Despite the work that banks currently have underway from building regulatory infrastructure and processes to sustaining and streamlining them, one potential headwind is the threat of regulatory divergence in substance and timing across jurisdictions. For banks with a global presence, divergence adds to uncertainty and complexity, fosters an unlevel playing field, and hampers the ability to plan and optimize resources. Successfully navigating the many challenges of regulatory divergence requires a deliberate disciplined approach that recognizes the regional tailoring of regulatory and compliance initiatives, and that regulatory strategy and business strategy should converge.
The growing divergence in regulatory standards is a reversal of previous post-crisis trends. For example, since 2009, banking regulators around the world have been committed to strengthening the capital, liquidity, and leverage standards for banks. Those efforts embedded an equally strong commitment to address the unevenness and complexity of the global capital framework for internationally-active banks. Regulatory convergence initiatives, such as Basel III and the Financial Stability Board’s (FSB) work on resolution regimes, set the tone for an increasingly consistent banking rulebook across most jurisdictions.
|More recently, however, governments have raised questions about whether reforms have unduly impinged on economic growth. In particular, several countries have questioned the necessity of adopting common global regulatory standards for the banking sector. Further, the European Union has recently shown an increased willingness to deviate from the rules set out by the Basel Committee on Banking Supervision, as evidenced by the European Commission’s proposed implementation of the Fundamental Review of the Trading Book and the Net Stable Funding Ratio standards.
At the same time, there has been a trend toward host countries taking regulatory measures specifically for foreign banks. For example, the US Federal Reserve Board (FRB) finalized a rule in 2014 requiring large non-US banks to form intermediate holding companies and the European Commission issued a proposal in 2016 that would require certain large non-EU banks to create a single EU intermediate parent undertaking.
In short, the global regulatory landscape for banks looks set to become increasingly divergent and fragmented.
These developments, left unchecked, will have very real implications for banks which have substantial operations in multiple jurisdictions. As bank decision makers drive towards more streamlined and sustainable regulatory, risk, and compliance infrastructure, they are confronted with the need to invest wisely in tools and strategies that help them navigate the new complexity efficiently. Without an investment in these capabilities, some banks may suffer a form of strategic paralysis.
We see the challenges associated with regulatory divergence giving rise to four types of questions that the management and boards of internationally active banks must consider:
For global firms that answer a resounding yes to the challenge of addressing these questions, there are a number of core capabilities that may need new investment and enhancements to prosper in a divergent environment including:
Global banks that are proactive in addressing the trend of regulatory divergence are likely to have a competitive edge by being able to more nimbly respond to regulatory constraints and adjust resources to capitalize on strategic opportunities in the marketplace.
1Board of Governors of the Federal Reserve System, “Federal Reserve Board approves final rule strengthening supervision and regulation of large US bank holding companies and foreign banking organizations,” (February 18, 2014), available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20140218a.htm.
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