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Death by regulation

One of the most interesting sessions at Sibos on Wednesday looked at the impact of regulation on transaction banking, which would at first glance fall into the “boring, complicated and dull” category; however it was both fascinating and worrying.

The session pitched two senior banking figures, Francesco Vanni d'Archirafi of Citi and Jaspal Singh Bindra of Standard Chartered onto the stage with David Wright, Secretary General of IOSCO, the international club of securities regulators.  It was ably moderated by Barbara Ridpath, CEO of the International Centre for Financial Regulation and it really brought to the fore one of the major challenges facing transaction banking.

We are now several years into the financial crisis and a reasonably optimistic observer in 2008 may well have thought that if we survived that near-death experience, we would by late 2012 be in a position where the root causes were well understood and that the industry would be getting back into shape.  To be fair, much progress has been made but the response to the crisis has led to a number of unintended consequences that makes the recovery harder and slower.

One of the most striking issues is the explosion of regulatory activity.  Francesco pointed out that on average, each and every weekend Citi has to implement 6,000 additional lines of code to its core banking systems just to cope with the ever-shifting regulatory targets.  That’s about 300,000 lines a year, just to keep their head above water.

Andy Haldane of the Bank of England neatly illustrated the point in a different way in his very lucid “dog chasing a frisbee” speech back in August.  He pointed out that in the UK in 1980 there was one regulator for every 11,000 people working in the financial services industry, and by 2011 this had risen to one regulator for every 300 people; this at a time that overall headcount has risen fractionally in the industry. 

The situation is worse when you look at the sheer weight of paper.  When completed, the Dodd-Frank act in the US may well run to some 30,000 pages, approximately a thousand times longer than the original Glass-Steagall Act.  Haldane believes that the European equivalents, when fully formed and brought together, could be 60,000 pages.  Nice work for lawyers and lumberjacks, but a nightmare if you’re running a bank.

So we now have banks being forced to deleverage whilst coping with a vastly increased, and frequently unco-ordinated, regulatory burden.  This will lead to the obvious consequence: some banks will decide that certain businesses, or certain markets, are simply not worth the risk and cost involved.  Whilst this will probably help to focus some banks on their core business, it will also force some banks out of otherwise viable markets.


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