Have banks reached ‘Peak Reg’? Or are there mountains yet to climb?

24 June 2019

In the energy industry, a concept has emerged called ‘Peak Oil’ - defined as the moment when global petroleum extraction reaches its maximum rate before it slips into decline. Today, more and more banking clients are asking if there is a comparable turning-point for their own industry. Is there a point of peak regulation or ‘Peak Reg’, when the advancing tide of banking regulation goes into retreat?

Peak Reg would represent a significant moment for banks. Throughout the decade since the global financial crisis (GFC) of 2008-2009, their strategic agenda has been dominated by regulatory changes—a fact reflected by rapidly-rising spending on compliance.  Looking back, it isn’t hard to see why this situation came about. Given the issues around risk management and too-big-to-fail that erupted during the GFC, a consensus quickly emerged among governments that they needed to defuse some of the risks that had built up in the banking system over many years.  In 2010, Basel III marked the resulting shift of focus towards increased prudential regulation, with both regulators and implementing regulations mushrooming in countries and regions worldwide. But a decade on from the GFC, this intellectual and philosophical framework for prudential regulation is now pretty much in place.

Has Peak Reg arrived?

In some parts of the industry, and for prudential rules, the answer may be yes. But it depends very much on where you’re located and what type and size of bank you are. And while prudential regulation may be peaking, other types of regulation are yet to reach their high-points Why do we say this? For starters, take the new banking regulators that have been set up in many countries. Having focused on prudential regulations for the past few years, they’re now looking at adjacent risk areas like market conduct, sales practices, combating financial crime, cyber risks and operational resilience. And with the regulatory rule-making machine having been built, it’s likely to continue whirring away until there are conscious decisions to stop.

That said, the overall pace of growth – global banks’ expected total spend on compliance with regulatory changes - seems to be slowing down. Even for those banks whose spending is continuing to rise, the mix of increasing spend on new areas versus decreasing spend in others means the total is no longer increasing at a faster rate every year.

Any levelling-off is of intense interest at banks’ topmost levels. For years, senior executives have been told that their massive new investments to ensure compliance are non-discretionary.  If the regulatory environment is becoming more stable, then perhaps there can be headroom to spend more on other value-creating uses. At a time when many industry leaders, especially in Europe, worry about persistent low returns and rising technology-enabled competition, any sign that a Peak Reg could be reached would be welcomed.

So Peak Reg matters. But our interviews with banks suggest its timing and scope of impact vary across the world. The US was first into the GFC, the first to legislate and implement reforms, and also the first to contemplate scaling back aspects of them. While we haven’t seen a ‘bonfire of regulations’ from the Trump administration, there have been reductions in the burden for smaller domestic banks, and changes to the supervisory tone and priorities for the largest ones. As a result, for banks in the US, many say that Peak Reg has indeed arrived there.

By contrast, Europe got into its post-GFC regulatory stride a little later, and some elements of Basel III have taken longer to legislate,  with implementation periods stretching several years yet into the future. Our interviews with banks suggest that for most, total spend in Europe on regulatory change and remediation has not yet peaked, although the rate of increase has slowed, with a peak expected perhaps this year or next.

For banks with a broad global footprint, the picture is mixed—with implementation of post-crisis prudential reforms well-advanced in most countries, but inconsistencies and localised ‘gold-plating’ remaining important drivers of cost. And even as the pace of new prudential regulatory change decreases, ‘remediation’ driven by supervision priorities means that total spending levels are unlikely to decrease sharply, if at all.

Also, the world has moved on since the GFC, especially in terms of technology. If a prudential Peak Reg really does arrive soon, and related regulatory requirements begin to stabilise, the agenda will turn to the cost and effectiveness of compliance as never before, with banks focusing on leveraging technology to change the way compliance is delivered.Finally, as all mountain walkers know, when you get over one peak the next looms into view. While prudential regulation may be plateauing or even starting to trend downwards, we still have the summit of conduct compliance ahead. And as for operational resilience regulation, we’re only just in the foothills.

Overall, the message is clear: global Peak Reg may not quite be here yet, but we’re getting close on prudential rules. The key questions arise about what happens next. Our soundings with major banks show the industry expects the focus to shift on to other areas. Given this prospect, we’ll devote our next blog to a drill-down into the regulatory priorities that are emerging for the era we’re now entering. Stay tuned.

Brian Polk

Brian Polk | Director
Profile | Email | +44 (0)7711 898535

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