Europe. What is needed, however, the panel agreed, in addition to a single pool of collateral, is a standardised way of being able to move and allocate collateral and maybe, a collateral utility. Chances are that SWIFT could play a role in this. The idea was that the CSDs would own such a utility but there was little clarity amongst the panellists as to what the role of the custodian banks and SWIFT would play in such a project.
Questioned about the current plans of the banks in the region, Caracciolo confirmed that SEB is already working towards a central collateral solution and Bolme stated that any bank that does not do the same will have a problem. He added that he expected that his and many other banks will have to look for other sources of collateral. “The collateral is in the market,” he explained, “but the question is whether the banks will get hold of it so, at what price?” Cassens agreed saying that the challenge is not so much a liquidity squeeze as a real challenge in how to optimise the collateral that each bank has available to it.
Wrapping it all up…
In an interactive discussion moderated by Arun Aggarwal, Managing Director, UK, Ireland and Nordics, SWIFT, Fors and Poutiainen shared their insights on the main themes and takeaways from the conference, and their thoughts on what they would really like to see achieved over the next year.
Regulations are supposed to make things simpler and more transparent, but they seem to be making things more complex and less transparent.
Touching first on the topics of regulation and compliance, Aggarwal asked each to name two or three things that must be taken note of. Poutiainen’s key message was that being neutral is not an option and that when dealing with regulation and compliance it is necessary to understand the impacts on one’s business area and take a stance. Looking at transaction banking in particular, especially the smaller transaction banks, the impact of Basel III will be significant as it will increase costs, which in turn will lead to increased pricing. On his part, Fors said that “Regulations are supposed to make things simpler and more transparent, but they seem to be making things more complex and less transparent.” That said, he did point out that just a few years ago, all we could do was “see the regulatory tsunami”, but now we are all “working in it.” This in itself, is progress. Echoing the views of other speakers throughout the event, he expressed his strong disagreement with the FTT proposal and expressed the view that if it did come into force, it would be a “nightmare.” he concluded his remarks on regulation saying that the extra-territorial aspect of some regulations is really tough. Aggarwal pointed out that this, however, does not apply solely to regulation issued by the US as there are also European regulations with extra-territorial implications.
Quizzed about whether the Nordics are at risk of losing their relevance in the European economy, Fors was quite clear that he sees the Nordics as being very strongly positioned in Europe, both politically and from a banking perspective.
Bringing the conference to a close, Poutiainen and Fors both shared their key takeaways. For Poutiainen, for the payments market in the Nordics, it was that regardless of the region in which the conference was taking place and the more peripheral implications of SEPA in the Nordics, SEPA is important for all of Europe and all banks should be positioning themselves in that respect, and asking themselves what they can build on that platform and how to make the most of the opportunities that it presents. Turning to the securities market, Fors said that the key question for securities players in the Nordics is how to adjust to the new CSD environment. “The four Nordics countries are going to see a new generation of CSD structure. We cannot, as market participants, cannot just let the CSDs run lose and do what they want’” he stated. Furthermore, he added, faxes need to be eliminated from the funds space and a collateral utility needs to be created.
Thanking everyone for their participation and engagement, Åhman bid the delegates farewell and announced that the next Nordics Regional Conference is most likely to take place in Spring 2015.