Sibos 2014: Are the Costs of Regulatory Reform Too High?

According to the vote, which came from a mixed audience of bankers, corporates and technology vendors, 65% agreed that change created by regulation came at too high a cost, while 35% disagreed. A similar proportion (63% to 38%) also felt that increasing regulatory compliance had also reduced banks’ appetite for lending.

In a session examining the increasing impact of regulation on corporates, moderator Shannon Manders, editor of GTR magazine, said that regulations that had been in the pipeline for some years had now arrived and were impacting both banks and their corporate clients, affecting the relationship between the two.

Carole Berndt of Royal Bank of Scotland (RBS) suggested that in the pre-financial crisis era, driving revenue had been accomplished by the banks relatively easily. “Regulation has caused us to think more about the cost of what we’re doing,” she said. The capital that they now put out to companies carries a distinct price and needs to be factored into the return and the relationship with the client.

The new rules forced each bank to consider exactly what it was good at doing, where it wanted to be and with which clients. Pre-2008, banks were keen “to be everything to everybody” but this policy had become unsustainable. The result had been “deeper conversations” between banks and corporate clients over just what each one expected from the other. This in turn led to deeper relationships but also a reduced number.

According to David Cruikshank of Bank of New York Mellon, the future will be one of greater fragmentation as banks become more stringent on what they take to market. “Companies must understand what value they are bringing to their bank, as well as vice-versa,” he suggested.

Five Year Itch?

An audience poll restricted to those representing corporates asked: ‘How has the business relationship with your financial institutions changed over the past five years?’ Forty per cent responded that the relationship has strengthened, while 30% said that it had stayed much the same and the remaining 30% felt that it had weakened.

“I’m glad to see the 40% figure,” said Cruikshank. “As much of the regulatory impact has yet to come, it suggests that conversations between banks and their corporate clients on what it will be are already taking place.

“Many of the market reforms still coming down the path will change the dynamic between the two,” he added. “Is your bank communicating that to you?”

Berndt maintains an overall positive attitude towards the effect of regulation on banks. “Consider the complexity and enormity of the new regulations – very few institutions are able to address such challenges,” she declared. “So the environment into which we’re now heading shores up the role of the bank and its position as an enabler and facilitator.”

However, Cruikshank noted that banks face a double set of pressures – not only from regulators but from their shareholders who want to see attractive returns. “So do you focus on the regulatory side at the expense of growth?” he asked. “Don’t forget that many of us are still shareholder-driven.”

Ultimately banks would be forced to shrink their focus in order to support their balance sheets. “We need more transparency, to ensure that we’re not over-leveraged and we need more liquidity,” he said.

One final audience poll asked corporate treasurers in the audience whether the new regulation-driven era had persuaded them to start investigating alternative sources of financing to the banks. In this case the response was a dead heat – 50% for yes and 50% for no.

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