Since the 2008 outbreak of the US sub-prime crisis, financial institutions have been under the spot light. Major banks suffered a great deal during the crisis and some were even bailed out using public money. Yet, once the major banks regained their profitability, the bankers could not wait to reward themselves with fat salaries and bonuses. Many people are unhappy with this - seeing that Wall Street is getting richer and richer, leaving the Main Street (taxpayers) to clean up the mess. The Occupy Wall Street (an ongoing protest movement that began on Sept 17, 2011 in Zuccotti Park, located in New York City's Wall Street financial district) has further deepened the dissatisfaction of the current regulatory regimes on financial institutions, which have been labeled as greedy, ruthless and only money driven.
Ever since then there have been calls for tighter regulations over the financial giants. The global development on financial regulation is to tighten up regulations governing financial institutions. Two recent incidents have brought financial institutions under greater regulators' scrutiny. The first one is the LIBOR scandal, and the second one is about money laundering.
The first incident involves the interbank interest rate market, which is characterized by a system of self discipline. The London interbank market is by far the most important interbank interest rate market. Its LIBOR (London Interbank Offer Rate) is an important interest element. Many floating rate syndicated loans are priced according to the LIBOR, not to mention similarly pirced derivatives. It was pointed out that some banks might collude during the fixing process to suppress the LIBOR. One major international bank was fined 290 million Sterling because its dealers were found to deliberately suppress the quotation of interest rates. Apart from this heavy fine, top managers of the bank also resigned. As a result of this LIBOR scandal, many banks are now being investigated by regulatory bodies.
The second incident is about money laundering. Another major bank is being investigated for channeling funds for Mexican drug cartels. Though the bank concerned is still under investigation, one major executive has resigned. The market believes that more top executives may follow the suit should the investigations reveal further negative implications on the bank.
From the experiences of these two incidents, the issue of how financial institutions conduct their business remains a big public concern. People in the past perceived that financial institutions were heavily regulated due to their important roles in the financial market. They also gave the public an impression of being conservative. Nevertheless, deregulations in the past 20 years have seen the business of financial institutions change. Apart from the above two incidents, many financial institutions were found to have speculated heavily in commodities, derivatives, as well as in currency trading. The calls for tightening up regulations over financial institutions are gaining momentum.
From the point of regulators, these incidents indeed offer them good opportunities to impose regulation reforms. In the literature on financial regulation, there is a famous saying "Never Waste a Crisis." This saying means that whenever there are scandals and crisis, there are opportunities for regulators to pursue regulatory reforms. Under normal conditions, financial institutions are reluctant to accept reforms because further regulations will mean lower opportunities or high compliance costs, and these will hurt their profitability, so they will not easily accept new regulations. However, when there is a big scandal in the market, public opinions will call for a tightening up of existing regulations. And financial institutions, no matter how reluctant they are, will still have to yield to public demands, giving regulators a good chance to impose regulatory reforms. Therefore, regulatory bodies are expected to make full use of the present opportunities to formulate new regulations over financial institutions.
To the financial institutions, these will not be the end of their nightmares, but rather the beginning. Financial institutions still need to cope with the European debt crisis, and now they have to devote their attention to possibly new and tighter regulations. The outlook for international banks is not that rosy in the near future.
The author is Dean, School of Business, Hang Seng Management College. The views expressed here are entirely his own.