As financial institutions across the globe recover from the effects of COVID-19, the focus is returning to regulation trends in the finance industry. Several regulatory trends in lending have been the topic of discussion for regulators for quite some time. Listed below are some important areas for financial institutions to focus on in 2023.
Higher Capital Requirements
Recently in the United States, regulators have increased the capital requirements of large banks and placed more stringent regulations on smaller banks. By 2025, the largest U.S banks will be required to boost capital levels by 20%, and smaller banks will need to hold assets of at least $100 billion. While the notion of such regulations has been in discussion for a while, the recent failure of banks such as Silicon Valley Bank and Signature Bank has recently spurred regulators into action. Financial institutions will have to stay alert as these harsher capital requirements are a result of the larger international banking framework known as Basil III.
Climate Change and Environmental Risks
Climate change regulations pose a challenge that companies from all industries must contend with. This is because climate change is currently regarded as one of the highest financial risks to businesses and institutions, and the finance industry is no different. Current financial regulations mean that institutions will have to qualitatively and quantitatively detail efforts undertaken to reduce climate change. Additionally, institutions will have to specify the steps they are taking to reduce their risk exposure from climate change. Financial institutions will have to identify climate-related risks and manage any impact they could have on strategic and financial planning.
Human Capital Management
Another regulatory trend financial institutions need to adhere to is human capital management. Human capital management pertains to an institution’s handling of its employees and includes managing issues such as talent, diversity, compensation, and benefits. In the United States, European Union, and Singapore, regulations require that institutions disclose their practices and performances where human capital management is concerned. An example of this type of regulation is the “Human Capital Disclosure Rule for Public Companies”. Human capital risks affect an institution’s ability to be organizationally resilient. It can lead to additional costs incurred via employee turnover, retention, litigation, and whistle-blowing.
The Digital Lending Landscape
An important area that will have an impact on financial institutions is the digital lending landscape. Digital lending facilitated by technology has been disrupting lending trends in recent years. The benefits are many, with a superior customer experience, higher accuracy, and faster turnaround times. However, with these benefits, regulators will need to watch this space carefully for any developments that can lead to changes in regulation. Issues in this sector can arise in the form of transparency, an enhanced due diligence process, grievance redressal, and more.
The crucial role of technology in financial services means that cybersecurity is still an important subject of discussion. Issues financial institutions can face in the future is dependent on whether data security standards are government-defined or whether they are out-come based. A government-defined approach can harm innovation, while an outcome-based approach can result in financial institutions having to comply with a wide range of data standards. Another issue institutions could face is if a more unified and modernized legislative framework is introduced to change the current overlapping patchwork of state and federal laws and regulations that are in place. Cybersecurity implementations could be more focused on consumer privacy and security in the future.
Financial institutions will have to stay on the ball concerning these regulatory Trends in Lending and how they will impact their strategic and financial planning in the near future. By 2025, the implementation of framework Basil III will result in financial institutions having stiffer capital requirements. Basil III also pertains to environmental sustainability and tackling developments in the digital landscape, making it a comprehensive guide to preparing for the future. Companies would do well to track the requirements and timings of these regulations as they get implemented. It should be noted that these are only some of the regulations financial institutions should be wary of.