Rewriting the Rulebook
The global regulatory maze and what it means for FinTechs
Authors: Sasi Desai, Nipun Jasuja
“Interesting” and “regulation” are words rarely seen together. In any context. But we live in a time of rare happenings and (de)regulation just got interesting!
So what exactly is bubbling on both sides of the Atlantic? And what does it mean for FinTech?
America’s Choice (act)
President Trump and the US Congress are pushing hard for banking deregulation. The banks seem to be in favor and one can see why.
Under the current regulatory regime, small and medium-sized banks have found themselves to be too small to succeed. Since Dodd-Frank came into effect in 2010, over 250 banks have shut shop. The weight of regulation probably didn’t help them in their final days. More staggeringly, only three new “savings institutions” (nine if you count commercial banks) have come into existence. Regulation has made barriers to entry too high and reduced competition. So one can see why mid-sized banks are leveraging the new political climate as an opportunity to put pressure on the congress to scale back regulation.
Things aren’t entirely rosy for big banks either. Many have found themselves to be too encumbered to fly. The argument is that harsher supervisory standards (relative to other geographies) have made US banks globally uncompetitive compared to their European counterparts. Jeb Hensarling, Chairman of House Financial Services Committee, has put forth a bill to strengthen the Financial Choice Act, which hopes to relax current Living Will and Stress Testing requirements. This is a BIG deal. The very fact that the proposal is making the rounds is a sign that deregulation is coming to the US.
Britain’s exodus
Deregulation clouds are gathering over the UK post Brexit. While more speculative at the moment, omens are all around. Banks are talking about fleeing to other European financial hubs, which are prematurely breathing down London’s neck (Dublin anyone?).
Post a hard Brexit, UK will have to find creative ways to keep financial institutions in London. One such way for the UK would be to ease the regulatory burden, but doing so will not be easy. Valdis Dombrovskis, the EU finance chief, recently made it clear that the UK will not be able to maintain access to their equivalence provisions if the UK lowers regulatory standards.
Europe’s conundrum
The ECB now finds itself in a precarious position. Without much government help, European banks have had a harder time recovering from the financial crisis, and European economies are still struggling from lingering problems — the classic twin balance sheet conundrum.
Neither of Mario Draghi’s options look particularly appealing at the moment. One option is to follow America’s lead and ease the regulatory burden on European banks. This will provide three clear benefits to the ailing banks — some breathing space for clearing up the remnants of the post-crisis mess, a golden opportunity to start afresh, and a strong hope to be globally competitive. But it does increase the risk that the overall system will crumble once again, something the EU cannot afford given its shaky economic foundation. With rock bottom interest rates, one wonders what levers the regulators will pull if another crisis were to hit.
The other option is to keep the banking regulatory oversight high. While this seems like the prudent thing to do (one doesn’t need to be reminded of the devastating impact of the previous crisis), excessive regulation could suffocate the already struggling banks and make them uncompetitive on a global scale. More importantly, and sadly, it could signal the end of an era of international cooperation on banking regulation, leading to fragmentation of the global regulatory system. This will redraw financial borders along national lines, posing unnecessary obstacles to international capital flows.
Implications for FinTech
Globally, FinTech firms should keep a close eye on the regulatory happenings in their region. Deregulation in the banking sector will chip away any regulatory arbitrage FinTech companies have enjoyed all these years across the globe. Meanwhile, under tighter regimes, regulators are increasingly setting their sights on FinTech players, wary of the potential new shocks they introduce to the financial ecosystem. In fact, the FSB just highlighted FinTech regulation as a priority in its letter to the G20.
Either way, FinTech firms need to watch out. Those in the game for the long haul need to look past regulatory arbitrage, provide real value to customers, and build a sustainable competitive advantage.
Regulation just got interesting!
