Are banks over-regulated these days?
They certainly think so and I think they have a point, particularly if they're operating in many countries. Some of it is self-inflicted. Some of the regulations are a response to things going wrong. Regulations get passed when something goes wrong to stop it happening again. Things have gone wrong because businesses weren't managed well enough.
If a small minority of businesses in America hadn't done what they did, we wouldn't have Sarbanes Oxley, which is one of those generic pieces of regulation that US-registered banks and financial institutions have to comply with. Banking is a regulated industry and on top of those specific regulations, there are a whole load of other regulations that apply.
For multiple territory operators you have similar, but different regulations in each country. So the application will vary by country, so you need to train your people to understand the nuances of regulation in multiple countries. Theis is very expensive, time consuming and difficult, as Citigroup has found out recently.
What has been the effect of this rapid increase in regulation on banks' performance?
They say the costs of regulation and compliance have expanded significantly and therefore impacted their returns to shareholders. In some cases banks have slowed their rate of expansion into new services or countries because of the need to comply with a new set of regulations. They contend that they have had to slow down their expansion.
Now, the last few years have been relatively good for the retail banking industry around the world, so their returns have looked quite good on paper. Their view is that with competition increasing it will be difficult to sustain those returns and having multiple regulations will only make matters worse. In our recent CEO survey, they argued that they can improve corporate governance without the big stick of excessive regulation.
Is there a solution to this? Is deregulation in the banking industry a long way off?
Not in the short term. There is a pendulum that has swung out one way, but I don't think it will swing back that quickly. Political pressures... mean there aren't many votes be gained from reducing regulations for financial institutions. I think there's a general acceptance among the politicians in Washington, that if they'd taken a bit longer and taken more care with Sarbanes Oxley, it would've been better. But no one is going to stand up and ask to change it in the short term.
The banking industry is looking for regulations to be more consultative. They're looking to play a greater role in the formation of regulation and how detailed rules are written and to help interpret high-level regulation. They're also looking for international regulators to continue the process of discussion around how there can be a more harmonious application of similar regulations. At the moment there's a lot of exchange of information, but it just lets a different regulator pass another set of rules rather than making it easier to harmonize them.
Who has the best banking regulatory environment in the world?
I think the Hong Kong Monetary Authority and the Monetary Authority of Singapore do a good job in this region. The UK's FSA does by and large a pretty good job, applying a more principle-based system.
Is that a trend you are seeing, a move to a super regulator like the FSA in the UK, which will allow more harmonization of rules? In Hong Kong you have a system where different parts of the banks are regulated by different regulators.
In Japan, the UK, Singapore and Australia you have a super regulator. It is moving that way in Germany, where the banks and insurance companies are now regulated by the same group. I think we're seeing a trend towards a single regulatory model, if not a single regulator, where different regulators apply a single regulatory model. However I think that most financial institutions, which operate across all financial services, would prefer to deal with one regulator rather than several.
With the increased amount of and focus on regulation, has the world become a safer place, financially?
I think it will become a safer place in some respects. To the extent that banks have "know your customer" type rules, then it is safer. I don't think regulation removes macro economic risk. You can have as much regulation as you like, but that won't stop Argentina happening again.
It will address some but not all risks. But if you removed all risks, you would have no rewards. It's about managing risks, not removing them.
There was a debate at the World Economic Forum financial governors session at Davos a couple of weeks ago about whether markets had less risk appetite these days. The view was that they had to some extent, but really it was about the markets rewarding companies that had demonstrated an ability to recognize and then manage risks, not to eliminate them.
We've seen huge macro moves in recent years such as the slumping dollar, or soaring oil and gold prices and we haven't seen any of the big breakdowns that would have occurred in previous years. Is this because of better regulation?
The system can manage it better. There are failures happening, but they're small and the system is managing it. The regulators are doing an increasingly good job, as are the financial markets and the financial industry. In my view there will always be failures around the world in financial services. Institutions have to take a risk to make a reward and sometimes things will go wrong.
Is this increase in regulation good for PwC's business?
Certainly at a micro level. One of the things we do is help companies deal with regulation, understand it, address it and comply with it. Yes there is an increased demand for our assistance. But to the extent that regulation is constraining economic growth and profitability, then that is not particularly good for us.
