Across The Border

Regulations remain biggest headache for banking sector – but President Trump could be about to become its new best friend

Already the president-elect has pledged to dismantle at least one complex piece of financial legislation

PUBLISHED : Sunday, 13 November, 2016, 8:07pm
UPDATED : Sunday, 13 November, 2016, 10:06pm

The banking industry collectively agrees that new regulations are their greatest risk area, and with continued and sustained populist sentiment around the world, analysts expect that a stricter and more aggressive regulatory framework is here to stay.

However, Donald Trump, once again, may be about to shake things up.

“Coming out of the global financial crisis, there was clearly a backlash against the financial services industry, and along with it came a lot of new regulation put in place,” PwC’s global financial services tax leader, William Taggart, told the Post.

“More recently there has been the Panama Papers, and the politicians who were unable to solve the problem of people finding jobs. Those then fed into Brexit, and what we are seeing to some extent, with the Trump campaign in the US.”

Trump’s victory, and particularly his wins in the so-called “rust belt states” has added greater weight to Taggart’s argument.

The flood of new regulations on banks, and perhaps more crucially, the scale of the fines for regulatory breaches, have meant that banks have become a lot more concerned about compliance and regulatory risk than they were in the past.

A recent survey published by EY found that the greatest risk area for board directors of financial institutions around the world in the next twelve months was “implementation of new regulatory rules and supervisory expectations”.

Putting that into context, the report said: “The industry has struggled with non-financial risk. In aggregate, fines, settlements and remediation costs have run to hundreds of billions of dollars... The underlying causes relate to weak oversight and controls, lack of first-line accountability, wrong incentives, and IT systems and data weaknesses, among other issues.”

As to banks’ progress in dealing with those, the report added the results show “how much the banks are experimenting, they reveal how elusive success remains after years of trying to find enduring solutions”.

While the anti-bank sentiment has primarily been seen in Europe and North America, Asian institutions have also been strongly affected by the ramping up in regulation.

“The impact of regulatory changes has a different dimension here in Asia,” EY’s regulatory leader of financial services for Asia-Pacific, Judy Vas, told the South China Morning Post.

“I would say it is more complicated as many banks are headquartered here, or carry their bookings in the west, so they have to comply with the applicable regulations there too. And if they have businesses or clients in multiple markets in Asia, they have to also keep on top of those as well.”

Taggart added: “The anti-elitist attitude [that drove some of the regulations] among much of the population is still the case in Europe. Look at Brexit, for example, and also to an extent in the US. Trump is a reaction to that to a certain extent, as was Bernie Sanders,” says Taggart.

“I only see this sentiment going away when the economy starts picking up.”

However, seemingly counter-intuitively for a leader of a populist movement, Trump’s transition team has announced it will set out to dismantle the Dodd-Frank Act, the sweeping legislation passed by the US Congress in 2010 to address problems underlying the 2008-2009 financial crisis, as well as temporarilily suspend all new regulation in the financial sector.

In a statement on its website, the Trump transition team described Dodd Frank as “a sprawling and complex piece of legislation that has unleashed hundreds of new rules and several new bureaucratic agencies”.

The suggestion has unsurprisingly received a positive response from some in the banking sector, including Dick Bove, vice president of equity research at Rafferty Capital Markets, who told CNBC Trump’s victory was “a grand slam home run for the [banking] industry”.

Even ratings agency Moody’s Investor Services noted that “a reduction in regulatory compliance costs would bolster bank earnings”.

However, its latest report adds that reduced oversight and a roll-back of requirements “would also result in a weakening of banks’ capital and liquidity positions, a negative from a credit perspective”.

A timely reminder, that the post-global financial crisis banking regulations were not only a response to populist sentiment, but also of how risk would be treated in future.