Too much regulation is seen as the greatest risk facing the banking sector globally, according to the latest Banana Skins survey by the London think-tank CSFI. This year’s survey pushed regulation to the top of the poll for the first time in its
10-year history and dramatically demonstrated that the 440 bankers and market watchers surveyed were concerned that the relentless growth and huge cost of regulation were eating into profitability and weakening the banking system.
Banks and bankers have plenty to be concerned about. HSBC chairman Sir John Bond noted his group spent $400m on regulatory obligations worldwide in 2003, over 3% of pre-tax profits. And the last few years have witnessed an explosion of global initiatives and directives that have added significant cost and complexity. Issues from the new Basel capital adequacy regime, to anti-money laundering legislation, to new international accounting standards and corporate governance have forced an unprecedented level of regulation on banks.
In Europe the weight of new directives from Brussels, such as the Capital Requirements Directive (CRD) and the Markets in Financial Instruments Directive (MiFID), among others, have made bankers feel uneasy. Regulations emanating from the US Patriot Act on terrorist financing and the US Sarbannes-Oxley Act, which have reach outside the US, add another dimension.
Are bankers just whingeing or is interference by regulators, regulation and compliance out of control, as many suggest? While few will deny that a more complex, globalised financial world demands more effective regulation, many believe regulators are overreacting to some money laundering and governance issues, creating unnecessary cost as well as distracting bankers from core activities. A balance needs to be struck and the Banana Skins verdict is that regulation is definitely out of balance.
What can be done? The UK’s regulator, the Financial Services Authority (FSA) talks extensively about “a proportionate view” of the cost of regulation but in its principles-led approach the FSA is not showing any sign of lessening the burden on banks. Regulators, traditionally, do not opt for less regulation and the multiplicity of regulatory bodies looking after global markets do not take an overview of their collective impact on the industry. They look after their specific patch only. Over-regulation is not healthy, the industry has overwhelmingly said it is a threat. Regulators should take note and provide a proportionate and equitable response.
