Now well past the immediate aftermath of the banking crisis, the “new normal” has emerged and banks and regulators are able to look at the ramifications of the original emergency measures and address the less-obvious and sometimes unintended consequences of bank regulatory reform.
Politicians, regulators and banks must take a holistic view of what we are seeking to manage with the banking regulatory agenda today, accompanied by recognition of the importance of the performance of the wider economy and the role of financial services.
When bank regulatory reforms were implemented, banks soon realized that the new rules have, in fact, affected the operating models of their core business, notably extending credit, making payments, selling savings and bank risk management products, or other protection products. Equally, politicians are now realizing that the endless focus on financial stability has had an impact on the wider economy and all stakeholders recognize that adjustment is required.
While banks are trying to address many of these specific regulatory issues, there is concern about how these all affect the “big picture” of the banking industry. The goal is for banks to achieve alignment on business planning and regulatory reporting in as many ways possible.
All of these issues have significant impact on the bank business model, legal structure, strategy, and use of new ideas to drive down cost (mainly through technology). Regulations have created a virtual cascade effect that impacts strategy, and the business and operating models. Recognizing this issue as part of strategic planning allows banks to identify and potentially mitigate some of the looming adverse consequences.
Looking ahead, banks faces a significant change and challenge to the status quo, which are not necessarily bad things. On the horizon looms great promise from technologies that can critically address the competing challenges of transparency and accountability in the new regulatory era.
A continued focus on factors that drive and inspire regulatory change will help banks plan effectively for the future. Active consideration should be given to aligning compliance and regulatory planning with strategic business development and customer centered business transformation.
Several less-than-obvious consequences (and unintended consequences) are emerging from recent bank reforms. The big question for banks today revolves around risk aversion. In the new post-crisis world of personal accountability, some managers are not prepared to take pre-crisis level risks, which leads to decreases in the volume of extendable credit in absolute terms, and banks’ willingness to extend credit to higher-risk borrowers. Requirements to hold even more capital than before are partially to blame. The net effect is a stifling of innovation and entrepreneurship.
While regulators are generally effective at managing the traditional banking sector, the web of regulations has a side effect of creating an appetite in the marketplace for alternative and nontraditional lending avenues, including “shadow banks.” If new risks do emerge, regulators will need to find the tools to identify them and find a proportional response through the existing regulatory regime or through new regulations.
Organizations cannot manage bank compliance issues on a case-by-case basis; instead they must address the bigger picture for the good of their business and the economies at large. Banks should approach the regulatory agenda in a holistic manner to ensure compliance but also move forward with their own growth and development.
While regulatory compliance is a responsibility, it also provides opportunities for banks to take a more comprehensive perspective.
In the Evolving Banking Regulation series, we examine these issues in greater detail, but it is clear that regulatory affairs must be centrally considered as an integrated factor for strategic planning overall and not a reactive component dealt with simply to address compliance concerns. The future is bright, for the banks that can embrace regulatory change as the premise for business transformation and innovation in banking.