Everyone is talking about regulation and little wonder, considering the burden and cost. Over-regulation not only poses a threat to the finance industry today – it is storing up problems for tomorrow.
Regulation is now the main topic of conversation among bankers. The
costs are huge, compliance is burdensome and the merits of the final
outcome are debatable. At some point – and we may be getting
dangerously close – over-regulation will destroy the entrepreneurial
spirit and innovative zest that has fired the financial industry over
the course of centuries.
The evidence of this is everywhere. A report from the Centre for the
Study of Financial Innovation identifies over-regulation as a serious
risk to banking. An ex-Deutsche Bank board member tells The Banker that
he is glad to be out of banking because of the regulatory burden. An
Oracle executive highlights Basel II and other regulatory moves as
being the most significant of five catalysts for change in banking. The
following two editorials both deal with regulation: the slow, painful
march of Basel II and the chicanery of the EU Investment Services
Directive.
Where will it all end? On one estimate, Basel II implementation will
affect 30,000 banks and cost $15,000bn. The burden falls
disproportionately on small banks and could drive some of them out of
business. Regulation, however intricate, far reaching and well policed,
cannot guarantee that financial centres will stay free from trouble.
Germany’s regulators from BaFin, for example, have a habit of dropping
in on bank supervisory board meetings, a happening that would give an
Anglo-American banker an apoplexy. But German fussiness hasn’t
prevented scandals such as the bad real estate loans made by
Bankgesellschaft Berlin and the recent problems of WestLB.
Crisis is, by its nature, unexpected. It’s clearly commendable to be
prepared and for balance sheets to be adequately bolstered with
capital. But total prevention is a nirvana that cannot ever be
achieved. Indeed, there are fears that putting all banks everywhere
under the same regime, and encouraging a single model of risk, may
accentuate the next crisis.
Someone needs to regulate the regulators. But with politicians seeing
regulation as a panacea for all their problems, this seems an unlikely
prospect. Meanwhile bankers can merely struggle on under an ever
growing load.
