The Silver Lining in Greater Regulation

With the dust settling on Reg. E, the regulation that requires U.S. banks and credit unions to get their customers to opt-in for overdraft protection, it looks like banks’ revenue will not fall all that much because a surprisingly high number of customers, particularly habitual offenders, said they needed the facility. Seems that everyone went away happy, after all.

Live and let live with regulation may well be the motto of future banking, because it’s clear that from a legislative point of view, there’s no going back. The U.S. financial sector alone may see up to 200 new rules implemented over 5 years!

So, is stricter regulation a one-way street of compliance and cost for the industry, or is there something to be gained from it?

All change inevitably brings challenge as well as opportunity for those who care to look for it. Compliance extracts its pound of flesh in terms of infrastructure, human resources, process change and lead time. And because banks are so globally networked, they face these risks many times over, every time the law changes in some country. There’s also a chance that the formalisation of rules in greenfield areas such as mobile payments or social lending may usher new entrants into the market.

But the smart banks will skirt these issues by gearing up their internal risk management processes at an enterprise-level, so that they know exactly what risks the organisation is exposed to. They will grab the chance to end the silo-based risk management mentality, with both hands. Also, sometimes regulations can spur banks to do better business – take the Basel norms for example, which forced them to become judicious lenders at a time when credit was scarce and as a result, earn higher margins on deployed capital, or the case of those banks which improved their revenue after reducing their overdraft fee in response to Reg. E. 

But above all, this is their road to salvation, to reclaim credibility by demonstrating that their compliance and risk management mechanisms are good enough to protect customers’ interests.

Do you think I’m being overly optimistic or do you agree? Has your bank gained any collateral advantage from compliance? Let’s talk.