In an October 20, 2016 address before the British Bankers Association's Annual International Banking Conference, Dr. Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, highlighted the environment of uncertainty in which banks currently operate. In addition to such things as technological change and Brexit, he also spoke about the fear and loathing arising from regulatory uncertainty and hinted at some ways regulators can help to lessen the regulatory strain.
Banks operate in an almost entirely new reality than they did before the financial crisis. The low interest rate environment, aggressive central bank monetary policies, rapidly evolving financial technologies and technological hazards, and Brexit have not only changed the landscape in which banks operate, but have also created an environment of uncertainty for financial institutions globally. On top of this environmental uncertainty, banks operate in a world of as yet unfinished regulatory reform. With several important pieces of Basel III still on the drawing board and finalized regulations being phased in slowly, bank managers understandably are struggling to adapt. This adaptation is not without its costs. And according to Dombret, these costs and uncertainties are beginning to damage the health of global financial institutions.
“[T]hese headwinds are placing a strain on the earnings prospects of banks. This is also reflected by the earnings-per-share forecasts for European banks, which have been in decline since the beginning of this year for almost all major institutions. Bearing this in mind, it's certainly no surprise that bank stocks have underperformed the rest of the economy."
"To make matters worse, the bulk of the developments I have just outlined aren't short-term hiccups; they will continue to absorb everybody's attention for quite some time to come. And I expect them to radically change the banking sector."
While banking institutions must meet these challenges in order to ensure their long-term survival, Dr. Dombret also pointed out that regulators, supervisors, and policymakers owe banks a duty to keep those challenges in mind. Banks are entitled to expect certain things from their regulators, including keeping technology from tilting the playing field in favor of some and to the detriment of others, sensitivity to the low interest rate environment, and continuous refinement of regulation to make it more efficient and fair.
“[B]anks can expect supervisors to closely monitor the introduction of new technologies and the entry of new competitors, and to ensure that the playing field remains level by assessing both technologies and financial institutions solely according to the risk they pose to financial stability."
"Banks can also be confident that central banks are aware of the challenges posed by low interest rates. That being said, it should also be clear that safeguarding an institution's net interest income is not the objective of monetary policy."
"As far as the perceived burden of regulation is concerned, banks can expect regulators and supervisors to listen to their arguments and continuously explore areas where they can do better.”
Dombret points to proper scaling of regulation as something that regulators can improve upon. One-size-fits-all regulation tends to place regulatory burden on too many of the wrong actors. Tailoring supervision and regulation to better fit differently sized banks could alleviate much of the burden of smaller institutions, while still focusing on the banking activities that present the most risk to the greater financial system.
In conclusion, Dr. Dombret also warns politicians that tinkering with financial regulation for political reasons introduces even more uncertainty and instability into the financial system and should be avoided at all cost.
"[P]oliticians are well advised not to exert influence in the wrong place or with the wrong measures. In this context, I am also worried about some rather protectionist tones in recent economic and legal debates. Politicians as well as public authorities must resist any temptation to give preferential treatment to domestic companies and banks - or to exert excessively tough action on foreign businesses. As Barack Obama recently said: 'A nation ringed by walls would only imprison itself.’"
A full transcript of Dr. Dombrat's address is available via: http://www.bis.org/review/r161021c.htm