Three years on from the financial crisis, the regulatory changes are starting to bite.

Tough global standards requiring banks to hold more capital and liquid assets have been agreed, and so far regulators are standing firm against industry efforts to water them down.

The US and the European Union are pushing derivatives rules through, requiring many over-the-counter swaps to move on exchange and even more to go through central clearing. Margin requirements are rising, as is the amount of capital banks must hold against those transactions.

Governments on both sides of the Atlantic are also looking to strengthen their investor protection efforts. The US has created a Consumer Financial Protection Bureau and the EU is re-examining Ucits (Undertakings for Collective Investments in Transferable Securities), the main pan-European retail product law, and several other directives that touch on sales to retail customers. Enforcement against misselling, insider dealing and fraud has also been stepped up across the globe, from Hong Kong to London and the US.

“The broad elements of a new public policy regime are in place and we are in the implementation phase,” says Tom Huertas, the outgoing director of the UK Financial Service Authority’s international division.

While most countries are still headed in the same direction – towards tighter regulation and earlier intervention – cracks are starting to emerge. Derivatives reform is going in somewhat different directions in the US and Europe, and most Asian countries have not done much at all.

“Fine-tuning the proposed regulatory measures from their high-level global perch so as to give effect to a ‘ground level reality’ will be vital if such measures are to be effective as a cure to the problems of today and set a framework for tomorrow,” says Tom O’Riordan, a partner at Paul Hastings, the law firm.

The UK is moving to force banks to ringfence their retail operations, and countries including Switzerland and Sweden want their institutions to hold even more capital than is globally required. Many US regulators, meanwhile, are consumed by the hundreds of regulations needed to implement their Dodd-Frank financial reform act.

“It caused a regulatory earthquake when passed because of its broad scope in imposing significant new financial regulation; the real issue though, is the tsunami effect of the many hundreds of implementing regulations and policies that will take years to develop,” says Gerard Comizio, also with Paul Hastings.

On the enforcement and supervisory front, demands on the industry are growing as well. The Galleon hedge fund insider trading case and the recent UBS scandal, in which the Swiss bank lost $2.3bn in unauthorised trading, has ratcheted up the pressure on banks to improve their compliance and risk monitoring.

“Banks are looking for the perfect system, but no such system exists – they need to implement the imperfect systems that are actually possible,” says Wolfgang Fabisch, chief executive of b-next, a market surveillance and compliance technology provider. “Regulators should impose standards that must be complied with by the banks.”

Not surprisingly, the pushback from the industry has grown more strident in recent months, particularly as fears have risen that global economic growth could falter. The Institute for International Finance, the global bank lobby group, insists that the cumulative impact of the reforms could cost 7.5m jobs, and there have been warnings that some banks might have to drop out of global payments systems and trade finance.

The next two years could well prove critical as regulators and politicians finalise the details of a host of new regulations. In some cases, they may tighten the rules, in others they could well back off. There is also the growing prospect that national and regional differences will overwhelm the often-expressed desire for a “level playing field” around the world.

With its ring-fencing proposal “I think the UK has struck the first major blow against global harmonisation”, says Simon Gleeson, a partner at Clifford Chance, the law firm, adding that the divergence could well lead to fragmentation of the global financial market.

“It is universally recognised that by damaging international trade, the introduction of the Smoot-Hawley tariffs turned the 1930s downturn into the disastrous recession that it became. If it is true that the primary victim of fragmentation of finance is cross-border trade, we might just be about to repeat that error,” Mr Gleeson warns.

It is probably too soon to tell whether all this work will pay off in the long run.

“The real test of global cooperation will be the resolution of a major international bank – and how this will work is still the big unknown,” says Jon Pain, a former UK regulator who is now at KPMG, the professional services firm. “Regardless of planning, this is still likely to rely on rapid multilateral cooperation and frantic conference calls late into the night.”

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article


Comments have not been enabled for this article.