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Grüne Arbeitsfläche, auf der Taschenrechner, Wecker und Stift neben vier Stapeln mit Münzen angeordnet sind, auf den wiederum Holzklötze mit den Ziffern 2,0,2 und 4 positioniert wurden.

Finance & Risk at regional banks – not old hat, but more relevant than ever

Release date: 07 June 2024

“The key is not to predict the future, but to prepare for it.” 

Finance & Risk: two words that encapsulate the essence of this idea. Because we as zeb are one of the leading strategy and management consultancies for the financial sector. And it has always been part of the business model of our clients’ – the banks and insurers – to have their finances under control as well as to assess, measure and manage risks.

My name is Vanessa and after working for several years in various expert and management positions at larger regional banks, I made a conscious decision to join zeb and become a consultant for regional banks on Finance & Risk topics. Why? Because this is about the banks’ core business, which  requires ongoing and targeted strategic management in a constantly changing market.

Current challenges

Banks and insurers are currently faced with various challenges. Sufficient capital must be available to support companies and private households in their sustainable transformation. At the same time, banks and insurers themselves need to drive forward their own sustainable transformation. In addition, capital is needed to further digitalize existing business processes. Demographic change also requires immense efforts to attract and retain skilled workers. All this against the backdrop of a market environment that is not very stable, e.g. due to new regulatory requirements or changes in monetary policy.

For example, the yield curve has risen by 300–400 basis points since the beginning of 2022, as a result of which some institutions have already realized losses in their securities and might have to deal with additional losses in their real estate business. These considerable interest rate risks must be quantified and taken into account when calculating the risk-bearing capacity. Usually, they result in higher capital requirements.

In our day-to-day work, we therefore focus on four main areas:

1. Strategic integrated performance and risk management

2. RiskMeetsReg

3. Treasury/ALM

4. Sustainability/ESG

1. Strategische Gesamtbanksteuerung

Integrated performance and risk management is a bank’s core area, which generally comprises income and cost management as well as risk controlling and reporting aimed at regulatory compliance. A strategic approach to integrated performance and risk management is of the essence, as banks do not operate in an unchanging environment and are faced with intense competition. That’s why we advise our clients on various issues, such as:

What is the best strategy for tackling the current challenges and how can we translate this strategy into a feasible medium-term plan? 

How can business segment accounting be optimized to enable coherent sales management? 

How do we optimize risk-weighted assets (loans) to make equity management more efficient?

How is it possible for merged institutions to meet the regulatory requirements from day 1, even if, for example, the technical merger has not yet been completed?

Against the backdrop of growing demands, how can you report to both your management and your customers in an addressee-oriented and lean manner (without unstructured and meaningless data? 

2. RiskMeetsReg

The issues in risk controlling / risk management and regulation are becoming increasingly intertwined. That is why we have pooled our expertise in these areas.

For example, we were once tasked with designing and implementing a normative and an economic risk-bearing capacity management cycle for banks based on regulatory principles. In this context, it was necessary to detail how individual risk types are measured and how they interact.

As already mentioned, our scope for action is determined by various laws and directives, such as CRR II/III, MaRisk/SREP and IRBA. In addition to existing regulations, which are constantly being refined over time (e.g. MaRisk), we are also dealing intensively with new and upcoming regulatory requirements (e.g. DORA).

Don’t worry, you don’t have to be a specialist in all of these legal topics. zeb has brought forth experts for each of these topics who continuously monitor and evaluate the developments. However, I would like to use two examples to illustrate how the various regulations affect our clients:

The 7th MaRisk amendment covers the topic of business model analysis with a focus on the sustainable orientation of the business model. The amendment also imposes requirements on banks’ real estate transactions. Losses in real estate value resulting from climate policy must be taken into account by banks in the future. In February 2024, BaFin published another update: the 8th MaRisk amendment. The core of the amendment is the comprehensive integration of the EBA guidelines on interest rate risk and credit spread risk in the banking book into German administrative practice. This has several implications for financial institutions. For example, they must take into consideration that commercial law and present value changes in interest rate risk management will be weighted equally in future. Moreover, they have to deal with credit spread risks as a significant risk type.

The CRR III (Capital Requirements Regulation III) will apply to all credit institutions and risk types in the European Union from January 1, 2025. It includes a refinement of the standardized approach to credit risk and a more realistic risk mapping approach, which reduces the available capital when there are identical portfolio/risk structures. 

Last but not least, we also help banks prepare for possible supervisory audits and resolve audit complaints.

3. Treasury/ALM

In addition to that, we support our clients with their interest rate and liquidity management as well as their holistic asset allocation, the management of their proprietary trading account, their balance sheet structuring and their deposit modeling by providing them not only with our consulting services, but also with our zeb.control tool. zeb.control enables our clients to efficiently manage their institution. From income and risk controlling to analysis and planning at customer and account level, we support our clients in fulfilling their very own transformation function.

4. Sustainability/ESG

Sustainability is a cross-cutting topic that also plays a major role in Finance & Risk, as strategic integrated performance and risk management has become inextricably intertwined with ecological, economic and social sustainability. Supervisory authorities, legislators and stakeholders alike expect banks and insurers to contribute to the climate neutrality targets and to gradually become climate neutral themselves. Consequently, this also pertains to their loan portfolios and proprietary trading accounts. They should aim to make targeted strategic decisions today and initiate measures that eventually help them achieve climate neutrality. This allows them to mitigate future risks, but at the same time requires capital for investment.

A typical week in Finance & Risk at regional banks 

As a manager for strategic integrated performance and risk management, I work on multiple projects relating to that topic at the same time; usually as a sub-project or project manager. Together with the client, I decide for which appointments it makes sense for me to be on-site – which is also a matter of sustainability. When I travel, I almost always take the train and try to schedule as many of my on-site appointments as possible within a few-day time frame. Regular internal meetings – for professional and personal exchange – and expert talks round off my day-to-day work. As I can organize my working day myself to a great extent, I still find time for hobbies and my personal life.

I hope I was able to show you how varied and self-determined our work in Finance & Risk at regional banks is. In our project work, we either bring in the necessary expertise from the outset or specialize within the scope of various projects. However, as all topics we work on are interlinked, we have regular (in-person or digital) cross-project meetings to stay in the loop and learn from each other.

Does that sound interesting to you? Do you have a passion for numbers, financial market regulation or strategy, or do you still have questions? Then get in touch with my colleague Robert Ellenbeck, Partner at zeb, via E-Mail or LinkedIn.

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