The New Regulatory World

Mark Astbury 27.10.2016

Regulatory change to banking accountancy, risk calculation, competition, market abuse etc has kept recruiters and contractors alike in business for years. They are the largest cause of structural, legal and even behavioural change in the market, leading to the creation of enormous programmes of change.

It doesn’t look like this will change any time soon with Mifid II, IFRS 9 & Ring fencing to name but a few of the big programmes. There is one regulation however which is believed to be on its way out; the Basel Accords are due to be delivered soon, however this may not be entirely true.  

Basel III, a response to the inadequacies in the regulations within the banking sector shown by the 2007/8 financial crisis, is in a quasi implementation / discussion / roundtable / classification phase. The Basel Committee is still deciding what the regulations should look like, while the banks are trying their best to implement something that hasn’t yet been decided. This ambiguity causes its own issues at a project and programme level, as anyone working in regulatory change will tell you. However, the main issues raised by this are far more integral to the banking sector.

Basel III essentially set out to strengthen capital requirements by increasing liquidity and reducing bank leverage. Hence we have the development on the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) and both have been developed with a view to reducing the risk taken by a bank when trading in both the short and the long term. However these are still in a state of flux, with each bank building systems and models that are essentially “best guesses”. As more information comes out, it has become clearer and clearer that these regulations are going to hit the European and Japanese banks exceptionally hard. A number of my clients have already begun the process of reducing their trading in the riskier, more capital intensive and therefore expensive products. 

Many would argue that this is exactly the reason behind those regulations. They were developed to produce a less risky, less vulnerable financial sector. Banks were until recently allowed to use their own internal models to value and measure risks on trades, a practice more widely used in the European banks than their American counterparts. These models in recent years however have been seen to understate risks to manage down their capital requirements.

The Basel Committee has therefore set out to harmonise the models used across the bank and to tighten the way in which banks measure risk. The US banks broadly have not used their own internal models to nearly the same level and their counterparts oversees, so have fared this new wave of regulations relatively well (there are of course other issues behind their performance of late). The European and Japanese banks on the other hand, have seemingly had enough. 

Over the past 2-3 months finance chiefs across Europe have been openly saying that the regulations need to change again. A number of the big players have said that the banking sector could not withstand the regulations as they are, let alone if they became harsher. One CFO of a major global banking player even went so far at say that the industry would be “stuffed” if the regulations remained unchanged. 

This is a very open and vivid realisation of the competition between business and government. The banks have been viewed, rightly or wrongly, as the bad guys, so the politicians needed to be seen to be hard on them. However, it seems that European Bank lobbying has forced the issues out of the corporate world, and now sits with the highest political levels. The fact that politicians are starting to appreciate the real impacts of these regulations could mean a turning point for the European banks, all of whom have felt the pinch in recent years.

I do think this situation presents an opportunity. Basel III was meant to wrapped up soon; the regulations set, the implementations completed and BAU rolling on. However this newfound political awareness alongside the exceptionally vocal condemnation of the regulations from senior finance chiefs across Europe tells me that we aren’t done yet. 

If this is anything to go by, the regulatory world in which we now live and work will never truly stop. The nature of banking is one of continuous change and innovation and new technologies such as crypto currencies and blockchain mean that the regulators will have to continually adapt, just like the banks themselves. The continuous ambiguity and ever changing regulatory landscape is going nowhere any time soon and that means recruiters and contractors should be busy for many, many years to come. 

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Mark Astbury's picture
Associate Director


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