CIB & Asset anagement

The world of Corporate Investment Banking (CIB) has been the financial services sector most affected by the 2008 crisis. Jacques de Larosière’s report on the unprecedented crisis criticised in particular the negligence of the management of liquidity on markets, the weakness of models, the problems of methodology in bank rating systems, but above all the lack of governance in banks.

In response regulatory requirements have increased, targeting specific weaknesses, and the regulator has increased the pressure on banks in terms of capital requirements and the management of short and medium-term liquidity. As a consequence all the major banking groups in France, for example, have, therefore, considerably deleveraged their balance sheets. This has, above all, affected Corporate Investment Banking, which is faced with many new challenges: new regulations to protects savers (Volcker Rule); new qualitative and quantitative requirements in terms of capital; higher financing costs; an overhaul of portfolio activities and improved risk management.

Moreover, there is a move away from the buy-and-hold model, towards the originate-to-distribute (O2D) model, regardless of the products involved as the new balance sheet calculation rules do not allow products to be stored and require an investor to be found before the product is launched. This has therefore led banks to refocus on more profitable activities.

Front-office activities are undergoing far-reaching changes

There are now significant restrictions on proprietary trading as a result of the Volcker Rule, as well as on investments in equity funds and hedge funds. For all transactions, it is mandatory to respond to customer requests and there are restrictions in respect to market making purely related to intermediation, underwriting related to distribution needs and hedging. The implementation of the Volcker Rule thus involves a new definition of the economic objectives of transactions, an analysis of hedges for each transaction by the middle-office, and an analysis of the needs of end customers in terms of products, redefining the organisation of the desks/portfolio of the trading room. This has a considerable impact on bank compensation policies, ST liquidity, collateral management policies and trader remuneration policies.

A new operational model in the making, between industrialisation and innovation

Industrialisation and standardisation are twofold objective for banks, since regulations, in particular EMIR, promote product standardisation, while competition intensifies the need to industrialise processes in order to reduce unit costs. Lastly, derecognition rules must be integrated on an industrial scale from the design and marketing phases. Nevertheless, another part of the regulation calls for a more customised approach, since the Basel Committee’s Fundamental Review of the Trading Book (FRTB) proposes an overhaul of the framework for managing, measuring and monitoring market risk, and requires desk-specific models and methods. Each customer segment expects not only its specific needs to be more closely taken into account but also wants personalised pricing.

The new relationship model is refocusing on customer expectations

The previously dominant model, namely a market driven by product supply, is declining and is being replaced by a demand driven market, focused on customer needs and expectations. Thus, CIB is being transformed from a vendor of products into a provider of financing and investment solutions and advice. We are undoubtedly witnessing the transformation of CIB from an omnipotent provider of all financing and investment solutions into an “organiser”, capable of forming partnerships for very standardised, low value added offerings. The development of new income drivers is essential for the survival of the world of CIB. It must focus on a new type of customer, by offering personalised pricing and a range of services tailored to individual customers or customer segments. It is also attempting to capitalise on new regulatory opportunities (OTC clearing, etc.) by sharing implementation costs with a client service offering. It is also developing a culture of innovation in order to reduce implementation costs and time to market.

Examples of assignments:

  • Strategic repositioning of trading activities
  • Determination of an ERM strategy
  • Blueprint design for market operations
  • Risk assessment coordination
  • Fraud prevention
  • Basel III compliance