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Coping with compliance

Posted by Rajashekara V. Maiya (View Profile | View All Posts) at 10:10 AM

Banking's systemic complexity is often cited as one of the principal causes of the 2008 financial crisis. But the tidal wave of regulation set off by that event is, ironically, secreting a new layer of complexity on the business. Apart from adding complexity, emerging regulatory norms will considerably inflate the cost of compliance for banks. For instance, US multinational JPMorgan Chase now expects compliance costs to touch US$2 billion in 2014, almost doubling its previous projections.

The sheer complexity of regulation, spanning applicability, ambiguity and interpretation, will place existing compliance structures in the banking industry under a lot of stress. Furthermore, some of the new provisions, on liquidity and capital reserves for example, are creating a huge drag on banking balance sheets already under pressure from shrinking fee incomes and cost inflating consumer protection safeguards. The steady trend of two -digit Return on Equity has also taken a nosedive in the post-crisis era and may never fully recover given the new standards of supervisory stringency. 

The reporting requirements of emerging regulations demand granular, instantaneous and holistic views into all aspects of banking operations. This will obviously necessitate a rethink of existing banking structures going beyond just compliance and governance models. In short, compliance will gain as much prominence as any of the other drivers of business strategy, like changing customer expectations or competitive dynamics. 

Another trend to emerge amidst all this regulatory disruption is that of the super-regulator, a unified regulator to exercise oversight over all components of the financial services ecosystem including banking. This idea has already become reality in Russia where the Central Bank of Russia took charge as the country's market regulator on 1st September this year. Late next year, the European Central Bank will also complete a similar transition to unified supervisor of all banks in the Eurozone. Even in India, the idea of a unified regulatory agency independent of the Central Bank has already been mooted in the Financial Sector Legislative Reforms Commission (FSLRC) report submitted to the finance minister earlier this year. 

Time, cost and quality of banking compliance will be front and center in 2014, as the lines of the regulatory landscape continue to be redrawn. With the full force of the Dodd-Frank regulations coming into effect this year, compliance is set to increase in importance in the strategic compulsions of business leaders alongside other challenges like digital customers and oblique competition.

Also read our blog on the Simplicity as a banking trends

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