Banks have been pretty successful at facing down regulation. But do they actually need to? And how long before the regulators hold their nerve and force the financial institutions off the road instead? By Chris Skinner.

Like two young rebels sitting in the driving seats of their roadsters, revving their engines on a hard-bitten dirt track, financial institutions and regulators face each other in a hard-bitten stand-off between compliance and free market movements. The winners are inevitably the banks. If you do not believe it, just look at what has been happening over the past few years.

In the US, we saw the climb-down over T+1, followed by a willingness to be more flexible for non-domestic firms listed on the NYSE and their duties related to Sarbanes-Oxley. Equally, in Europe, there have been murmurings over the deadlines for MiFID, SEPA and for the more over-arching Financial Services Action Plan. There’s even been some talk of postponing Basel II.

Why is it that governments come up with such ambitious, detailed, fully consultative proposals for change, only to have it knocked back? Could it be the cost of compliance is just too burdensome?

That is the excuse claimed by bankers worldwide. Yet if it were true that banks cannot adapt to regulatory change fast enough, how come Y2K went by without a murmur? How come the euro currency is working? And how come banks are making record profits? If the costs of compliance were really so burdensome, surely we would not be seeing such profitability as it would all be absorbed by changes to technologies and systems to meet tight government deadlines.

For example, take HSBC’s results, announced in early March: £9.6bn, most of it coming from Europe and north America, with the largest growth in profitability expected in China. These results follow strong earnings across the banking sector overall. On the same day, the UK government started talking about passing a law to force banks to clear a cheque in less than a day (it currently takes three days or more), and HSBC’s chairman, Sir John Bond, said that the bank could do that in under six months if it became law.

Perhaps most of the stand-offs between the industry and governments are just pure political brinkmanship for banks to maintain profitability. And, funnily enough, the banks normally win the battle. Maybe it is because politicians do not see how complex financial instruments can blind them with science. But don’t sit back complacently thinking it will last forever. After all, there are more than enough bankers being hired into political circles to correct these false notions.

So when you are playing chicken on the dirt-track roads of regulators, don’t be surprised if, one day, you suddenly find your car becomes unroadworthy and is about to be impounded.

Chris Skinner is an independent financial commentator (www.balatroltd.com)

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