Where We Are Now in Banking Regulations

by Jeremy Anderson, KPMG, 16 February 2011

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topics:
Finance and Banking Law and Compliance

tags:
banking regulations Basel Committee Dodd-Frank Act FSB G20 IMF

When we released our first Evolving Banking Regulation report in November 2009, there was still significant uncertainty around the eventual shape of banking regulation. What a difference a year makes.

Policy makers in every region have sprinted ahead with new rules for banks. The Basel Committee has finalized new principles for capital and liquidity. The United States has passed the Dodd-Frank Act, which touches on virtually every aspect of the nation’s financial sector.

Proposals have been put forward by global, regional and national policy setting bodies which will change the structure, supervision and governance of financial services. But we are nowhere near the finish line – regulatory change remains on the G20 agenda and will continue so for years to come, as we enter the much longer marathon towards implementation and transformation of the industry.

Working through the enormous volume of policies and proposals which have been issued in 2010, I am struck by how much uncertainty remains. High level proposals are still subject to detailed rulemaking and implementation guidelines – and I have no doubt the devil will be in the detail.

All stakeholders agree on the need for a safe, effective financial sector. But how we strike the balance between ‘safe’ and ‘effective’ – for there will be trade offs – remains a contentious issue, as evidenced in some of the announcements in the lead to the G20 summit in Seoul in November.

Tensions and competing priorities between nations will, in the end, influence the tone and detail of how changes are finally implemented on a local level. Outcomes look increasingly likely to differ by region and indeed by country, but by how much?

Despite commitment to a level playing field from the G20, the IMF, the FSB and other major players, the reality is very different. Major jurisdictions are taking different paths over issues, including systematically important financial institutions, governance, remuneration and supervision.

This is partly driven by very different starting points – countries that emerged relatively unscathed from the financial crisis are reluctant to implement costly measures to improve safety and resilience. Timelines for implementation will also diverge – by geography, and within that, by institution – as larger cross-border banks race ahead to demonstrate their stability and position themselves for opportunities.

Safety and soundness dominate the policy agenda in Europe. We are seeing the end of ‘light touch’ supervision in favor of multi layered ‘intensive supervision’ – with potential knock-on consequences for Europe’s competitiveness in the global financial markets.

In the U.S., compliance with Dodd-Frank will require liaison with new and reconfigured regulatory entities, operational redesign, and vigilant attention to one of the largest rule-making exercises in the history of the country. But the accelerated timeline to finalize rules increases the risk of unintended consequences – which will have an effect on all markets globally.

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