As regulators push for financial stability, they need to be careful that the pendulum does not swing so far in the other direction that banks cannot exercise their core mandate of providing finance to households and industry.

Since the onset of the financial crisis in 2008, the intense glare of the regulatory spotlight has been focused on the financial services industry. Closer scrutiny of market, credit and operational risk across banks is being demanded by regulators as a means of mitigating wider systemic risk.

Regulators are right to make such demands. The financial crisis has clearly demonstrated that lessons not only have to be learnt but embedded in the way that we as an industry work today.

Bringing financial stability and mitigating systemic risk is an ambition we all share. We must, however, do so in a manner whereby the regulatory pendulum does not swing too far in the opposite direction. If it does, the role of banks in bringing stability to the wider economy may well be hampered.

Points to address

As regulators outline the measures banks need to take to bring financial stability, it is important regulators also ensure banks are able to continue to exercise their core mandate while respecting this common objective. And this involves considering the implications of some of the key regulatory actions being contemplated today. We need to be careful to achieve the appropriate balance to avoid stifling growth through excessive or conflicting constraints. In this context, I believe there are five main points to address.

Support a model that is proven: A question around banking models has been extended to the universal banking model. Throughout the crisis, when considering the global landscape, universal banks have generally weathered the storm better than narrowly focused banks. Diversified banks are more stable and better positioned to service client needs, playing a major role in economic recovery.

A hankering for a Glass Steagall-like segregation of banking services is a misplaced nostalgia for a simpler world. We must put in place the appropriate regulation for the world as it is today, not as it was long ago. Depositors’ money must of course be protected, but segregation of these units will make the functioning of banks much more difficult, especially as we shift towards an environment of greater capital and liquidity constraints.  

Avoid taking something away until there is something to replace it with: In Europe, small and medium-sized enterprises (SMEs) are typically financed via relationship banking rather than capital markets. Penalising bank financing would harm growth in Europe, which does not yet have the same deep capital markets for SMEs as, for example, the US.

By prematurely moving to this approach, there is the real danger that swathes of businesses – those that fall below the rating for which investors are willing to commit – will not gain access to capital required for them to grow. This can include SMEs, but also local authorities, potentially impacting in the long term on necessary infrastructure projects. SMEs represent a cornerstone of economic growth and must continue to grow. They cannot tap the markets, banks should be positioned to play their role as lenders.

Regulatory solutions should be proportionate to risks not to size: We must be wary of creating arbitrary size-based categorisations such as systemically important financial institutions or, as they are more commonly known, SIFIs. Big is not always bad and small is not always beautiful. The objective of regulatory reform should be to put into place the checks and controls that ensure institutions are sound, regardless of their absolute size. By creating a hierarchy in the banking system between those deemed as SIFIs – or considered too big to fail – and those that are not, there is the danger of creating an uneven playing field in the competitive landscape.

A global market requires global regulation: We fully endorse the G-20's objective to review regulation on a global basis to avoid regulatory arbitrage. However, since regulation is by nature local, it is essential that regulators co-operate closely on extraterritorial aspects to avoid regulatory overlap that would stifle competition from foreign institutions. This should be done sooner rather than later to give firms the time and visibility to prepare their transition to the new regulatory regime.

Evolution of international banking views as a result of regulatory actions: Some regulatory actions, perhaps being driven in part by public opinion, are at risk of being translated into the return of protectionism across financial markets, and this is especially apparent in the US. The consequence of this is that it may force other regions’ banks to act collectively to find an alternative to the dollar as a currency to finance the global economy. In order to re-establish positive momentum across the markets, we need take measures that help to build Europe. That means avoiding forging protectionist barriers that may hinder economic growth and instead support actions that promote it, and that includes educating all stakeholders of the dangers of financial protectionism.

Banks impeded

The paradox for banks is the role that they must play in supporting the economy – providing finance to households and industry – may itself be impeded by the framework of the new financial landscape being carved out by regulators worldwide. For regulators, it is about banks reducing risk-taking and ensuring they retain enough capital to minimise systemic risk in the event of bank failure, all while ensuring they can continue to perform their role in the economy. 

Achieving the appropriate regulatory reform is a complex task, with much potential for unforeseen consequences. Joined-up thinking across these many different issues is challenging and we should be humble rather than radical. We need to focus on those actions that can strengthen banks and the banking sector, while meeting the dual objectives of promoting growth and financial stability.

The temptation to punish banks is always present after every financial crisis, but if we overly restrain the ability of banks to competitively provide financing solutions to their customers then we risk the pendulum swinging too far in the opposite direction and simply pushing those customers toward less-regulated providers in the shadow banking market.

Michel Péretié is chief executive officer of Société Générale Corporate and Investment Banking

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