Investment banks must invest in controls technology, defence against cyber breaches: EY

Some investment banks need to spend more money on improving cyber security and monitoring staff communications, while some are not calculating the value of their risk-weighted assets (RWA) accurately, Ernst & Young suggested in a recent report.

The report, titled Transforming Investment Banks, was announced Friday.

EY described investment banking as “an industry in turmoil with low returns on investment, rising costs and “stagnating revenues.”

Additional costs in 2014 were “driven by a tougher regulatory environment,” EY added. “Regulations are having functional impacts on legal entities, business conduct, trade execution, reference data and trade reporting, yet all too often these new rules are not consistent across national borders.”

EY recommends ways that investment banking firms can change their business models.

“We believe there must be significant investments in controls technology, including investment in internal monitoring systems to track staff activities and communications to detect indicators of conduct breaches,” EY said in the report. “Banks will also have to invest significantly in combatting cyber threats and financial crime – now a key agenda item for investment bank management teams, with one major universal bank spending US$250 million enhancing cybersecurity capabilities in 2014 alone. We also believe there will be opportunities for banks to use social media and mobile technology to enhance organizational performance – for example, by supporting greater connectivity with clients or enabling staff to access information they need for their jobs more quickly and easily.”

Investment banks should be “moving away from product-centric approaches by putting the client at the heart of business and operating models,” EY said in the report.

Related: Banks have greater systemic risk than insurers: report

“The days of leverage-inflated, 20%-plus returns on equity are long gone,” EY stated. “The once-lofty ambitions of management teams to deliver ROEs in excess of 15% have been moderated considerably.”

EY advised investment banks to “optimize assets and operations,” adding business models “must refocus existing finance functions to better manage capital and collateral requirements.”

The report suggested that some investment banks have “issues with the quality and accuracy of data used in RWA calculations, which means the RWA values do not accurately reflect risk.”

For example, “missing or poor collateral data could lead to valid securities being considered ineligible and removed from RWA calculations,” EY said in the report. “This will inevitably result in a higher RWA than the risk of loss from the counterparty defaulting.”

EY added some banks, in a “rush” to comply with regulations, “have made compromises in their processes, such as manual interventions at various points, around RWA calculations.”

For example, the report added, if an investment bank “has a convoluted process to identify whether counterparties should have Credit Valuation Adjustment (CVA) RWA against them, generating a false positive result, this could result in the bank holding additional RWAs where they do not need to. This issue could be addressed with relative ease and would result in more accurate RWA values.”