Headlines around the Euro crisis have resurfaced with a vengeance in recent weeks. The uncertainty surrounding the future of the Euro is taking its toll on financial stability and the markets. What is certain is that the resolution of the Euro crisis - however it pans out - will bring with it major and extensive challenges across the industry, as banks implement major systems and process changes to restore trust with their customers, while minimising any financial losses, liquidity pressures and business risk.
The Eurozone that may emerge from this crisis is likely to be very different from the one we know today, with one of three possible outcomes.
The first is status-quo where all the Euro member states successfully implement tighter fiscal integration and none opt out of the Euro. The second is a contracted Eurozone, which will see some members opt out with agreed terms. The third - and most feared - is total disintegration, resulting from the failure to reach an agreement on fiscal integration and will lead to a number of major economies leaving the Euro. Any and all three options will result in significant turbulence.
For most, a status-quo version of the existing Eurozone is the preferred scenario, and the reforms agreed in December 2011 to embrace tighter fiscal rules and monetary expansion, represent a step in the right direction to resolve this crisis. However, based on the challenges that have come with implementing these reforms in some Eurozone countries, the changing political climate, the ongoing weakness of a number of European banks, and the increasing reluctance of stronger countries to 'bail out' financially weaker or politically unstable countries, it is very likely that the 'contracted Euro' scenario will be the one that becomes reality.
So, what does this mean for banking and financial institutions?
The introduction of the Euro in the late 90s provided a great deal of experience of changing from one currency to another, and provides a strong basis to tackle the challenges associated with any countries leaving the Euro. However, it is clear that a contracted Euro will have a widespread impact on both operational / IT processes and underlying solutions, requiring additional resource and experience to plan and deliver the necessary changes in a cost-effective and efficient manner. The key impacts are market infrastructure, regulatory, customer and operations, resulting in several significant process and system changes.
In terms of customer impact examples, in core banking, client on-boarding and management processes would need to be changed; client accounts would need to be reset to accommodate multiple currencies, and the data migrated. In addition, any changes in account terms and conditions would need to be planned and communicated to clients effectively. The impact on pension funds could be huge. For example, the potential redenomination of long-term assets (such as government or company bonds), which had already been redenominated from the original national currency into the Euro, might pose significant challenges.
In terms of operational impact examples, the withdrawal and reintroduction of new currency notes and coinage (such as the Drachma) will be a particular test for the banks within countries exiting the Euro, and advance contingency planning will be absolutely crucial. Channels such as branch, direct, mobile, contact centres and ATMs would need to be reset and standardised to be able to cope with currency change and make sure customers still receive the service they require without interruption.
In terms of infrastructure and regulatory impact, Agent / Correspondent banking would need to be restructured and payments infrastructures / systems updated in line with new currencies and regulations. There will be a knock-on impact on European regulation such as SEPA, EMIR and MiFID II across all BFS institutions.
If we look specifically at capital markets, in addition to the above examples, financial institutions will be saddled with changes to Risk Management processes (for example, collateral management, margining and asset services) and potential fragmentation of the market infrastructure. Regulatory bodies will stipulate varying demands on how instruments are priced and may demand capital adequacy changes. The fragmentation of market infrastructure will lead to uncertain liquidity availability and hence the need for more complex connectivity. Real-time trade analytics will play an even more important role. The additional cost of setting up new trading desks / centres will add to the cost of operations and regulatory burdens.
All of the above will impact reporting and management information systems at a global level.
The examples above are just snapshots of the potential extent to which financial services institutions will need to change to be able to cope with a contracted Euro. As such, banks need to place an increased focus on assessing and reacting to the changing situation to limit potential financial losses, evaluate new strategies for operating in these markets and develop appropriate risk management frameworks. This will result in several initiatives to address the need for process and systems changes.
In summary, whilst a lot of groundwork and experience was gained in introducing the Euro, it is essential for all financial services institutions with Euro exposure to start putting plans in place now to be able to adapt to market infrastructure, regulatory, customer and operations changes with minimal disruption. Those that do will be the ones that will not only be ready for any disruption / financial impact caused by future developments, but will be in a strong position to benefit from the changing environment ahead of their competitors.
It is time to act, rather than wait for the next stage of the crisis to unfold.