Tough question indeed, when it comes to assessing the cost of regulation as opposed to its benefits! Take a deep breath, as there is no concrete response to this.
Do these large global corporate’s and leading financial institutions, leave alone the institutions in the emerging markets, have a choice? I suppose, not.
Right from regulatory revelations of Basel III to correct the definition of capital deficiency to the quantum of Tier 1 capital, stress tests have not been adequate enough.
The increasing impositions over capital liquidity via CRD and Basel IV are indeed plunging banking profits and to the point of them becoming mere public utilities.
With Basel IV in the pipeline large exposures with significantly higher capital dictate improvements in capital management, combined with less risk sensitive to capital ratios and internal modeling. Here, I am referring to 5% of CET1.
‘Volcker’s act’ in the US with respect to prohibition, ‘Vickers’ in the UK for ring-fencing or ‘Report of the Europeans commission’s high level expert group on bank structural reform (Liikenan)’ do instill the need to make a considerable difference in the way international banks operate in the global space.
Scarce population within various executive committees within these banking organizations do really realize the implications on strategy, financial resources and client products, with emphasis over financial strength.
In the backdrop of fines to the tune of billions, added are the woes with a ‘blank check’ approach as many financial analysts have inherently supported the higher spending. Here, I would like to quote hypothetically about the huge salary expense for compliance analysts borne by these big banks.
Firms now are anticipating regular circulars or publications from regulators with personal liability for compliance officers, being on the rise.
Coming back to the cost aspect, regulations like FATCA that now have a global impact are costing institutions substantially (today with its active presence in about 100 countries with model agreements) where money is hidden under the mattress by various tax exiles (now the focus is not just over US persons, but for all hailing from UK, Cyprus, Cayman Islands etc., and you name it, particularly after Switzerland entering into the new bandwagon with agreement signed off).
Hence, forcing the big banks to make contradictory and inefficient decisions, interesting isn’t it? Particularly when the amalgamate factor arises from the discretionary structural separation power granted to authorities to prohibit a credit institution (in this case when a depository institution that is covered by a guarantee scheme) from undertaking trading activities!
Indeed, a substantive approach which forces inefficient use of economic and financial resources locked in for eternity, which results in reduction of intra group funding too.
Reduced economies of scale do impact global competitiveness, with increased capital requirements and reduced liquidity. Thus, driving banks and other FI’s to increase pricing for their business models. So, the customer bears the brunt, after all!
A pertinent approach should be adopted to derive more efficiency, else, the economy is going to take the hit effecting overall health of the ecosystem.