The banking and financial services industry is riddled with political, regulatory and market pressures. While other industries may face similar political and regulatory pressures, few share the international markets pressures currently felt by the banking and financial services industry. Events halfway around the world can cause waves for the U.S. banking and financial services industry in a matter of minutes. Together, it all adds up to unimaginable legal and regulatory scrutiny. To best understand the current pressures on the banking and financial services industry from a regulatory and legal perspective, it is important to remember where we have been.
The trouble with certainty in the banking and financial services industry is that every time things seem to be a bit more stable in places like Ireland, Spain and Greece, new problems pop up in more remote countries, like Cyprus. Problems in places like Cyprus can lead to pressures on markets 5,500 miles away here in the United States. The banking and financial services industry is absolutely (if not sometimes inexplicably) linked to these global events. International currency and bond markets in addition to more exotic investments tie the United States to just about every other country.
Closer to home, the banking and financial services industry in the United States is just climbing out of the Great Recession. Much of the blame for the recession has been put squarely on the shoulders of this sector, leading to a significant amount of federal legislation designed to curb perceived abuses and flawed practices. The Dodd–Frank Wall Street Reform and Consumer Protection Act, for example, explicitly requires that banking and financial service regulators author numerous and extensive new regulations that will add thousands upon thousands of pages of new rules requiring review, interpretation and compliance.
As of this past April 1, a total of 279 Dodd–Frank regulatory rulemaking requirement deadlines had passed. Of these, 176—or 63.1 percent—have been missed; the 103 others have been met with finalized rules. Needless to say, Dodd–Frank has contributed to a significant amount of new legal and regulatory compliance, in addition to a great amount of uncertainty in the banking and financial services industry. Uncertainty about the future of the regulatory landscape puts the banking and financial industry on the defensive, preventing banks and financial institutions from fully planning for the future. The continuous flow of new regulations causes an undesirable shift of resources toward regulatory and legal compliance and away from the development of new banking and financial products.
Once Dodd–Frank has played out more fully, we can hope that the banking and financial service industry will have a chance to focus more on growth.
This shift, along with many of the Dodd–Frank regulations that have already gone into effect, has made it tougher for the banking and financial service industry to generate revenue out-side of traditional core lending. Many fee-based revenue sectors of the banking and financial service industry have been hit especially hard by Dodd–Frank. This has put extreme pressure on new revenue in an attempt to generate earnings for shareholders.
Unfortunately, Dodd–Frank fails to adequately discriminate between Main Street and Wall Street financial institutions, forcing the haves and have-nots to comply with many of the same regulations.
The Bottom Line
So, what does this all mean for consumers and businesses? More and more banks and financial service institutions will be unable to keep up with the costs of the ever-changing legal and regulatory landscape. As a result, most industry pundits predict a continued uptick in mergers and acquisitions because of the financial pressures faced by banks trying to conquer the mountain of regulations on their own. This will lead to more consolidation and fewer options for individual consumers and businesses alike.
However, once Dodd–Frank has played out more fully, we can hope that the banking and financial service ind-ustry will have a chance to focus more on growth and less on the waiting on the unknown.