Automation and intelligent solutions help ensure overconfidence is unmasked and oscillating risks are quickly detected. Still, many banks lack either the will or the machine to do so.
«The bank's business model was not the problem, but the people who implemented it,» says Monika Roth in an interview with the «Neue Zuercher Zeitung» (in German, paywall) about Credit Suisse. She spoke openly about a phenomenon that applies not only to the crisis-ridden Swiss bank, where too many «rainmakers» performed their raindance with impunity for too long.
Dealing with risks is first and foremost a question of culture and incentives, and in this respect, the Swiss mentality seems more advantageous in terms of adherence to rules. In Switzerland, the smallest violations are punished at Credit Suisse. At the same time, in the international asset management unit one can get away with many things as long as they bring in money, Roth surmises.
Lines of Defense
To properly manage risks, a bank's safety net must be cast properly. In Switzerland, many banks apply the «Three Lines of Defense» system, where to prevent rule breaches, various units in the value chain are responsible for risk management.
The first line of defense is on the customer side. The second ensures the customer behaves along the defined lines and no red lines are crossed. The third line of defense is internal audit, which monitors the other two lines for regulatory compliance.
Weaknesses in Client Identification
To strengthen the Swiss financial industry, compliance has expanded in recent years as seen in the fight against money laundering and the flow of funds to terrorist organizations. To keep pace with ever stricter and more extensive supervisory regulations, financial institutions have spent billions annually.
Nevertheless, compliance with Know Your Customer (KYC) regulations continues to pose major challenges for the banking world, according to a report by Moody's Analytics.
Outdated Manual Labor
Some traditional banks still performed poorly in an international comparison. The study's authors explain outdated infrastructure and, in some cases, paper processes for attracting customers, as reasons for lagging.
However, a majority of companies have an «enlightened» view of KYC. Executives in this group believe that KYC, when used correctly, are good processes that create value and drive change.
Speed Makes the Difference
Not only can stricter regulations be met, but customer relationships can be improved and the integrity and reputation of the company enhanced. Compliance teams, however, are struggling with recruitment, data quality, and customer satisfaction, according to the analysis.
The authors believe KYC should not be an intermittent activity occurring every few years after onboarding, but rather be an automated, trigger-based activity operating in virtually real-time. This shift to rapid and continuous KYC allows compliance teams to transform from a purely regulatory function into a revenue driver.
Emergency Exit
Automation and smart solutions are the paths to quickly detect overconfidence and risks, which by their nature are constantly changing. Had Credit Suisse had such systems and intact risk culture in place in March 2021, it might have mitigated the effects when the Archegos family office owned by Bill Hwang collapsed.
Because the alarm lights seemingly lit up quickly at UBS, Deutsche Bank, Goldman Sachs, and Morgan Stanley, they were able to run for the exits earlier and got away with a loss of less than a billion dollars. But Credit Suisse lingered and eventually ran behind. Cost: 4.4 billion francs. Ouch.
