Just keep them guessing…

We have written quite often about how, ever since the onset of the Great Recession in 2007-8, banks have been subjected to ever more onerous and complex regulatory rules across the whole spectrum of their business, with the intention of making Too Big (or Too Important) To Fail (TBTF/TITF) a thing of the past.

However, considerable skepticism remains as to whether a) bank behaviour has really changed; b) incentives are now properly aligned with personal risks; and c) the regulatory changes will have the desired stabilizing effect, even in economic and political stress scenarios.

So it is worth considering whether all the complexity and seeming arbitrariness of much of current and proposed regulation is, in fact, part of a “cunning plot” on the part of the BIS and its acolytes to game the banks into submission, by keeping them guessing and on the back foot so to speak.

In making this point we are perhaps being a little facetious. However, when one surveys the seemingly never-ending and absurdly voluminous and complex range of published and threatened regulations and constraints, one does begin to wonder whether there is method in the apparent madness. After all, if one has to keep increasing the number of compliance officers and lawyers; make regular visits to [fill in name of building and city] to perform obeisance; is kept guessing as to what will dreamed up yet; and keeps woodcutters in business with the amount of paper being delivered, how is one to find the time or have the inclination to cause further trouble by daring to perform one’s supposed purpose of ensuring that the world’s economy continues to thrive and prosper, or the spare mental capacity to dream up new financial weapons of mass destruction.

Of course, human ingenuity should never be underestimated and the banks have deep pockets (hence, their attractiveness as targets for ever-increasing fines and penalties), but distracting them and their armies of lobbyists by keeping them guessing as to which new rule or amendment may be coming next, clearly serves a purpose in at least slowing down their ability to influence and change policy making to their advantage, or to lessen constraints; even though the US has recently seen a classic example of “influence” being exercised in the roll-back of part of the Volcker Rule.

Similarly, setting repeated and layered stress tests, and including not only quantitative but qualitative factors, makes it more difficult for those running capital and regulatory models to achieve the most advantageous outcome; while publicly chastising the banks for not being up to the expected standard in terms of their ability to comply with new rules or requirements (such as “living wills”, or capital buffers) serves to keep senior management and Boards on edge, although’ we do wonder whether regulators would really enforce draconian outcomes on key components of the financial system in an environment where the effects of the Great Recession still linger.

At Awbury, we continue to monitor regulatory developments across the various regimes affecting banks and the overall economy, so that we can understand both the specific changes that result from new or amended rules, as well as how they fit within the pattern of broader industry changes resulting from regulatory behaviour.

-The Awbury Team

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