When world leaders gathered in London for the April 2009 G20 Summit, financial regulation was top of the agenda. With the financial crisis still at its height, there was a strong consensus that regulation needed to be overhauled. With unprecedented unanimity, leaders from the world’s 20 largest economies pledged major reform of regulation, including the formation of a new Financial Stability Board, as well as steps to overhaul compensation and credit rating agencies.
Two years on, financial institutions are starting to feel the impact of this determination. New standards on capital adequacy and liquidity agreed by the Basel Committee on Banking Supervision are being introduced, albeit over a fairly extended timeframe. The US has proposed sweeping reforms to financial regulation under the Dodd-Frank Act, which also places strict limits on banks’ investment in proprietary trading. Both the US and the EU are pushing for the mandatory central clearing of derivatives and are undertaking reform of their supervisory structures.
The scale and scope of proposed regulatory reform has predictably led to forceful protest from the financial services sector. Leading sectoral bodies have complained that stricter capital requirements will dent returns in the sector and reduce lending capacity. They argue that this could have a knockon effect on the broader economy at a time when the recovery remains fragile. Concerns have been raised that stringent reforms to the banking industry could lead to the migration of activities into the unregulated “shadow” banking industry. And despite the show of unity at the G20 summit, different jurisdictions are likely to have divergent views about how they interpret and implement new rules, raising the potential of regulatory arbitrage.
This report examines the steps that financial institutions are taking to prepare for the future regulatory landscape, and considers the impact that they expect this to have on their competitiveness.
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