Regulatory Unanticipated Implications

Banks have been struggling to keep up with the regulatory demands in place from the likes of Basel, Dodd-Frank, and more. In a previous blog post, I discussed some of the hurdles banks are facing including, but not limited to, the technical or technological needs to meet requirements. Now, we are seeing other non-intended consequences from the regulations which are forcing change for banks in areas they did not expect. These changes are required from areas beyond the regulatory task teams. In Dodd-Frank for instance, there is a provision in the Volker rule outlining the limitation for employees to participate in bank run investments. This limits the ability for employees to invest their contributions in bank fund investments. Hence, we will see a clear delineation between client investments versus employee (management and non-management) investments. This could become very messy as you consider existing and new employment scenarios. Will someone refuse, or be declined, employment at a financial institution if they have investments with that institution? Bank interpretation of this rule has been diverse and we have seen banks act very differently. For example, Citigroup has decided to implement these limitations to all of their employees regardless of rank. Other banks have such as JPMorgan have taken a relaxed approach to this rule while Wells Fargo is still on the fence. Either way, banks are going to need more clarification, or at least consistency, in how to handle this rule. In the example above, we see how the desire for more bank scrutiny on risks will impact investment portfolios and opportunities for the working class. The flip side of the argument is this will also prevent top executives from inflated profits. However, the pending question is whether this will have any impact to reducing bank risks as intended by the Volker rule. Meanwhile on cross-border rules, several lawmakers are concerned that US global banks will engage in risky trading practices in foreign markets. Nothing in the currently drafted regulations will stop them from doing so, and American taxpayers can again be on the hook for losses. This is another example where reducing bank risks may have unanticipated consequences. There are many such examples of where regulatory reform falls short of securing the financial system. One key aspect that remains clear is that the financial system will always have some level of risk and all we can hope for is that risks are simply reduced. In the end, we must hold top executives accountable with financial accountability of their future potential failures. There is no better motivator than holding decision makers with skin in the game.