The View | Banks count the cost of compliance

Financial compliance managers and regulators have been struggling to fix the system for the past eight years since the global financial crisis. Yet, regulatory overreach has created permanent gridlock in all areas of banking. Compliance officers privately admit that no one knows how to implement current reforms while new ones are being piled on. The situation will have serious consequences when the next financial crisis hits.

Regulatory changes are always emerging and they are event led. So banks are constantly reacting, trying to meet compliance demands from competing jurisdictions.

The hard truth is that financial institutions are completely bewildered and confused about how to implement the new regulatory frameworks. The result is that bank managers and central bankers have become inward looking and focussed on finding the next evil money launderer and unable to focus on how to protect themselves from the next crash.

While the commonly used analogy is that regulators are like army generals fighting the last war, the reality is that they are stuck in the trenches they have dug themselves. Until regulations stabilise, bank returns and profits will remain uncertain.

An even more troubling observation is that excessive compliance is preventing banks and regulators from preparing for the next crisis. By definition a crisis is unexpected and must be invisible to mainstream financial participants. But we can see signs in the current market. China’s recent admittance to the International Monetary Fund’s reserve currency basket could be a temptation for it to devalue the yuan.

A strong yuan may counter China’s foreign critics, who often accuse Beijing of manipulating its exchange rate to support its exports, but some believe China will be unable or unwilling to hold the line.