Dealing with divergence

Despite the work that banks currently have underway from building regulatory infrastructure and processes to sustaining and streamlining them, one potential headwind is the threat of regulatory divergence in substance and timing across jurisdictions.  For banks with a global presence, divergence adds to uncertainty and complexity, fosters an unlevel playing field, and hampers the ability to plan and optimize resources.  Successfully navigating the many challenges of regulatory divergence requires a deliberate disciplined approach that recognizes the regional tailoring of regulatory and compliance initiatives, and that regulatory strategy and business strategy should converge.

The growing divergence in regulatory standards is a reversal of previous post-crisis trends.  For example, since 2009, banking regulators around the world have been committed to strengthening the capital, liquidity, and leverage standards for banks. Those efforts embedded an equally strong commitment to address the unevenness and complexity of the global capital framework for internationally-active banks. Regulatory convergence initiatives, such as Basel III and the Financial Stability Board’s (FSB) work on resolution regimes, set the tone for an increasingly consistent banking rulebook across most jurisdictions.

More recently, however, governments have raised questions about whether reforms have unduly impinged on economic growth.  In particular, several countries have questioned the necessity of adopting common global regulatory standards for the banking sector. Further, the European Union has recently shown an increased willingness to deviate from the rules set out by the Basel Committee on Banking Supervision, as evidenced by the European Commission’s proposed implementation of the Fundamental Review of the Trading Book and the Net Stable Funding Ratio standards.

At the same time, there has been a trend toward host countries taking regulatory measures specifically for foreign banks.  For example, the US Federal Reserve Board (FRB) finalized a rule in 2014 requiring large non-US banks to form intermediate holding companies and the European Commission issued a proposal in 2016 that would require certain large non-EU banks to create a single EU intermediate parent undertaking.

In short, the global regulatory landscape for banks looks set to become increasingly divergent and fragmented.

These developments, left unchecked, will have very real implications for banks which have substantial operations in multiple jurisdictions. As bank decision makers drive towards more streamlined and sustainable regulatory, risk, and compliance infrastructure, they are confronted with the need to invest wisely in tools and strategies that help them navigate the new complexity efficiently.  Without an investment in these capabilities, some banks may suffer a form of strategic paralysis.

We see the challenges associated with regulatory divergence giving rise to four types of questions that the management and boards of internationally active banks must consider:

  • Strategic – Does divergence impact the sustainability of cross-border business models and the ability of managers to plan and make well-informed regulatory and business/model/strategy decisions?  How can capabilities for scenario driven analysis be helpful?
  • Operational – Will divergence increase the complexity of regulatory processes and are bank governance structures, controls, and regulatory capabilities up to the task of coping with this fragmentation?  What should be handled centrally versus coordinated between businesses and jurisdictions and corporate center functions?  What is the appropriate transition between a change the bank/program and a run the bank/business as usual process?  What impact does divergence have on resources and leveraged capabilities across jurisdictions?
  • Technological – Will divergence multiply the pressure on banks’ data management systems in such material ways that strategic IT capability investments will be required?  Are the right tools in place and sufficient investment in IT in place?
  • Regulatory – How will divergence necessitate regulatory relationships and interact between home/global regulators and host/local regulators?  Is the organization ready for more frequent and detailed supervisory requests (ad-hoc) and ongoing regulatory reporting?

For global firms that answer a resounding yes to the challenge of addressing these questions, there are a number of core capabilities that may need new investment and enhancements to prosper in a divergent environment including:

  • An agile Central Strategy Group (or Central Regulatory Change Group) that provides leadership in evaluating shifting and diverging regulatory impact on business strategy and profitability and proposes potential responses both globally and specific to key regions, including:
    • Analyzing opportunities from both relaxing and tightening standards
    • Assisting in design and budget decisions for reallocating scarce resources to areas of highest need (which could be at a local/jurisdiction level)
  • Tailored regional compliance, risk and governance capabilities to address greater complexity and unevenness in standards and expectations by region (global processes evaluated for local tailoring) while retaining ability to measure and aggregate risk and performance at global level
  • Centers of excellence for resources, coordination, consistency while letting regions tailor solutions for regional demands (e.g., a thin central layer with subject matter experts complimented with local support)
  • Advanced analytic capabilities to detect and prevent regulatory noncompliance before significant issues emerge (impact for technology integration across regulatory requirements and controls between first line, second line and across functions); enhanced capability to address regulatory change lifecycle in transparent ways that are linked to a holistic, end to end compliance framework
  • Simplification and rationalization of risk and compliance systems to shift to sustainable run the bank approach with greater automation and controls with minimal hand-offs
  • Investments in technology and data to support the direction of on-demand reporting and analysis capabilities and activities

Global banks that are proactive in addressing the trend of regulatory divergence are likely to have a competitive edge by being able to more nimbly respond to regulatory constraints and adjust resources to capitalize on strategic opportunities in the marketplace.


Irena Gecas-McCarthy
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

David Wright
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Chris Spoth
Executive Director | Deloitte Center for Regulatory Strategy, Americas
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Aaron Bhardwaj
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Alex LePore
Senior Consultant | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

1Board of Governors of the Federal Reserve System, “Federal Reserve Board approves final rule strengthening supervision and regulation of large US bank holding companies and foreign banking organizations,” (February 18, 2014), available at
2European Commission, “Proposal for a Directive of the European Parliament and of the Council amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conversation measures,” (November 23, 2016), available at

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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