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London whale resurfaces to reinforce lessons from Dubai

Regular readers of www.thetradenews.com will have noticed that our London-based news desk effectively migrated to Dubai last week to cover the Sibos conference. Operated by bank-owned financial messaging network SWIFT, Sibos is a week-long conference and exhibition that encompasses a wide range of wholesale financial services from custody to trade finance, from payments to collateral management. Though still betraying its correspondent banking roots 35 years on, Sibos is a good opportunity to take the pulse of the finance sector, particularly with the event’s growing emphasis on market infrastructure developments in the securities and derivatives world, in line with SWIFT’s own commercial ambitions.

On the evidence of last week, the current state of mind of the executives running the transaction banking and securities processing businesses of global banks is not dissimilar from those in charge of brokerages, as reflected in the roundtable The TRADE held last month in association with Pershing (published in the Q3 2013 issue of The TRADE).

There is still anger and frustration at how banks are having to alter their businesses to fit in with new legislation, often because those reforms appear self-defeating. Werner Steinmuller, head of global transaction banking at Deutsche Bank, said that strict implementation of tighter capital ratios would stop banks from doing what politicians wanted them to do, i.e. support economic growth.

“I’m not a fan of the current implementation of leverage ratios. If you limit the assets a bank can hold, what you will find is that they kick out the low-margin, low-risk instruments in favour of higher-yield riskier assets, which is doing the opposite of preventing a future crisis,” he told the conference.

This would appear to be a fair point. And there is no shortage of examples of new rules that stem from good intentions that have negative consequences, such as the impact on equity trading costs from the desire of politicians and regulators to make Europe’s trading venue rules more transparent and consistent. But the resentment and frustration that is often evident at industry gatherings such as Sibos must be put aside in favour of acceptance and constructive dialogue with politicians and legislators, however long it takes for the message to get through.

Also speaking at the conference was William Fox, global financial crimes compliance senior executive at Bank of America Merrill Lynch (BAML), who said regulatory compliance costs were “out of control”. Fox tempered this observation by suggesting that banks had little choice but to adapt to the new environment. This view seemed to be in keeping with comment by political risk analyst Ian Bremmer who closed Sibos telling bankers that governments had much more power in the post-crisis environment than in the preceding era. As BAML’s Fox noted in relation to his own experience of the current US regulatory climate: “The cancer in the financial system and society is not something the government is going to let up on. [Regulators] view banks as gatekeepers and we have to accept it and move forward.”

One of Fox’s core responsibilities is to ensure that BAML complies with government rules to prevent criminals and terrorists using the financial system. As is often the case with banks’ response to a new demand from regulators, the first instinct is to go it alone in the hope of potentially creating a field of differentiation and competitive advantage, followed by a reluctant acceptance of the need to collaborate, often years later. Banks have been struggling to cope with the mounting cost of know your customer (KYC) and anti-money laundering rules for over a decade. Samir Assaf, group managing director and CEO, global banking and markets, HSBC, told Sibos enough is enough. “We all use the same data but there is no proprietary value in doing KYC. We should look at creating a KYC utility, which will save costs,” he said.

That increased collaboration is firmly on the agenda of such large institutions as HSBC is no doubt music to the ears of Sibos’ organisers, as SWIFT clearly has an opportunity to provide new services to its shareholder banks in addition to core financial messaging business. But it is also a positive sign on a much broader level because it suggests that banks are ready to engage with whatever parties necessary – industry utilities, regulators, technology vendors, even each other – to get back to business.

On the way back to London from Dubai, a brief opportunity to catch up with events beyond Sibos (producing two daily magazines on-site gives little time to keep in touch with world events!) confirmed that banks could not expect the benefit of the doubt from governments or the public any time soon. J.P. Morgan’s US$920 million fine for failings relating to trading by the ‘London whale’, may still be followed by further charges of negligence, not to mention separate investigations from the Commodity Futures Trading Commission and criminal prosecutors. Meanwhile the Financial Times reported that two former Barclays employees had signed ‘non-prosecution agreements’ with the US Department of Justice as part of its investigation into abuse of Libor, inferring that new charges would be brought soon, on both sides of the Atlantic.

“People have questioned [banks’] culture and integrity, and quite fairly in some cases,” stated HSBC’s Assaf in Dubai. That questioning is not going to cease until banks consistently show that they have accepted the need to change how they are run by deliver value in new ways to customers across the real economy.