Beyond prudential regulation: welcome to the next wave of regulatory priorities

26 July 2019

I began this short series of blog posts on developments in bank regulation by asking whether ‘Peak Reg’ has been reached—the point at which the advancing tide of banking regulation pauses and goes into retreat. As ever in the global regulatory field, there’s no single, hard-and-fast answer: as I concluded, it depends where you look and who you ask—although most respondents to research I’ve conducted in Europe think Peak Reg is certainly not far off.

I also pointed out that the post-crisis regulatory machine that’s now been built will likely continue generating new rules until someone decides to stop it. So in this second post, I’m going to examine the changing priorities that are shaping future regulations, as the initial wave of prudential reforms begins to level off.

The first wave of regulations

There’s no doubt that ‘top-down’ prudential regulations, driven by the desire to ensure that banks have sufficient capital to prevent failure, have dominated the regulatory agenda for most of the decade since the global financial crisis (GFC). And our soundings in the industry confirm that these reforms—primarily the Basel III capital and liquidity framework—have been the costliest regulations to implement.

However, these prudentially-focused projects—the likes of capital adequacy, margining for trading, new governance structures and accounting rule reforms—are now among banks’ most mature change programmes. While they won’t scale down quickly, the prudential reform programmes are essentially known quantities, are well-advanced, and also won’t grow by leaps and bounds in the future.

However, even as the prudential regulatory surge passes its peak, the next one is already gathering—heralding a further wave of rules-driven spending by banks.

What does this next wave consist of?

As the chart below shows, the answer is a diverse array of regulations aimed at addressing problems that can’t be fixed just by adding capital: rules in areas like market conduct and sales culture, cyber security, operational resilience, data protection and sustainable finance, plus benchmark reforms as LIBOR is replaced. It’s not clear that these issues lend themselves to global compliance programmes in the way that previous top-down prudential programmes did.

USE 190618-162737-JF-OS_V3_Peak reg blog 2 graphic_max

This next wave also includes the new Fundamental Review of the Trading Book (FRTB) regulation. While this is capital-based—focused on ensuring sufficient capital is in place against the riskier aspects of capital market trading books—its implications go much further and wider, potentially affecting the viability of parts of capital markets businesses. So it’ll have knock-on impacts on banks’ strategies and investment choices, potentially prompting withdrawals and consolidation in some areas.

As this wave of post-prudential regulation and spending start to build, the challenges for banks are substantial and—in some respects—growing. The economic and political pressures driving supervision priorities vary significantly by region and country, with increasing inconsistency of rules, data definitions, supervisory requirements and timings. So the complexities for international firms are continuing to expand.

A further shift is that regulators and supervisors, particularly in Europe, are making use of new forms of rules—namely ‘guidelines’ and ‘opinions’. These don’t have the same legal force as Regulatory Technical Standards (RTSs), but nonetheless drive new requirements for compliance and spending. All of this makes the goal of reducing the costs of compliance difficult to achieve: but there will no doubt be a focus on it, especially given the opportunities opened up by technologies that have emerged since the GFC.

So, as we enter an era of post-peak regulation, banks are facing a need to adapt to—and comply with—a new and still-emerging set of regulatory priorities and technologies. Given this situation, what should firms be doing now to ensure they’re ready? That’ll be the topic of our third and final blog in this series. Watch this space.

Brian Polk

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

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