Regulation remains a critical driver for the global financial services sector, even as other fundamental factors, such as the evolving interest rate environment, gain traction.
This year, global banks will begin phasing in a countercyclical capital buffer required under Basel III (which starts at 0.625% of risk-weighted assets, and will rise to 2.5% by 2019). The phasing in of new liquidity requirements also will continue, as will other aspects of the revised regime, which won’t be fully implemented until 2019.
As that work proceeds, policy-makers are hammering out certain details of these reforms. For example, in late 2015, the Basel Committee on Banking Supervision launched consultations on total loss-absorbing capacity (TLAC) requirements for global systemically important banks (G-SIBs). These requirements are intended to ensure that a failing bank has adequate resources to allow for an orderly resolution.
None of Canada’s big banks is considered to be a G-SIB by the global regulators, but the Bank of Canada indicates that the final TLAC requirements for the G-SIBs will help to define similar requirements for Canadian financial services institutions that have been defined as being systemically important to the domestic financial system.
The Basel committee also released proposals related to the risk of bank subsidiaries, such as asset-management and wealth-management businesses, running into financial trouble. Factoring in this so-called “step-in” risk could have significant impact on the capital requirements for some banks.
In addition, policy-makers have begun to assess the impact of measures already in effect. In November 2015, the Financial Stability Board (FSB) produced its first annual assessment of the reforms to date. This assessment found that the banking sector has been made more stable in general by efforts to boost the quality and quantity of capital that banks must hold; further, no major unintended negative consequences have been experienced.
These ongoing evaluation efforts are expected to lead to further adjustments to the Basel rules, which may ratchet capital requirements even higher.
Not every regulatory reform is a direct response to the 2008-09 global financial crisis. In mid-December, Canadian officials unveiled a series of measures designed to address risks particular to the domestic market: high household debt levels and inflated housing prices. These measures include plans for higher capital charges for banks’ residential-mortgage exposure. The Office of the Superintendent of Financial Institutions plans to consult on these measures in 2016, then introduce changes in 2017.
In the meantime, other pillars of the global financial services sector face their share of ongoing regulatory uncertainty.
New risk-based capital standards for the insurance industry remain a work in progress. New rules are expected to be finalized this year but won’t be implemented until 2019. However, the basic capital standards for global systemically important insurers are slated to take effect in 2017.
Global policy-makers still have to agree on a framework for identifying other types of financial services firms – such as asset managers, brokerage firms and hedge funds – that should be deemed systemically important. The FSB also is scheduled to publish the results of a review of the so-called “shadow banking” sector in the first half of this year, a report that is likely to form the basis of reform proposals that the FSB will make to the G20 for this sector later this year.
The other major focus for policy-makers is derivatives markets, in which reforms remain under construction. A number of jurisdictions, including Canada, have adopted derivatives trade-reporting requirements in the past couple of years. But there’s work to be done in harmonizing that reporting.
In the meantime, global regulators are tackling several other aspects of the derivatives markets, including rules designed to encourage central clearing for over-the-counter derivatives; setting margin requirements for trades that are not centrally cleared; and establishing rules for trading venues. Regulators are hoping to complete much of this work this year, resulting in measures that are expected to increase the cost of dealing in derivatives markets while increasing safety and stability.
There also is a global trend toward tougher standards in the retail investment business. Regulators in the U.K., Australia and Europe recently adopted measures designed to improve retail investor protection. The U.S. industry is facing the prospect of a fiduciary duty being imposed on financial advisors, either by the U.S. Department of Labor or the U.S. Securities and Exchange Commission.
In Canada, securities regulators have pledged to reach key policy decisions in the first half of this year that could affect the retail investment business in general – and the mutual fund industry in particular.
Regulators are considering possible intervention to alter mutual fund fee structures, such as banning trailing commissions and imposing a fiduciary duty on front-line advisors. These fundamental actions are strongly supported by investor advocates, but just as vehemently opposed by the industry amid fears that firms’ margins would suffer.
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