Regulatory reform: may the forth be with you...

Written by James Thomas on Tuesday January 28, 2014

Last week an application was made to grant the Forth Bridge“UNESCO world heritage site” status. Of course, legend has it that no sooner is the bridge painted than the job of repainting it has to begin again... which seems a fitting theme as world leaders have been gathering in Davos to discuss, among other things, the seemingly unending task of regulatory reform.

With some commentators predicting a return this year to levels of economic growth not seen since before the financial crisis, one obvious question is whether the successive rounds of regulatory re-form since 2008 have rendered the financial sector any more resilient to future crises. Conversely, could a return to robust economic growth herald a return to the type of practices that precipitated the crisis, as the "tide comes back in"?

The conclusion it seems is that, in spite of (or perhaps partly due to?) seemingly relentless regula-tory activity, the job of preventing a repeat of the crisis is far from complete.

Senior bankers were keen to emphasise this point to the world leaders gathered in Davos last week. Antony Jenkins, Barclays CEO, suggested that, while progress has been made, the task of creating a system resilient to crisis may not be complete until the end of the decade. He was echoed by UBS's Axel We-ber.

Significantly, the challenge exists on two major dimensions of risk: prudential and conduct. For ex-ample, Mr Weber believes that many eurozone banks will be caught out by the stress tests due later this year; that banking capital, in many institutions, remains inadequate. Add to this the observation by the IMF's Jose Vinals that, so long as resolution measures for large financial institutions remain imperfect, the implicit subsidy to such institutions will persist and in the event of their failure the taxpayer will still bear the brunt.

Indeed, as the issue of resolution remains unresolved, so too does the question of banking compe-tition: Ed Miliband's headline grabbing speech of two weeks ago once again asked the question of whether banks were simply too big rather than too big to fail. The issue of banking competition looks set to return as an agenda item in the run up to the the next general election.

While prudential measures appear far from perfect, conduct risk has also emerged as a primary concern. Bank of England governor, Mark Carney, is said to have emphasised this point to senior bankers through a series of private meetings at Davos. Banks have some way to go on getting a handle on conduct risk. The London School of Economics has recently suggested that ten of the worlds top banks collectively incurred costs of £150bn due to misconduct between 2008 and 2012. Howev-er, as research from Thomson Reuters released last week re-vealed, uncertainty about conduct risk remains a hurdle for regulated firms, with 84% of companies polled suggesting that they did not have a working definition of "conduct risk".

So with a new year underway the same issues continue to dominate the regulatory agenda.

What are your thoughts? Will 2014 be a transformative year for banking regulation and the indus-try? Indeed, is such change possible, or is regulation and compliance, by necessity, an endless task?


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