Are we on the brink of economic war?

There was discussion at Sibos Boston about the potential for SWIFT to get caught up in the sanctions regimes adopted against Russia by either the U.S. or the EU. This would constitute a major milestone in the process and has serious short and long term implications.

There was discussion at Sibos Boston about the potential for SWIFT to get caught up in the sanctions regimes adopted against Russia by either the U.S. or the EU. This would constitute a major milestone in the process and has serious short and long term implications.

In the short term, barring Russia from SWIFT would place a material strain on the banking system given the impact it could have on maturing liabilities. In the longer term, the issue risks fragmenting the global payments infrastructure for it could result in the creation of alternative non US/non EU based networks with serious consequences for the liquidity and reliability of the entire international payments business.

My initial reaction was that such an event was a low likelihood, but, having spent a day with leading experts, I am beginning to question if this judgment is as sound as I had thought. First of all, should there be ban on Russian payments (or that of any other country) over SWIFT, it appears clear that any attempt to use bank owned proprietary networks as an alternative could be interpreted as circumventing the sanctions regime. And there is a firm view that most alternative methods, including check-based payments, could be treated in the same light.

SWIFT has since stated that any decision to impose sanctions would only come from the relevant governmental authorities, and SWIFT is right to stress the importance of its neutrality, for any direct action against SWIFT risks undermining not only that institution, but many other global utilities, with the potential for causing far reaching negative economic and systemic consequences.

The world of regulation has now proven extraterritorial reach and has become incredibly invasive in decision making, even at the most senior levels of banking. Although the world of stock lending and account transitioning have provided exceptions to the rule, the world of the global custodian has been a high performance zone in respect of banking ethics. This is mission critical to our business with its powerful fiduciary role. Yet, on SIbos TV, my suggestion that our world was an ethical one despite the few rare cases of malpractice experienced, was dismissed by the interviewer as pretty irrelevant given the contrary perception that tarnished all bankers in that eponymous Court of Public Opinion.

And, from my discussions in the U.S., that philosophical approach is mirrored by regulators generally. The major banks, especially, appear to be under pressure to stick to their core business and eschew any innovation. Regulators, fearful of institutions that are too big to fail, would prefer, perhaps, to see a gradual erosion of their footprint. What simpler way than to erode the effectiveness of their product base?

I still question if the regulators are the only culprits in this process and whether bank executives have been robust enough in shaping their destiny and explaining the value of their propositions. The Volcker rule and other regulatory tools are containing the growth of banks in areas of high risk. It is the cultural shift, whereby banks are fearful of antagonizing the regulators, that has become the biggest hurdle to product change. Unless the world has changed far more than I believe, I find it hard to accept that a well-reasoned proposal would bring down the wrath of the regulators on the heads of the proposers, even if it failed to gain the appropriate approvals.

Regulation has indeed been tightened and that was required for light touch regulation failed. Most importantly, its failure has caused recession and severe financial stain on the public purse in many countries. But, over and above the horrific challenge of the quantum of new regulation being introduced, we have to face up to the intentional or accidental opaqueness of many of the regulatory strictures being adopted. Then, there is the added problem that the accused is deemed guilty, more often than not, and having to prove non-guilt as a result. This has led to a cultural shift against new ideas and initiatives at the top of many organizations, and the flow of innovation that has characterized our industry, appears to be under threat.

Client needs are being subjugated more and more to the broadest interpretation of the new rule books. Technology spend is absorbed almost in its entirety by regulatory or infrastructure change management. Staff cuts are being introduced to compensate for the cost of the new army of regulatory and risk officers. Fear of inadvertent breach of a regulation, penalized often in the same way as an intentional breach, and the absurd disjoint between the level of penalty and the level of culpability are also killing new initiatives and curtailing sensible cross-industry cooperation.

It is hard to understand how this will end. Public policy makers would prefer the big banks to be less dominant. At the same time, in the securities services space, there is a desire to see intermediaries carrying more liability. But there needs to be a correlation between an institutions’ ability to absorb losses and their profit generative capacity, or ultimately, their capital.

The reality is that liability under regimes such as the Alternative Investment Fund Managers Directive (AIFMD) and UCITS has changed the risk landscape. Our business is now higher risk. Can one be certain that the intermediary will, in a Court of Law, be deemed blameless for events that all assume currently to fall under the escape clauses by being beyond their control?

Organized crime must have always been tempted by the monetary values transiting global settlement systems or residing in the major central securities depositories. Cybercrime and fraud were major themes at Sibos. The growth in pariah states or quasi states means that there is a risk that such actions become state sponsored and ever more threatening. The danger is that, ridiculous as it appears to the specialist, courts find banks’ due diligence processes inadequate in this area and their guidance to clients defective.

Yet such issues do not appear to get the deserved traction, or clarity, from regulators or the regulated. They remain an area of specialists. They should be mainstream. The world is more risky. Economic warfare is dangerous. And the focus of many appears to be being distracted from these real risks. Unfortunately, the cost of a failure in internet security could be far greater than the penalties ever envisaged by the regulators for breach of the rules.