At last year’s World Economic Forum meeting in Davos there was a major focus on framing the regulatory issues facing the financial services industry, including capital reform, liquidity, leverage and systemically important institutions. Those same themes have returned to Davos this year, but with a difference: this year the discussion is all about the detail.
Take, for example, the issue of systemically important financial institutions - or SIFIs as they have been dubbed. The regulators, politicians and financial services executives generally agree that there are certain institutions whose failure could have a catastrophic effect on the financial system and, as a result, should be subject to more stringent rules and regulations.
So far, so good. However, the difficulty arrives when these groups try to agree on what these more stringent rules and regulations should include, or even define which institutions should be categorized as SIFIs. Some have argued that the qualification for SIFI should be based on size, while others maintain that leverage, risk appetite and interconnectivity should all be used in measuring whether an institution is systemically important or not.
Each of these major industry issues are at a different stage in the process of having their detail defined. Some are still at the very early stages of discussion, while others are moving closer to what will likely be their final agreed form. However, one thing is consistent: the financial services industry is going to negotiate right until the very end of the process. They are lobbying hard and making sure that their point of view is heard at this year’s meeting in Davos. Much of this effort is driven by the industry’s concern that the global regulatory response might go too far, driven by the politicians’ desire to appease an angry public.
With such powerful forces still pushing and pulling the debate around the detail it is likely that the industry will experience a continued period of regulatory uncertainty. Perhaps we will witness over-regulation to begin with, followed by sensible retrenchment, before the new global financial regulatory landscape finally settles into something stable and predictable.
So what can financial institutions do while these all important details are still being debated and discussed? Well, I believe institutions should continue focusing on activities that preserve their operational and business ‘flexibility’. Take regulatory compliance as an example. Institutions may need to invest to bring more senior talent into their compliance function over the short-term, and use that experience to empower more flexible decision making and judgment to specific situations as the detail behind the new regulations unfold.
Navigating the journey into the new financial services landscape continues to require delicate decision making on the part of financial services CEOs. If they wait until all the details are worked out they risk trailing those competitors who have marched boldly ahead. However, if they move too quickly, their efforts could be undermined by the still shifting detail behind many of these key issues.
I believe it’s one of the reasons why this year’s Davos discussion will be very closely watched around the financial world.
Jack Ribeiro is Chairman of Deloitte’s Global Financial Services Industry (GFSI) practice. He has over 32 years of experience working with financial services clients and has played a prominent role in the management of some of Deloitte’s key practices around the world.