Compliance

03:35 PM
Kathy Burger
Kathy Burger
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Dealing With The Inevitability Of Regulation

It's time for bankers to get over their aversion to regulation and figure out how to optimize the unavoidable investments in compliance.

The Volcker Rule goes too far. The Volcker rule doesn't go far enough. It will create new problems. It doesn't address the right problems. It will restrict banks' ability to manage risk. It will encourage more risk taking. We should have revived Glass-Steagall instead of creating the Volcker Rule. Glass-Steagall doesn't address the problems the Volcker Rule is designed to address.

[The Financial Service's Tim Pawlenty, in an exclusive interview with Bank Systems & Technology, says the industry group hopes to see the Volcker Rule implemented in "a simple and manageable form."]

No one is ever happy when it comes to financial services regulation, as suggested by this summary of the debate that has ensued following five federal agencies' mid-December approval of the so-called Volcker Rule provision (intended to restrict risky proprietary trading on the part of the nation's largest banks) of the 2010 Dodd-Frank financial reform legislation. For example, politicians and others looking for a ready villain will argue that more regulation is needed to rein in out-of-control institutions.

Banks inevitably will claim they already are too heavily regulated, the new regulations are unfair or only apply to other types of institutions, and that the cost of compliance is too high. Increasingly we're told that the resources (money, time, intellectual capital) that must be committed to regulatory compliance are resources that will be withheld from other, more appealing areas such as customer service, R&D and innovation.

There's no question regulation comes with a high price tag, one of the themes of Bank Systems & Technology's recent digital issue focused on compliance. New research from BAE Systems Detica reveals banks are investing more this year in operational risk, compliance and anti-fraud compliance solutions; 50% of senior financial institution executives responding to the study said their firms would be making up to 20% more investment in compliance solutions. Meanwhile, IDC Financial Insights reports the worldwide risk information technologies and services market will account for $71.2 billion in 2014, and will grow at a composite aggregate growth rate of 6.92 percent. Risk IT will account for 16.5 percent of all spending in 2014, IDC Financial Insights forecasts.

Still, given that regulation is a fact of financial services life and that expanded regulation is inevitable, the responses to approval of the Volcker Rule were dispiritingly familiar. It might be too much to expect Congress or the mainstream media to engage in nuanced analysis of a complex topic, but it would be refreshing to hear bankers say: "We recognize there must be consequences and shared responsibility for dealing with the impact of the financial crisis. We never like dealing with more regulation, but since we knew that the scope of the crisis would require a similarly comprehensive response, we were prepared. We will make the necessary investments in the reporting and analytical tools we need to comply with the Volcker Rule -- and we plan to leverage those investments in other areas of the business."

Well, we can dream, can't we?

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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KBurger
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KBurger,
User Rank: Author
1/10/2014 | 6:13:18 PM
re: Dealing With The Inevitability Of Regulation
Well, that is kind of the point of my original post. Some regulation makes sense and is justified/warranted; some is overkill or made sense at a certain point but has outlived its usefulness. Regardless, financial services always has been and will continued to be one of the most highly regulated (if not the most regulated) industry (and insurers even more so than banks), that is a fact of life. So (as you also pointed out in your feature), it's essential to manage it as efficiently and intelligently as possible, and that includes looking at it strategically to leverage as many of those efforts & activiites as possible in other areas of the business.
Byurcan
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Byurcan,
User Rank: Author
1/10/2014 | 2:12:43 PM
re: Dealing With The Inevitability Of Regulation
Unfortunately, most taxpayers, and regulators, don't really have a nuanced view of the financial system. You can't just say, the more regulation you have = more safety in the financial system. The extreme level of mindless paperwork banks have to complete hurt small and mid size banks the most, who don't have the resources to comply with all of this and also spend on innovation. At this point, most banks of all sizes spend more time on compliance than anything else.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
1/9/2014 | 7:04:30 PM
re: Dealing With The Inevitability Of Regulation
Is there over regulation in financial services? It really depends on who you are talking to. If you ask a trader, they will say things were much better pre crisis when you could use excessive leverage, take on a boatload of risk and basically keep your fingers crossed. If you talk to most taxpayers, I have a feeling that they either don't care or prefer a financial system that doesn't self destruct every 2 decades.
chemphill
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chemphill,
User Rank: Apprentice
1/8/2014 | 9:50:49 PM
re: Dealing With The Inevitability Of Regulation
Well said, Bryan...
chemphill
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chemphill,
User Rank: Strategist
1/8/2014 | 9:50:49 PM
re: Dealing With The Inevitability Of Regulation
Well said, Bryan...
KBurger
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KBurger,
User Rank: Author
1/8/2014 | 7:43:37 PM
re: Dealing With The Inevitability Of Regulation
I really don't see the over-regulation right now -- especially since enactment of many aspects of Dodd-Frank has been stalled or watered down. But, yes, there is a tendency in all things to take the "pendulum" approach -- go from one extreme to another. It applies to regulation, policy, and, yes, business. How many times have enterprises embraced centralized IT and then a few years later shifted to decentralized models (and back again)? How many times have banks invested in branches, then decided not to focus on bricks and mortar, and then renewed their love affairs with branches? I think it's more of a tendency to manage (and think) for the near term, not the long term.
Byurcan
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Byurcan,
User Rank: Author
1/8/2014 | 2:47:19 PM
re: Dealing With The Inevitability Of Regulation
While it is true that banks should look at regulation not solely as a burden, but a chance to invest in innovative technologies, it must also be acknowledged that most regulators are career bureacrats who have no expereince in the industry they purport to regulate. While we were perhaps under-regulated before the financial crisis, the government naturally overreacted and now we are over-regulated. Unlike Goldilocks and the three bears, politicians never seem to be able to get things "just right."
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