Banks battling the regulation tsunami

Last week, the Government’s expert group, whose purpose is to make suggestions for tidying up the regulation of the financial sector after the financial crisis, held what is expected to be its final meeting before being ready to present its suggestions for a thorough tidy-up. However, throughout the rest of Europe, banks are also battling what they believe is a far too excessive and costly regulation which, according to a new report, impacts their clients.

By Complidia

It has been called a tsunami of regulation – what the financial sector has experienced from legislators after the financial crisis. An expert appointed by the Government has been tasked with looking at whether regulations have been too extensive and imposed too many restrictions on the financial sector. The working group has been in existence since last summer, and with an expected final meeting last week, you can almost talk of a fast-working committee. This particularly pleases Lars Christian Ohnemus, Director of the Center for Corporate Governance at CBS, where he researches, amongst other things, financial regulation.

“Particularly from 2009-2012, the entire financial sector was subjected to many regulations. And it is a sound principle, and highly appropriate to stop to have a critical look at whether all the measures were necessary or unnecessarily tight. Granted, I do expect that we will see more suggestions for easing when the expert group presents their conclusions”, Lars Christian Ohnemus says.

Forced to look inward
Nothing has been announced as to when the recommendations will be published. But Lars Christian Ohnemus points out that regulations have forced banks to focus too exclusively on their own business model and less on what can help develop their clients’ business opportunities, something which is evident primarily in corporate lending.

This was underlined by the National Bank’s latest monthly figures for the banks’ lending, which showed that in the first two months of 2018, corporate lending grew by only 0.8% compared to the same period last year. This prompted Finance Denmark to refer to this as “a flat development”.

“The banks now have large deposit surpluses, and therefore excellent opportunities to provide loans to companies which approach them with sound projects. It is also in the clear interest of banks that the surplus in deposits is put to work out in the companies”, says Niels Arne Dam, Chief Economist from Finance Denmark.

The whole of the EU is looking at banking regulation
However, much of the regulation comes from the EU rather than Danish legislators. MiFID2 and PSD2 are two directives which entered into force at the beginning of the year, and MiFID2 in particular required enormous resources to implement, just as it will be costly to maintain. And as of next month, the General Data Protection Regulation will come into force, also impacting the financial sector.

It is not only in Denmark that the financial sector is currently working hard and seeing their chance to ease some of the many regulations.

The Association for Financial Markets in Europe (AFME) have presented a major report prepared in collaboration with consulting firm PwC, who have estimated what the many regulations have cost the financial sector.

Regulations worth billions of dollars
Data from 13 global banks has been collected and analysed for the report. Five of the banks are American, the rest are European, while there are no Danish banks in the survey.

The report places the total cost and expenses of regulation at upwards of USD 37 billion, or 39% of the total capital market costs in 2016. And this has had serious consequences in terms of lower returns, and it reduced the banks’ ability to provide many businesses with good loan facilities and improve their equity. And, in many cases, it has made it more expensive for companies to borrow money, the report claims.

It does not include regulations introduced after 2016, and thus, for example, not MiFID2 or the new Basel requirements. However, AFME sees no signs that the development described in the report will slow down.

Hoping for a reduced pace
Consequently, the lobby organisation harbours no immediate hope that any of these regulations will be withdrawn or limited. However, the organisation hopes that the pace will at least be reduced. Therefore, the organisation makes the following suggestion:

“The authorities should launch more studies of the effects of current regulations before they decide or implement any new major regulations”, AFME Director Simon Lewis said in connection with the publication of the report.

You can read the full report here.

This story is produced by – the leading Danish news media on financial regulation, compliance and privacy.

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