Something happened in the banking world last week which on the face of it seems innocuous enough, but which could well define the future of international banking. The news of a decision taken by a federal judge to uphold a policy designed to extend regulatory reach across international borders to the overseas subsidiaries of U.S. financial firms gave rise to this supportive statement by Commodity Futures Trading Commission (CFTC) Chairman Tim Massad, but flies in the face of sustained efforts by banking groups to limit such powers.
The policy affecting firms involved in derivative swaps, first announced by the CFTC in July 2013, came in response to the 2008 financial crisis and to the role that the overseas entities played in contributing to economic pressures back home in the U.S. We should remember that a number of banks almost collapsed because of their international operations.
The fact is that for years, banks have relied on their ability to push regulation aside in order to pursue their own trading agendas around the world. The renewed support for the CFTC’s policy has just made this more difficult.
But that’s only half the story and there’s more to this than meets the eye. The decision is not an isolated occurrence. I believe it also tells us something fundamental about how the U.S. intends to continue its shake-up of the banking sector. The message that comes across loud and clear is that the government can’t be duped, it understands what the banks are trying to do and is deadly serious about reining in rogue banking behavior at every level to avoid a repeat of the financial meltdown that brought much of the world to its knees and which cost governments and the general public millions of dollars.
A robust process to forcefully regulate the market, create greater competition and to prevent a repeat of 2008 is underway. Banks are being challenged directly to change their attitudes and behaviors, where fraud and concealment will not be tolerated. What this means is that any banks choosing to circumvent requirements set out by legislation such as Dodd-Frank Title VII are fighting a losing battle and “merely seek to delay the inevitable”. In short, it’s crunch time – comply or die.
Armed with the knowledge that regulation is coming and that it will be ruthlessly enforced, banks should be 100% focused on expediting their timelines for satisfying key milestones. To do that, they need to understand what is going on in the trading floor environment, using what they learn to reshape trader behavior and clean up their act.
We can still expect resistance from the banking community, but the pressure is well and truly on and I for one will be watching with interest as the fight for financial reform gathers momentum.