The Diligent team Image
The Diligent team
GRC trends and insights

What is a banking entity?

December 23, 2019
0 min read
A financial district containing banking entities.

It's unsurprising that, in a time when international regulators are shining a massive spotlight into the operations of the wider banking sector, and when banks' compliance and governance processes must be water-tight, the question of what exactly a banking entity is has come under scrutiny. After all, if an entity is deemed not to be a banking entity, then it won't have to comply with the plethora of new rules and regulations facing the financial services sector.

But does a banking entity differ from any other organization's entity type? And if so, how?

If we take a regular legal entity as being an association, company, person, agency or institution identified by a particular name ' the body corporate or the corporate entity ' then a banking entity, by extension, will be the entity or entities set up by a bank through which to operate in a jurisdiction. Same thing, different sector.

It does, however, get more complicated when it comes to regulatory compliance for a banking entity. Since the global financial crisis of 2008, banks have had to change the way they operate. There are calls for more transparency in operations, and for more restrictions to be put on those operations, to mitigate the risk of another global financial collapse following risky banking behavior.

Banking entities and the Volcker Rule

In the US, this behavior is now driven by what is termed 'The Volcker Rule.' According to Investopedia, this rule is 'a federal regulation that generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds.' Named for the former US Federal Reserve Chairman Paul Volcker, it's a way to protect bank customers by 'preventing banks from making certain types of speculative investments that contributed to the 2008 financial crisis.'

Volcker wanted to limit the ability for banking entities to buy and sell stocks, bonds, currencies and risky derivative instruments from their own accounts. In essence, the rule prohibits banking entities from using customer deposits for their own profit. It's section 619 of the Dodd-Frank Wall Street Reform Act of 2010.

The Volcker Rule is currently in a state of flux ' the Office of the Comptroller of the Currency voted in August 2019 to amend the rule to clarify what securities trading was and was not allowed by banking entities, and we await its signing off ' but the amendment is generally seen as a relaxation of the Rule's previous restriction on banking entities using their own funds to trade securities. The relaxation is part of President Donald Trump's orders to ease the banking regulations that grew out of the 2008 financial crisis.

What does the Volcker Rule and its forthcoming changes mean for banking entities? According to Lawrence D. Kaplan of the Paul Hastings practice: 'These changes seek to modify the Volcker Rule from a strict, prescriptive form of regulation to a principles-oriented form of regulation, permitting banking entities to trade within risk-based ranges rather than compelling compliance with bright-line tests.' He says the proposed revision would 'create three categories of regulated banking entities based on an entity's consolidated gross trading assets and liabilities, and establish corresponding requirements.'

It's worth noting that the trading assets and liabilities are those of the combined US operations of any top-tier foreign banking organization, and so the tailoring proposal will have the effect of placing many foreign banks without a large US presence into the limited trading assets and liabilities category.

And this means that those in charge of legal operations, governance and compliance for any banking entity must maintain a close eye on how the banking entity operates ' they must be able to track those consolidated gross trading assets and liabilities, and to know whether the banking entity has moved into a new area of trading activity according to the Volcker Rule.

How entity management software can help keep track of banking entities

Whether a banking entity falls under the category of significant, moderate or limited trading assets and liabilities according to the Volcker Rule, the regulatory compliance needs remain the same: It's essential that the banking entity has robust governance and compliance processes, that it has a central repository from which it tracks entity data, and that the banking entity can efficiently report on its compliance position using real-time entity data.

Entity management software can ease the burden of this tracking for legal operations teams. By establishing a single source of truth for the banking entity's data, the entity manager can take a real-time snapshot of the compliance status at any time and report to regulatory authorities and auditors whenever needed, both accurately and efficiently. It enables the banking entity to manage the ongoing accuracy of the corporate record using compliance calendars, reminders and workflows for better data.

Entity management software, such as Diligent Entities, can also help to break down the silos that can easily emerge in large banking structures. With entity management data sitting at the epicenter of several necessary business processes that help legal, tax, finance and treasury to maintain compliance, it's essential to deploy an integrated entity governance and compliance system that fuels good practices across multiple business units and helps to break down those silos to enable strong and efficient communication across and within banking entities.

Diligent Entities integrates seamlessly with Diligent Boards and a secure file-sharing portal to create the Governance Cloud, an all-in-one compliance and governance ecosystem that streamlines reporting and helps inform better business decisions. Strategy can be based on the full and up-to-date picture, not just a small fraction, helping to enable more growth for the banking entity and its wider structure.

Modern governance is about delivering the right information at the right time. Get in touch and request a demo to see how Diligent's suite of compliance and governance software can help your banking entity get the right information to the right people at the right time, and help to ensure the compliance workflow remains robust and secure.


Your Data Matters

At our core, transparency is key. We prioritize your privacy by providing clear information about your rights and facilitating their exercise. You're in control, with the option to manage your preferences and the extent of information shared with us and our partners.

© 2024 Diligent Corporation. All rights reserved.