Is regulatory reform getting out of hand?
Jeremy Anderson, global chairman of KPMG's Financial Services practice, certainly thinks so. He recently predicted a potential tipping point for global regulation.
'The aggregate impact of regulatory reform and the accelerated timetable for adjustment,' Anderson wrote, ‘may be coming close to the tipping point at which the costs of regulatory reform – through the negative impact on the real economy from reduced availability of bank lending and other banking services – begin to exceed the benefits to financial stability.'
At least one reputable source, the Washington-based Institute of International Finance, has predicted significant economic consequences as a result of the present regulation avalanche. It estimates that the combined effect of the Basel III changes and the impact of the capital surcharge on the 28 entities deemed to be 'Global Systemically Important Banks' could trim real GDP by an average 3.2 percent across the 15 major economies (including Australia) represented in the Macroeconomic Assessment Group over the next five years. Lending spreads could rise by 364 basis points over the same period for the same reason.
For banks in the Asia Pacific region, KPMG has nominated several important regulatory matters for attention in 2012.
- Australia, China and Singapore will continue to push capital reforms ahead of the Basel III timetable. Others will not necessarily follow.
- Basel III liquidity ratios are raising some fundamental questions. Asian regulators await further details.
- Pressure will continue to prepare acceptable Recovery and Resolution Plans, also known as Living Wills.
- Corporate governance is moving up the agenda in many Asian jurisdictions.
- Some countries are looking at over-the-counter derivatives reform, although any changes will need to respect the particularities of Asian markets.
- Emerging conflicts between local and global regulatory requirements.
- Ongoing difficulties with the application and interpretation of the US Foreign Account Tax Compliance Act.
In short, it will be a busy year.
Australian banks should take more than compliance-driven approach to these regulatory pressures. They should adopt a proactive response, assessing the strategic and operational consequences of reform proposals on their business models, pricing structures, and risk governance capabilities – while considering the 'customer lens' at the same time.
Several questions present themselves:
- What products/services will remain viable under the new regulatory arrangements?
- Is regulatory change creating hitherto unidentified business opportunities? What are they?
- Does our existing business strategy offer sufficient flexibility to allow us to respond optimally to the direct and indirect effects of regulatory change?
- Have we formulated appropriate structures to optimise financial efficiencies in the evolving regulatory climate?
- Do we really understand how regulatory issues interact with our core business activities and critical operations?
- How will the plethora of regulations impact on how we interact with our customers.
We believe that taking a holistic response will not only drive increased compliance that is sustainable and nimble to a changing landscape but can also underpin the basis of an enhanced customer experience and operational effectiveness.