How much more regulation can the industry take?

As regulators are about to unleash even more regulation on the financial services industry in the wake of the financial crisis, guest blogger, Gareth Lodge of TowerGroup,  says they should stop and think carefully about whether more regulation is going to have the desired effect?

I’ve just been enjoying the Big Issues debate on transaction banking, chaired by TowerGroup CEO Karen Cone. I may be somewhat biased when I say how interesting it was!

What continues to strike me is how transaction banking has emerged successfully from the financial crisis. There are some good reasons for that success. Bankers and other observers sometimes forget that global transaction banking isn’t one “thing” but actually comprises multiple businesses. As a whole, however, transaction banking emerged as one of the few areas of the bank to have grown in the last year. Transaction banking is all about helping the banks’ customers manage risk. The help may be as straightforward as a letter of credit designed to take the risk out of international trade or as highly sophisticated as the systems and processes that flawlessly move billions of transactions and trillions in currency value. The recent market uncertainty has therefore been good for the transaction banking business in many ways.

At least in some parts of the bank such as global transaction banking, banks have managed risk extremely well, I think. The policies and processes put in place meant that no payment system failed, which is why many are surprised about the threat of increased regulation. This concern stems from the open question as to whether existing regulations — and regulators — are effective. Many banks, particularly in Europe, have come to see regulation as unavoidable and in effect simply an increasingly large cost of doing business. What has always been a concern, and is becoming of even greater one, is the perceived lack of benefit and value in the regulations. The proportional cost of IT spend related in some way to regulation is already large and is rising. 

The cost is starting to have a material impact on some banks, with results contrary to what the regulator wished. In essence, much of the regulation addressing competition and risk levels the playing field. One consequence seems to be that some banks suffering from the burden of spending on regulatory compliance are outsourcing to larger banks, with the converse and unintended consequence of reducing competition and concentrating risk. 

Of course, not all will agree with this view, each “group” having a different opinion as to the view’s truth and merits. Although there is no easy solution, it would seem beneficial to all to provide greater clarity and governance of regulation before embarking on yet more. Defining and agreeing what is required and how success should be measured surely should be the basis on which any project should be undertaken.