The onslaught of regulatory reforms is likely to continue for the financial services sector in the year ahead.
Since the global financial crisis hit in 2008, regulators in the sector have been engaged in a massive rules overhaul in order to address the many regulatory gaps and systemic weaknesses exposed by the crisis. Over the coming year, financial services firms and their regulators will be finalizing details and figuring out how to implement many of the core reforms while expanding reforms to secondary areas at the same time.
For example, global banking regulators have created much of the new capital-adequacy regime for banks, known as Basel III. But a key part – the new rules setting leverage and liquidity requirements – have yet to be finalized. New leverage rules are scheduled to begin taking effect at the start of 2015, while agreement on liquidity requirements is expected this year, with implementation to come over the next few years.
At the same time, regulators are assessing the impact of the reforms that have been completed to determine whether they’re likely to work as intended – and this may lead to some tweaking of these rules. For example, reviews by bank regulators have found wide variations in banks’ calculations of certain risk-weighted assets under the Basel III rules, so the regulators are considering revisions to these rules to reduce those variations.
Given the global nature of many of the regulatory reform efforts, it’s taking more time to finalize rules in other industries within the financial services sector as well.
This is evident in the slow progress on reforms to the over-the-counter (OTC) derivatives market. Originally, global policy-makers intended to have OTC reforms – including improved market transparency and greater standardization and centralized clearing – finished by the end of 2012. But policy-makers are only now beginning to finalize these new rules.
In late 2013, several Canadian securities regulators issued derivatives trade reporting requirements that will take effect in mid-2014. However, other aspects of proposed derivatives market reforms remain works in progress.
Regulators in other jurisdictions are starting to implement their own new derivatives market rules, but consistency among jurisdictions and the timing of the new rules remains an ongoing concern.
A major complication for the global efforts is the possible implications of reforms in the U.S., where many foreign financial services institutions operate. Indeed, the possible extra-territorial reach of certain proposed U.S. rules has emerged as a key concern for the global financial services sector, and this concern is likely to continue in the year ahead. An example is the so-called “Volcker rule,” which was released in 2013 with 900 pages of detailed text to which five U.S. regulatory agencies contributed. The aim of this initiative is to insulate financial services firms in the U.S. whose deposits are covered by federal deposit insurance from taking excessive market risks by prohibiting certain proprietary trading and limiting their exposure to hedge funds and private-equity investments.
This rule faced intense lobbying from U.S. financial services firms, foreign financial services firms and even regulators and governments in other countries, including Canada, that are concerned about the possible impacts.
The Volcker rule officially takes effect in April 2014, but firms will have until mid-2015 to comply. In the meantime, figuring out just how to achieve compliance – and negotiating the possibly divergent interpretations of five regulators – will preoccupy many firms in the year ahead.
In Europe, banks are facing the prospect of a fundamental overhaul to the regulatory framework in response to the sovereign-debt crisis that followed the global financial crisis. The European Central Bank is set to establish a single supervisory mechanism for banks, starting in November. In preparation, European banks are undergoing a series of stress tests to enhance market confidence.
This new regime is expected to result in greater stability for the European banking system, but there’s still plenty of work to be done in repairing bank balance sheets and shoring up the banking system in certain parts of Europe.
At the global level, 2014 will be the first year that banks deemed to be “systemically important” will begin to face additional regulatory requirements. In November, the Switzerland-based Financial Stability Board will issue its annual list of banks that it deems to be global systemically important firms. The banks on the list will face added capital requirements and heightened supervisory demands. The actual requirements won’t start to take effect until 2016 (with full implementation slated for 2019), but these banks will be expected to be in compliance well before the deadline.
In addition, global regulators are looking to extend the “systemically important” designation to other parts of the sector. In 2013, global insurance regulators named nine insurers as being systemically important. In the year ahead, regulators are expected to identify reinsurers that meet this definition.
At the same time, insurance regulators are aiming to develop a set of new basic risk-based capital requirements for their industry, similar to the Basel III regime in the banking sector. This is expected to be completed this year, with additional requirements for systemically important firms to be agreed upon in 2015. The actual implementation of these new charges is not expected to start until 2017, although once regulators agree to the levels, firms are likely to come under market pressure to start meeting the new targets as soon as possible.
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