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Regulatory intelligence

Previewing bank regulation in 2026

Keith Mullin  

Keith Mullin  

Global bank regulators and monetary policy chiefs have spent nigh on eight years trying to eradicate the causes of the last financial crisis, yet the full force of the in-process regulatory response won’t be in place for at least another two to four years. And that discounts regulatory streams yet to be finalised.

The tenth anniversary of the collapse of Lehman Brothers will by then have come and gone. What will the banking and regulatory landscape resemble 10 years from now? It’s anyone’s guess, of course, but I sense an easing bias seeping into the fabric of today’s regulatory discourse. False optimism? We’ll see.

A brief history of time

Before we get to the future, let’s review the past. Being frank, our financial overlords have failed to eliminate the root causes of the economic and financial cataclysm that erupted post-2008. Mark Carney, chairman of the Financial Stability Board, admitted as much in his open letter to G20 leaders ahead of their September summit in Hangzhou.

The notion of “too big to fail” is still with us; the derivatives world still needs taming; there are simmering concerns about the significance of official stress tests and whether they tell the real story; certain banks continue to be highly levered; and there’s palpable anxiety about the efficacy of deeply complex resolution schemas and the new-style bail-in instruments introduced under the G20’s total loss-absorbing capacity (TLAC) initiative (and
regional equivalents around the world for non-Global Systemically Important Banks (G-SIBs)).

These instruments are supposed to remove the burden of saving failing banks from the shoulders of taxpayers. I’m not convinced that where we’ve ended up on bank resolution is the right place. Having banks move inexorably towards bail-in triggers will be more inclined to instigate volatility than prevent it as everyone lunges, panic-stricken, for the exits at the same time; and takes the entire sector with it as single-name exposure concerns give way to broader disquiet and irrational responses.

The concept of a progressive form of early state intervention – mobilised before a situation turns disorderly and on the basis of a clear profit motive for the taxpayer through the extension of medium-term, fixed-maturity loan facilities with generous equity kickers and onerous conditionality – has merit. Call it state-sponsored Chapter 11.

Ah, but banks today are much better capitalised and more robust, I hear you say. Yes, but if onerous capital adequacy, leverage, liquidity and net stable funding ratios; a forced shift to standardised risk- weighted asset (RWA) modelling not to mention forced changes to strategic and business models to take account of the new realities are, in the round, so arduous and debilitating that they put the patient into a deep coma, doesn’t it all become rather futile and self-defeating?

Think: Banks’ shrinking head count and balance sheets, ditching business lines, exiting geographical locations, shrinking client footprints, altering client service levels, changing legal structures, hiring armies of compliance staff and spending billions on regulatory fulfilment.

Perhaps more to the point, policy makers and lawmakers have failed to create any sustainable currents of business or consumer confidence; to the extent that even with 40% of developed market government bonds trading at negative yields (perverse in itself) and dragging the rest of the fixed-income universe to untenably low levels, and even with returns on savings below economically viable levels; savers are increasing their savings rather than spending. This is counterintuitive.

By the same token, corporations may have binged on cheap borrowing like there’s no tomorrow (perhaps they think there isn’t …). But very little of that money has been invested in capital expenditure projects that directly benefit job creation and accelerate growth
in the real economy. No, borrowing has been used to finance a prodigious quantum of share buybacks and dividend distributions; to pay executive compensation; to engage in financially inspired M&A or simply to stockpile cash on the balance sheet.

Continued official support for zero or negative interest rates in the face of poor results from such actions; and continued support for the frankly absurd notion of investors lending at negative yields tells you all you need to know about how lawmakers, policy makers and regulators have monumentally misread the psyche of the moment.

Why do savers save to lose money? Simple: Beyond the issue of what else you can do with your money (speculate in overpriced urban real estate?), it’s because we know something is up. As conservative souls at heart, survival instincts kick in. Squandering cash via conspicuous consumption is definitively off the table.

One of the issues that troubles me in all of this is that monetary and regulatory bodies – often different departments of the same agencies – have blithely sauntered along two separate paths; delighting, it would appear, in mutual oblivion of each other’s actions.

… policy makers and lawmakers have failed to create any sustainable currents of business or consumer confidence.

Central banks have spent trillions of dollars on various unorthodox monetary schemes. To what effect, exactly? Regulators, for their part, have tied the banking sector up so tightly in overzealous rules with questionable benefits that insofar as funding economic growth is concerned, the industry has been rendered incapable and unwilling – and teetering on the edge of being uneconomic.

Do we really want our banks to become compliance-driven utilities? Banks are by definition risk-takers. They have to be. And I don’t mean risk-taking as in highly leveraged proprietary trading in the casino investment bank; I mean economically beneficial risk-taking as in consumer, small-business and corporate lending. That’s true risk. We need our banks to engage in risk analysis and extend credit. The problem today is that even if they were inclined to lend, demand for borrowing is weak. We’re seemingly locked into an eternal negative feedback loop.

Here’s a deep irony: Our monetary chiefs are now forcing a rebalancing between the banking sector and the capital markets, exhorting us into the bargain to load up on cheap borrowing and to barbell portfolio strategies with a bias towards risky assets.

Given where we are in the monetary cycle, long-dated securities, lower-rated securities, securities in the nether regions of the capital structure; in emerging markets; or exotic local currencies as well as structured products have been hotly bid up. That’s where the yield is – or at least where it was before the wall-of-money effect took hold and subverted the risk-return profiles. The more we’re directed away regulatorily from the pre-2008 world; the more we’re forced monetarily into aping that exact same world.

A brief review of the future

So where do we go from here? I’m a believer in cycles: economic cycles, business cycles and regulatory cycles too. The overarchingly onerous wave of regulation that washed over the banking world in the wake of the global financial crisis, tinged with a fair degree of vengeance on greedy bankers, etc., may have been a natural reaction in that closing-the-stable-door- after-the-horse-has-bolted manner.

But I’ve noticed with increasing frequency that regulators and national and transnational bodies have firmly accepted they may have gone too far. Not that they say that outright; it’s more that a body of discourse is emerging into the mainstream that talks openly of unintended consequences.

Time is a great healer and the vitriol of those post-global financial crisis (GFC) days has receded. In the second annual report of “Implementation and Effects of the G20 Financial Regulatory Reforms,” published on August 31, the Financial Stability Board (FSB) said this: “The FSB, in collaboration with the standard-setting bodies (SSBs), continues to enhance the analysis of the effects of reforms. Policies will be adjusted where necessary to address material unintended consequences. Work is underway to address the conceptual and empirical challenges in evaluating whether the reforms taken together are having their intended effects on the financial system and the broader economy.”

It added: “the monitoring of progress, challenges in implementation and the adjustment of policy measures to address material unintended consequences represent good regulatory practice and form an important part of ensuring the accountability of the FSB and SSBs.”

The more we’re directed away regulatorily from the pre-2008 world; the more we’re forced monetarily into aping that exact same world.

Meanwhile, the European Commission (EC), in last year’s “Action Plan on Building a Capital Markets Union (CMU),” said the following: “Given the different pieces of legislation adopted over the past years and the numerous interactions between them, there is a risk that their collective impact may have some unintended consequences, which may not be picked up within individual sectoral reviews.

“Regulatory consistency, coherence and certainty are key factors for investor decision-making. If clear evidence is provided to justify specific and targeted changes, this could further help to improve the investor environment and meet the objectives of the CMU.”

So where does that leave us in 10 years’ time? I suspect at the dawn of another new paradigm. Where normalised monetary conditions have supported the return to a more classic rate and maturity structure. (I won’t even get into the chaos of “the great unwind” that’s likely to stand between now and then).

But also where the role of regulation has receded to a more classic role: not with an intent to neutralise the patient but to nurturing and marshalling the sound and smooth functioning of bank and capital markets, enhancing the role of banks as key economic agents and giving end users genuine choice in their access to working capital and investment funding.

Am I wrong? Tell me in 2026.

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