Amid declining investment banking revenues around the world, there remains a growing call for increased regulation of the industry. From think tanks to governments, it seems that most involved in the discussion of public policy are determined to prevent the consequences of systemic risk from falling on the taxpayer. Whether policy makers are successful in accomplishing that objective remains to be seen, however, we can be sure of increased scrutiny and regulation of a sector that is already struggling for growth.
Calls to Ring-Fence or Split Banking Operations Continue
According to the Financial Times, the British government continues to pressure European Union member nations, such as Germany, to adopt the recommendations of the EU-commissioned Liikanen review. The report suggested that establishing ring fences between investment banks and retail operations would reduce systemic risk. “We need better and more intelligent financial regulation to ensure that banks work for the benefit of our economies. [Liikanen] is an idea that the EU, including Germany, should give serious consideration to implementing,” the British chancellor George Osborne told an annual conference of global policy makers.
Britain is currently moving ahead with plans to implement the “Vickers reforms,” which will establish substantial ring fencing measures between retail and investment banking operations. British financial institutions are growing increasingly concerned that they may be at a competitive disadvantage if reforms take hold in the U.K. before similar rules are adopted by the European Union. Germany, clearly one the largest players in the European financial industry, has been cool to support the Liikanen proposals, fearing potential impacts on their financial institutions, led by Deutsche Bank.
Also in Britain, the Institute for Public Policy Research issued a substantial report on suggested financial industry reform, specifically how to ensure the industry works for all players in the British economy. The think tank is pressuring the government to reduce risk taking in investment banking, while making senior banker’s bonuses subject to claw back in times of bank losses. The report also suggests, along the lines of the Vickers reforms, that investment banking be ring fenced from retail operations. In addition, the report’s author, Tony Dolphin, suggests implementing financial transactional taxes, a move that would certainly have a real and immediate impact on investment banking revenues.
Basel III Backslide a Momentary Break
While pressures continue on other regulatory fronts, banks did receive a brief respite from tougher liquidity rules with the announcement that the implementation of the Basel III reforms will be delayed and with less onerous restrictions than previously thought. More securities will be included in liquidity measures, which should reduce the need for institutions to shrink their loan portfolios. While this may not directly concern investment bankers at first glance, the overall health of their institutions is critical in gaining some forbearance on cost cutting as the investment industry climbs out of the current slump. While delaying the implementation of Basel III may be positive, regulators will continue to look for ways to reduce risk in the system, and such moves will likely have real impacts on the recovery of the investment banking sector.