The Growing Impact of Regulation and Technology
by Chris Paizis, Head of Markets Distribution at Barclays Africa (ex SA)
Banks are having to redefine themselves, looking five or 10 years ahead to make sure they are prepared for a changing financial order. It’s an exciting journey as we develop new and innovative products, explore new ways of doing business and find new revenue streams. This focus on innovation is the response to two very different forces impacting the banking industry – new regulations which have made us do things differently and technological advances which have not only enabled us to do things differently, quicker, easier and with less risk, but have opened up whole new areas of innovation.
Banking is not the same as it was 10 years ago and certainly it's likely to change drastically over the next few years.
These dual forces - restrictive regulation and technological advances - have been the two biggest drivers of change in bank treasuries in recent years. And, because companies are our clients and our partners, these changes are affecting corporate treasuries as well. The combined impact of regulation and technology has been to change banking business models. Banking is not the same as it was 10 years ago and certainly it’s likely to change drastically over the next few years.
Regulation has been a spur to change
Particularly since 2008, regulation has weighed very heavily on the banking system. Regulations translate directly into higher costs which of course also mean higher costs for our clients. It has not just been the regulations that followed the 2008 financial crisis – we have seen crisis after crisis since then. The regulations that evolved made it much more expensive to do some parts of the traditional banking business. Even though banks have lobbied quite heavily on behalf of clients (on some specific regulations) to regulators, it is, however, difficult to change regulations. It’s much easier to change business models.
So banks have responded by changing the way they do business. Banks are having to downsize some traditional areas of banking simply because it doesn’t make economic sense anymore. There is also much less activity in the banking industry in the way of proprietary trading compared to pre 2008. We have had to take a very close look at the range of counterparts that we deal with, for example US based entities have specific rules when it comes to derivatives, and there are specific regulations on whom they can transact with. We are making a lot of traditional banking business less bank dependent. At the same time, we are looking for different areas where banks can add value through our expertise and our global reach.
An example of traditional bank activities affected by regulation is the area of very capital-intensive long-term funding (and associated hedging). Ten years ago you could access 10-year bilateral bank funding and interest rate hedging quite cheaply. Since then a whole array of regulations means that it’s become too expensive, driven mainly from a capital perspective, the cost of which has become a lot higher in recent years. So now banks might not necessarily want to do a 10-year loan and a 10-year hedge, while increased costs mean that clients are less interested. The result is less investment in some areas as banks focus more on businesses that still make economic sense for both their clients and them.
If I were in corporate shoes I might be looking at different forms of debt. Accessing the DCM markets more or looking at more innovative ways to raise debt / different kinds of funding – all of which will have a direct impact on corporate margins.