Concentration Risk is Being Dispersed, But Banks Aren't Becoming Utilities

Utilities or mutualization of services are growing in the financial industry as a way to reduce cost and manage parts of the business that don’t add value. But are all the new regulations stemming from the financial crisis turning banks into utilities themselves, like an electric or water utility?
By Jake Safane(2147484770)
Utilities or mutualization of services are growing in the financial industry as a way to reduce cost and manage parts of the business that don’t add value. But are all the new regulations stemming from the financial crisis turning banks into utilities themselves, like an electric or water utility?

At the RMA Conference on Securities Lending in Naples, Florida, Ed Marhefka, managing director and co-head of Markit Securities Finance, recalled a conversation he had a couple years ago with a CEO of a large asset management firm, who said to Marhefka that “regulators want to make all you financial institutions a utility.”

But how accurate is this view? Will banks becoming bland, non-innovative companies?

“I think that’s the popular view, but that’s not clearly what [regulators] are doing at all,” said James Slater, executive vice president, global head of securities finance, BNY Mellon. “They’re trying to make the market a safer place.

“I think what they are definitely by design trying to do is encourage more players in the market to spread the risk across the market. They’re clearly very concerned about ‘too big to fail,’ and so they’ve created an incentive structure, if you will, where some institutions are subject to a higher standard than others. So big players are held to a different standard because they represent larger risk to the overall market, and then the smaller players get the pass on that, which allows them to grow and disperses the risk across the market.”

Lou Maiuri, executive vice president at State Street Global Markets and head of securities finance largely agreed, but conceded that it does at least feel at times like regulators are trying to turn them into utilities. But overall, he sees a push for safer markets and consistency in application of new rules.

“I think we’re in the third inning of a nine inning baseball game,” he said. “When I think of AML, KYC, cybersecurity, [etc.], I think there’s vertical implementations going on, and I think what we’re all going to see is a horizontal framework to make sure that all of us are complying the same way, interpreting it the same way and that there’s consistency across the board.

“The intention is to make it safer, the intention is to focus on culture as opposed to policies and procedures—get the culture right, get people to think about it right, and then make sure State Street, for example, complies in the same way as BNY Mellon and vice versa. So this isn’t over. We’ve got to take our vitamins and keep working hard to make it safer and comply and find innovative ways to keep supporting our clients.”

In some ways, by spreading the risk and getting banks on the same page as each other, these institutions are actually looking less like typical utilities. For example, said John Stracquadanio, head of prime services at Scotiabank, during Hurricane Sandy, it wasn’t as if those who lost electricity had an option to use another service provider. The intention of these regulations is to avoid these sorts of concentration risks; even if there’s no monopoly, they still don’t want to have a concentration of risk in five to ten banks globally.

“So maybe that’s working,” said Stracquadanio. “You see new balance sheets coming in and some of the risk being driven to asset management.”

Indrajit Bardhan, global head of Prime Services Risk & head of Prime Services America at Credit Suisse, recalled how he was catching up with some college friends recently, and as the only one in the banking industry, they asked if him if the system was safer. They didn’t necessarily want to know all the nuances, they just wanted to know why the same issues around the crisis won’t happen again.

And regulators are not trying to completely undermine banks, he said, but they need to answer to this general public sentiment. So there will be a transition to new models, such as cleared swaps, and rather than continually debating and trying to chip away at these changes, the industry can figure out how to operate in this new environment.

“It’s not the end of the world for this business,” agreed Stracquadanio. There’s a bunch of smart people in [the industry], and we can figure this out.”

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