WASHINGTON — Nearly 10 years since the onset of the financial crisis, the once all-consuming demand for improved safety and soundness in banking has been replaced by a single-minded pursuit of a streamlined regulatory structure emphasizing economic growth.
Banks are all but pleading for regulatory relief, hoping it can help stave off a new wave of consolidation in the industry, which they claim is driven by compliance costs from all these new rules. But whether regulatory relief — if it ever happens — results in lower compliance costs is an open question.
"It’s all dependent on the facts and circumstances,” said Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association.
The terms “regulatory relief” and "compliance costs" are problematically broad. Banks have been subject to various types of regulations from various levels of government for as long as there have been financial institutions, but the banking industry generally separates regulation into two categories. What it calls “compliance” generally refers to consumer compliance rules; that is, fair-lending rules, anti-money-laundering requirements, mortgage lending rules and the various stipulations handed down by the Consumer Financial Protection Bureau. Other requirements — such as capital and liquidity rules, stress testing and other prudential rules — fall under the category of risk management.
Banks also bear their compliance costs in different ways. As a general rule, the larger the bank, the more likely it is to hire in-house staff to meet its requirements. Smaller banks are more likely to meet those requirements with third-party vendors, but large and midsize banks may also rely on third parties for compliance duties as well.
Tom Kimner, head of marketing and operations for the global risk practice at the analytics firm SAS, said there is an expectation that the deregulatory environment might reduce the demand for compliance-based business. But the information that the company provides banks about its own balance sheet is still valuable in other ways, he said, such as asset optimization and streamlining business models.
“There’s a bit of a natural shift … from regulatory compliance to a model where banks are using technology and analytics to run the business to make better decisions about onboarding an appropriate set of assets, and how they manage those assets once they’re on the books,” Kimner said. “I think banks will look at technology through more of a competitive lens than a compliance lens in the future.”
Other providers say there is still money to be made in compliance assistance. Ambreesh Khanna, group vice president and general manager of Oracle Financial Services, said that whatever the U.S. regulators may choose to do, there will still be international standards for them to meet in areas like accounting and capital adequacy.
So as long as large multinational banks remain that way, they will have substantial compliance burdens, he said. Oracle even launched a partnership with the accounting and consulting firm PwC to assist banks in complying with changes to the International Financial Reporting Standards set to be implemented by 2018.
“Unless the plan is for those banks to completely retrench and focus only on the domestic market — which I don’t believe the plan is — the plan is to grow the industry, not shrink the industry," Khanna said. "We don’t anticipate that these banks will be allowed to not comply with the standards that are the 'gold' standards: capital adequacy standards, accounting standards. Things like that we believe will still be in place."
What reforms are ultimately prioritized — and what replaces the existing regulatory regime — will make a big difference in associated costs. Some low-hanging reforms might include raising the threshold for systemically important financial institutions from $50 billion assets, a reform that both regulators and congressional Republicans have supported in one form or another and that could substantially reduce compliance costs for midsize and regional banks. There may also be some consensus changes that could be reached in the definition of so-called high-quality liquid assets for the purposes of calculating a bank’s liquidity coverage ratio.
H. Rodgin Cohen, partner at Sullivan & Cromwell, said there will soon be a political opportunity for bankers to address not only the newer post-crisis regulatory changes, but also to get regulators to rethink some of the older supervisory rules that might be updated without compromising effectiveness. A reconsideration of the supervisory regime surrounding bank regulators’ anti-money-laundering rules would be a particularly helpful place to start, he said, and such a change would help banks of all sizes and the supervisory agencies as well.
“There is not necessarily a tension between reducing regulatory burden and making the anti-money-laundering regime more effective,” Cohen said. “Some may disagree on this, but if there were a single area of focus … that would be at the top of the list, or at least very close.”
But other ideas could be more costly to banks. Karen Shaw Petrou, managing partner with Federal Financial Analytics, noted that Treasury Secretary-designate Steven Mnuchin’s nascent support for a “21st-century Glass-Steagall” separating commercial and investment bank functions could potentially be costly for multinational banks depending on how it is executed. In the United Kingdom, for example, regulators have put forward a ring-fencing regime that separates commercial and investment banking activities in a way that appears reminiscent of what Mnuchin has in mind.
“I wouldn’t even begin to contemplate whether it’s more or less [expensive] across the board, except to say that it would be at least the same if not more, because here you have different regimes covering different parts of the holding company,” Petrou said. “That means, basically, a lot more [compliance employees] than these banks thought they needed to have when everything was in one place.”
But Michael Wiseman, a partner at Sullivan & Cromwell, said that even if regulatory changes may cost banks initially, a simpler regulatory system brings with it fewer costs — both in terms of financial resources and in terms of helping banks spend less of their time worrying about compliance.
“Anytime you change anything, I suppose there is a cost to it,” Wiseman said. “To the extent that the channel markers are easier to follow, I think that has both economic and noneconomic benefits.”
Abernathy said that he thought whatever compliance cost savings ultimately arise will be “on the margin,” but that one of the obvious benefits of a simpler regulatory regime — either in the risk management area or in consumer compliance — is reduced demand for consultants to advise on whether some or other activity or product violates a rule. That could mean leaner years ahead for compliance consultants, but perhaps not for lobbyists.
“If the operations of compliance … are less complex and complicated than they were, you don’t need as many consultants to help you figure it out,” Abernathy said. “But I don’t think that happens overnight, and I think before that happens, the consultants play an important role in helping bankers figure out what kind of reforms should [they] look for.”