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Risk regulation: Ship shape?

Regulators struggle to meet the challenge of defining the right level of regulation – globally

David RogersBanks and their regulators are in a constant struggle to agree upon the level of regulation that will provide a suitable operating framework for a successful and profitable business without endangering the economic well being of the state and its citizens.

With the political mandate firmly in the court of more regulation and more transparency, a question can be asked as to what really happens when a global guideline is passed through the political (legislative), regulatory and economic imperatives of each country. No one country wants to lose out on the economic benefits that the financial services industry provides (At the moment, it’s the downside that everyone sees).

There will always be a trade off. An interesting allegory is in the shipping industry. When established shipping nations introduced stricter regulation, companies transferred their ships and crews to countries that were lightly regulated (known as flags of convenience). Although not all shipping firms did this immediately, over time major shipping nations such as the UK saw its fleet dwindle to a pale imitation of their past size.

Finance may not be entirely in the same boat as the world shipping register, but there the fear remains that heavy-handed regulation will create unintended conditions. Variations in the economic cycles of countries and regions do not make a single approach easily applicable, and so, financial services firms will search out the best deal from a country willing to offer best terms to operate within.

The Basel III situation is similar to previous regulatory discussions. Namely, banks will emphasize questions as to the negative impact of new regulatory regimes, and regulators will be asked to look to find a solution by negotiation at a global (guideline), regional [guideline and law, e.g. European Union Capital Requirements Directive (CRD)] and country (law and negotiation with banks/FI firms) level.

Regulation at a global level is a set of guidelines reviewed at various political and regulatory levels, and so interpretation is the name of the game. Basel III is no different. ‘Dilution’ of regulation is in the eye of the beholder and liquidity guidelines will ultimately vary by country – some tough and some not so tough.

The challenge for politicians and regulators is that financial services is a  highly networked international business that is constantly innovating. In this industry, the relationships between corporate headquarters and its subsidiaries and customers cross country borders and operate in a way that government institutions have struggled to cope with. The question is whether adding more regulation is the way forward? Or could banks offer the best of their analytic technology to lessen the burden on the regulator and themselves?

Read Clark Abrahams’ blog post, “What’s needed — innovation or more regulation?” for another view.  

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