A study on key risks to local banks’ business models and their readiness for SREP business model analysis

Abstract

For the second consecutive year running, business model and profitability risk has remained a key SSM supervisory priority for 2017. The importance of this area is reflected in the new Pillar 2 Supervisory Review and Evaluation Process (SREP) methodology, wherein the first element on which banks will be supervised is Business Model Analysis (BMA). This study aims to understand the key vulnerabilities to local banks’ business models and how they may threaten viability and sustainability. It seeks to assess the readiness of banks to have their business model scrutinised under BMA. It also aims to analyse BMA within the regulatory context; how the regulator plans to conduct BMA, how the results will be used in practice, and how the scoring mechanism will work. The research objectives will be predominantly achieved through thirteen interviews conducted with relevant bodies. The research conducted has established that local banks are indeed wellversed with the risks they face. However, amongst other aspects, in view of the prolonged low/negative interest rates, the emergence of Fintech and the excessive regulatory burdens, bank business models and profitability are invariably at risk. This study identifies that BMA awareness and readiness differs amongst respondents, with a significant portion claiming that BMA is not currently a focus area for the bank. Similarly, although the regulator recognises the importance of BMA, it is still very much in its initial stages and no BMA-related work has been carried out yet. This study indicates that the local banking sector has not yet given BMA its due importance. A gap evidently exists between this SSM priority and the local reality, both in terms of the financial institutions to be under scrutiny and the regulator.