You might expect the writer of a preface to this book to remark on how the world of banking regulation has been turned upside down in the past year following the result of the UK referendum on European Union membership and Donald Trump’s election as President of the United States. Revolutionary changes may happen, but at the time of writing they have not happened yet. It seems premature to predict major changes in the outlook for banking regulation over the next year when policymakers themselves have not yet decided what the past year’s events will mean in this area.
Dealing with such certainty as we currently have, it does seem clear that the past year’s political events will bring forward an era in which banking regulation will be more varied, and potentially much less well coordinated, between major economies than the principal authors of the major post-crisis reforms in the United States and Europe had hoped. This presents a complex scenario for banks. For some banks it seems that just as the great structural reform agenda that emerged from the financial crisis has reached a conclusion, a new set of challenges has emerged that might in some ways be almost as profound as what went before. Brexit is, at the time of writing, the best example of this, but who would now dismiss the prospect of another round of bank structural reform, or at least a new way of looking at the ‘too big to fail’ challenge, emerging from the United States?
The choices that the boards of international banks now have to make on business models are as difficult as they have ever been. They face the combined threat of encroachment by FinTech business models, increasing compliance risk and complexity across the countries in which they operate, and the menace of cybercrime. Threats that begin locally may become international as regulators probe systems and controls, and inadequate anti-money laundering controls allow criminals into a bank’s systems at the weakest points.
In the next 12 months it will be essential for banks that are affected by these challenges to think creatively and flexibly about how best to deal with them, particularly as the nature of the challenges will, in many cases, continue to evolve for years to come. The relationship between the UK as a financial centre and the rest of Europe is a case in point: the Brexit negotiations that take place in the coming 18 months will just be the start of a period of history in which that relationship will evolve, and this evolution is unlikely to follow a predictable path. Banks will not be able to evaluate the threats, and perhaps the opportunities, that may transpire unless they have a thorough end-to-end understanding of their business origination methods, booking models and risk management techniques. It is the banks that can adapt these aspects of their business models to changing circumstances most quickly, and maintain a transparent and positive dialogue with their clients about impending change, that will suffer least when events take an unexpected turn.
Attention must also turn to how regulators in the major banking centres respond to renewed uncertainty and the risk of fragmentation in the post-crisis consensus on banking regulatory reform. While that programme of reform solidified new ways for regulators to work together, there is a very strong case for regulators to redouble their efforts to secure meaningful regulatory cooperation given current uncertainties. This may now seem counter-intuitive to some of their less perceptive political masters, but it has never been more important for regulators to increase their cooperation so as to maximise the options for early intervention and avert threats to financial stability. There is a real need to renew and re-emphasise the lines of communication and understanding that are essential to ensure that there will remain a good chance of managing a major cross-border bank resolution effectively.
This eighth edition of The Banking Regulation Review contains chapters provided by authors in 35 countries and territories in April and May 2017, as well as the usual chapters on International Initiatives and the European Union. Thank you again to all of the authors, for many of whom this has now become an annual event, albeit one that never seems to require less effort than before given all that is happening in this interesting area of regulation.
The team at Law Business Research have succeeded admirably in finding the deep reserves of patience that they needed this year to cope with a group of authors experiencing a very busy start to 2017. I would like to thank them all again for their understanding.
Finally, thank you to the partners and staff at Slaughter and May in London and Hong Kong, firstly for encouraging projects such as this and then for putting up with them when they take longer than expected to complete. Particular thanks are due this year to Nick Bonsall, Emily Bradley, Tim Fosh, Ben Kingsley, Peter Lake, Tolek Petch, Jocelyn Poon and David Shone.
Slaughter and May