I read this week that UBS’ compliance head Markus Ronner believes that while they will inevitably remain high, compliance costs for the banking industry have peaked. There are undoubtedly a host of financial markets’ participants out there who fervently hope he is right, actually if it comes down to it, I hope he’s right!
The thing is though, there is a growing sense that the post-GFC round of regulation has failed and while the unwinding of some regulation may well reduce costs, there has to be a chance that the regulators do what they so often do – and come up with new rules.
One only has to look at across financial media this past week to see what appears to be a concerted campaign to highlight how MiFID II has failed to achieve much beyond putting European players at a disadvantage and increasing costs for trading for everyone. We have had stories of US investment managers outperforming their European peers and while it cannot be the entire reason, some commentators believe this is largely because Europeans have to pay for their research, are reluctant to do so, and therefore by implication are less informed than their offshore competitors.
The knee jerk reaction to this is to suggest it is clutching at straws, but given the level of benchmarking and index tracking involved in these markets these days there has to be something in it.
Another report says that MiFID II has reduced liquidity, meaning wider spreads, which obviously results in higher trading costs. It strikes me that just about every piece of regulation in OTC markets is likely to widen spreads because there is always a cost involved – the cost of actually setting up a trading business to provide liquidity and risk warehouse is way higher than it ever has been.
Moving on, we have what seems to be fast developing a crisis of confidence in the replacement of the Ibors. The world’s regulators seem to be waking up to the realisation that while liquidity in inter-bank deposit markets has dried up, there is little liquidity in the Ibor replacements, certainly not past the very short end. Somehow, markets are expected to revalue long term loans and deposits with rates derived from transactions with a value date of under a week – it just doesn’t work. It should beg the question, do we need to continue with Ibor reform? After all, the real crisis was one of conduct and, as in the FX market, that has largely been fixed through better rules of engagement (which are vitally important in markets) and vastly impr0ved surveillance. Quite simply, it’s very difficult to attempt, let along get away with, some of the actions that triggered the Ibor crisis.
In the US there seems also to be a mood to roll back some of the regulation there, including aspects of Volcker and Dodd-Frank. This actually doesn’t surprise me that much because the US has always taken a “lighter touch” regulatory approach compared to Europe, but it can also be seen as an admission that, at least partially, the regulators got it wrong.
The fact is that regulation has imposed enormous costs on the banking industry in particular, has made liquidity more fragile in markets and has yet to deliver any real benefits for the end user. As a speaker at the recent Profit & Loss conference in Frankfurt noted, we are a decade on from the GFC and the start of this regulatory cycle and not a lot has really changed – we still don’t have a trading or clearing mandate for example.
Overly-onerous regulation is failing the global financial system and the end users it is intended to protect. I totally understand the need to make the financial system more robust, but I fail to see how being heavy-handed achieves that end.
So perhaps now is the time for the global regulatory bodies to study the issue intently and at least consider the possibility that they have got it wrong. As FX (hopefully) shows, a private solution to market reform is better than a public, therefore perhaps the regulators need to spend more time encouraging such solutions (yes, I know, from the very institutions that triggered the crisis in the first place, but different people are in charge now having heeded some strong lessons) than they do thinking of new ways to come up with a way to control what is, frankly, largely uncontrollable.