In your view, do the increased regulatory requirements for financial institutions promote good corporate stewardship or act as a hindrance to shar...

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Since the financial crisis the banking industry has gone through unprecedented structural and regulatory reform aimed at reshaping and stabilising the banking systems. Although some of these changes were both necessary and beneficial to we have reached a point of overregulation is damaging the sector.

Banks have been forced to respond to the substantial increase in capital and liquidity requirements by scaling down their businesses and strategically evaluating their choice of customers, products and geographies. To a certain extent simplification of banking business is positive since leading up to the crisis, bank balance sheets were undoubtedly too big, business models were too complex, leverage was too high and risk models were inadequate and to handle the extreme events that occurred. However the required changes will inevitably lead to lower returns.

Although it can be argued that the longer term benefits of stability are more important than the short term costs of reform we have reached a point where the cumulative impact of regulatory changes is becoming a hindrance to banks being able to effectively do business. The increasing cost of compliance required by ever-expanding regulation is strangling the sector and impeding economic growth without resulting in a real reduction of systemic risk.

There are a number of significant concerns around the current and proposed regulatory measures. Firstly is complexity. As regulations become more complex there is a risk that that the impact of individual initiatives is diluted or that regulation become contradictory. It also becomes more likely that supervisors don’t fully anticipate potential exploitation of complex regulation or have the technical expertise to prevent it.

A co...

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...rice bubbles. For example an artificial increase in the prices of sovereign bonds regulators require banks to hold.

The sheer volume of new regulation means that banks have to focus enormous resources on regulatory implementation. There is a danger that with intrusive regulation the focus on regulatory compliance is actually acting as a distraction from proactively managing other business risks. There is also a danger that over regulation leads to decreased accountability if banks can point to following regulations.

To operate banks need to be able to reasonably price and manage risk and generate adequate shareholder returns. A reform of banking regulation was required however we have reached point of over regulation where compression of profit margins and ever increasing regulatory cost may mean that it becomes impossible to find investors in bank capital.
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