To view the digital version of this report please click here. IFR: A number of the punitive capital charges on certain products appear fairly arbitrary if you ask me, whether it’s task financing or long-dated swaptions trading or whatever. If the intention is to create a utility-banking model, does investment banking fit a utility-bank model? Harps Sidhu, KPMG: We talk about a paradigm shift, I think that’s there. There’s no real way the regulator will back down on issues like remuneration, like high capital charges on esoteric products.
There will be fewer bespoke derivatives products, for example. That’s not heading to improve or disappear completely. The bit that’s interesting with the regulation is where the effect on bank balance sheets, broader financial impacts, and infrastructure costs to comply are not well understood. For example, the economic ramifications on cross-border trade aren’t well understood. It’s an extremely delicate balancing act for the banks to engage in the right way on the impact of legislation. At the moment the industry is on the trunk foot in conditions of being trusted to assess the real impact of these changes whilst not being wholly self-serving.
I’m also worried about the cross-border influences of the localisation of regulation and the greater parochial build being taken by regulators. Steven Lewis, Ernst & Young: You can understand the rules that are powered by the G20, under Basel 3. You may argue about the benefits or constraints on particular products but you can understand the explanation behind it. Secondly, this move is had by you beyond gold-plating towards a focus on subsidiarisation, so the branch model in many jurisdictions is likely to be dead. The impact of subsidiarisation will maintain things like stuck capital and far less efficiency.
And then your third thing in addition is which you have – and Keith alluded to the – an almost punitive component. You can understand the concerns that people have not wanted to repeat the mistakes of the past about. Andrew Golden, Deloitte: What we’re seeing is a pendulum effect.
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Whether we like it or not, the banking institutions were under-regulated so we’re viewing a ricochet aftereffect of some very extreme regulations, such as caps on payment. Clearly we’d to have significantly more regulation and I think you’re probably right: we aren’t yet seeing if Basel 3 works and gets us to a better place.
But it’s all tick-box rules; a principles-based strategy is way always, way better because the tick-box mentality allows visitors to work around the guidelines in a triumph of form over compound. Banks have got to change the culture. Things such as the bonus cover are a response by populist politicians who are elected with a public that feels the banks took the economy down.
But this will hurt not merely the industry however the economy all together. We’ve surely got to try and get to a stage where in fact the pendulum comes back just a little to the middle to allow the banking industry to work. Julian Wakeham, PwC: I think that’s right. Whether it’s a genuine belief or simply political awareness, the political antennae out of all the senior executives in these banks has risen significantly. There’s very little disagreement about the intent of the regulation; the disagreement is just about the execution and implementation of it. You’re also seeing regulators, perhaps feeling their way about how they will achieve the intent.
So things like recovery and quality planning still have to be strolled through in terms of how it’ll actually work. And you see emerging regulation around carry out and culture and rather blunt devices are using to operate a vehicle that, which creates a very challenging environment for banks because it’s an extremely difficult move to make. IFR: But by the end of the day the new regulatory strategy dangers making the bank model uneconomic. I presume that’s not the purpose.