Banking Business Model Will Be Redefined On Account of Shift from De Regulation to Reregulation

European University

The European University celebrated its 40 year of diversity in business education last week. Dr. R. Seetharaman, CEO of Doha Bank participated as a keynote speaker in the reception held at the Centre de Convencions Internacional de Barcelona (CCiB), Barcelona, Spain.

Dr. R. Seetharaman highlighted how the current global crisis impacted the global economies and human lives. He said “This crisis is a social crisis and not just a financial crisis. As a result, of financial innovation, new business models of banks emerged which changed the underlying economics of banking as new financial instruments enabled credit risk to be shifted away from the originators of loans. However, securitisation also changed the nature of risks and, in particular, transformed credit risk into liquidity risk, then into a funding risk, and ultimately into a solvency risk.”

Dr. R. Seetharaman was highlighting the key reasons for the crisis and the areas which require attention from regulatory level and macroeconomic policy level. He said that “Financial regulators were not equipped to see the risk concentrations and flawed incentives behind the financial innovation boom. Neither market discipline nor regulation were able to contain the risks resulting from rapid innovation and increased leverage, which had been building for years. Policymakers failed to sufficiently take into account growing macroeconomic imbalances that contributed to the buildup of systemic risks in the financial system and in housing markets. Financial supervisors were preoccupied with the formal banking sector, not with the risks building in the shadow financial system. The key areas which required attention from regulatory level are scope of regulation, market discipline, information gaps and systemic liquidity provision. The key areas which required attention at the macroeconomic policy level are response of monetary policy to systemic risks, strong fiscal policies, and regulation of international capital flows and alignment of fiscal and monetary policies. Today’s euro crisis is a clear case of conflict between monetary and fiscal policies.”

Dr. R. Seetharaman gave insights on the current trends in financial markets. He said “Japan had come with the easing measures recently which involved enhanced purchases of long-term Japanese government bonds. This move sent the dollar close to the ¥100 line .Last week the IMF said it was lowering its outlook for world economic growth this year to 3.3 percent, down from its forecast in January of 3.5 percent. It expects U.S. economic growth of 1.9 percent this year, down from its January estimate of 2.1 percent. It expects that the combined economy of the 17 euro countries will shrink 0.3 percent in 2013. Sluggish global economic recovery, increasing energy production in the U.S. and slightly slower growth in China had put pressure on oil prices recently. Gold prices had fallen on reports Cyprus could sell a significant volume of gold. Gold and industrial metals fell hard after China reported that economic growth slowed unexpectedly in the first three months of the year.“

Dr. R. Seetharaman highlighted the regulatory reforms in response to the crisis. He said “In response to the crisis the Global regulatory reforms had been actively reviewed under the leadership of G20 countries in co-ordination with financial stability Board (FSB), International Monetary Fund (IMF) and Bank for International settlements (BIS).The Dodd–Frank Wall Street Reform and Consumer Protection Act in US implemented the regulatory reforms in response to the crisis. The Volcker’s Rule was enacted under this regulation to restrict proprietary trading. The SEC also proposed tougher disclosure rules for Hedge fund and private equity firms. FSB, IMF and BIS are working on macro-prudential policy frameworks, including tools to mitigate the impact of excessive capital flows. Policy framework for systemically important financial institutions, regulation and oversight of shadow banking, risk practices on structured products were some of the areas which required review in the light of current crisis. Basel 3 is also planned to be implemented. The Banking Business model will be redefined on account of shift from de-regulation to re-regulation.”

Dr. R. Seetharaman also highlighted the major reforms impacting Banking Industry. He said “Basel 3 has brought reforms to increase quality and consistency of capital, increase counterparty credit risk charges, restrict leverage, reduce capital buffers, and increase the quantity and quality of liquid assets and funding profile of banks. The Dodd–Frank Wall Street Reform and Consumer Protection Act in US created a new consumer protection agency to protect consumer interests. The retail segment and the investment book of banks have been regulated after the crisis. The reforms underway pertaining to the Banking industry includes strengthening the oversight and regulation of shadow banking, building resilient financial institutions and ending too big to fail. “