Risk Management

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Addressing Compliance Challenges: Regulatory Risk in Practice Regulation cannot be avoided or hedged: the focus is therefore on ensuring compliance to reduce the risk of financial and reputational damage.

Addressing Compliance Challenges: Regulatory Risk in PracticeAddressing Compliance Challenges: Regulatory Risk in Practice 
by Daniel Schmand, Global Head of Trade Finance, Deutsche Bank

Managing risk and uncertainty– whether created by market volatility, geopolitical events, regulatory change or lack of economic confidence – dominated 2016, with 2017 looking set to deliver more of the same. With diverse pressures and potentially competing priorities, how can treasurers make sense of the diverse set of issues that they are forced to contend with? Deutsche Bank recently commissioned the Economist Intelligence Unit (EIU) to produce a comprehensive whitepaper, Managing Risk in Challenging Economic Times, to understand treasurers’ issues in more detail. In a series of articles that will follow in TMI, experts from Deutsche Bank explore some of the concerns and priorities that arose from the study in more detail, and illustrate how leading companies are overcoming them. In the first of these articles, Daniel Schmand, Global Head of Trade Finance, Deutsche Bank, discusses regulatory risk, which has emerged strongly as a key priority over the past year.

In September 2016, the Economist Intelligence Unit (EIU) published its whitepaper, Managing Risk in Challenging Economic Times which was commissioned by Deutsche Bank. The report was based on a survey of 150 senior corporate treasury executives and 150 CFOs from around the world, representing companies of above $2bn in turnover, to find out how they are managing risk in challenging economic times.


Key findings included:

  • Uncertainty about economic growth is treasurers’ top concern worldwide;
  • Low or even negative interest rates are triggering significant policy changes in cash management; however, respondents continue to maintain large surplus cash balances;
  • Regulatory developments continue to be a priority – and significant overhead – for treasurers;
  • Treasurers recognise the importance of technology innovation, but adoption can be more challenging;
  • Treasury functions continue to expand their range of responsibilities, particularly in the areas of risk management and capital allocation.

The report can be accessed at http://tiny.cc/ntcdiy


A growing regulatory burden

Managing the impact of regulatory change is not a new phenomenon for treasurers, but over the past eighteen months, the burden of compliance has grown, with this set to continue or even increase in the future. Indeed, according to the EIU study, treasurers now identify regulatory and tax risk as the second most significant risk after global economic growth. There are a variety of reasons for this:

Firstly, as corporations of all sizes expand internationally, they are subject to domestic financial regulations in a larger number of jurisdictions, as well as global regulations.

Secondly, corporate treasurers are not only subject to regulations that are directly targeted at their activities, but there are also indirect consequences of regulations to consider. Basel III, for example, aims to build resilience and transparency in the banking sector, but as banks adapt their capital structures and liquidity ratios to comply with these requirements, their corporate clients are inevitably affected as the solutions and pricing that banks are able to offer will change. Some treasurers are also concerned that banks may become more selective in their corporate relationships.

Thirdly, in the case of requirements such as know your customer (KYC), as most corporations operating internationally work with multiple banks, their compliance obligations are replicated across banks. Although banks are subject to the same regulations, their interpretation may differ slightly: consequently, while their policies and procedures may be similar, they are not identical, which inevitably adds to corporate clients’ compliance burden. Similarly, KYC requirements in each country will often differ, further exacerbating the compliance burden.


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