There are two types of banking regulation: that which sparks a market change, and that which increases oversight without affecting the fundamentals of the business.

Photo from triplepundit.com

Most landmark pieces of regulation fall into the former category and have sparked true market change.  For example, The Banking Act of 1933, also known as Glass-Steagall, mandated a separation of commercial and “speculative” banking practices and transformed Wall Street into a collection of boutique investment banks and created the Federal Deposit Insurance Corporation which was, to some, a vital protection against banking panic and, to others, a dangerous source of moral hazard.

As another example of regulation that sparked true market change, in the 19th century many states enacted restrictions on bank branching within and across state borders, including “unit banking” laws that limited financial institutions to operating via a single branch. Those restrictions, in addition to lax charter requirements in the Free Banking Era, directly encouraged the proliferation of a large number of unique financial institutions in the United States; in 1990 there were more than 12,000 banks (not including credit unions) in the US, nearly double the number of banks in the entire European Union today.

Repeals of these regulations, the Gramm-Leach-Bliley Act of 1999 and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, produced equally dramatic structural changes, sparking consolidation of the commercial and investment banking sectors; 12,000 commercial banks in 1990 have become 7,000 today.  (For more on Riegle-Neal and the end of unit banking see “Big Bad Banks Winners and Losers from Bank Deregulation in the United States” by Thorsten Beck, Ross Levine, and Alexey Levkov)

States started repealing branching restrictions before 1994, contributing to the decline of unique Financial Institutions

The latter category – those regulations which increase oversight without affecting the fundamentals of the business – is much less likely to make the history books, but often requires more reaction from financial institutions, top to bottom. These are laws like the Bank Secrecy Act (BSA) of 1970, that requires financial institutions to document and report cash transactions larger than $10,000 and other suspicious activity, the Truth in Savings Act (also known as regulation DD), the Right to Financial Privacy Act of 1999 (also known as regulation P) that requires financial institutions to meticulously cross their t’s and dot their i’s when opening new accounts and dealing with customers. None of these regulations provoke mergers or fundamentally change how banks do business; for lawmakers and the public, they ensure that things are being done correctly and safely, and for bankers, they just make business as usual a little more difficult.

In the wake of the 2008 financial crisis, we’ve seen regulation of both sorts. Dodd-Frank established theConsumer Financial Protection Bureau and the Financial Stability Oversight Council, two institutions that are designed to watch banking, not change it; other elements, including the Durbin Amendment and the still unimplemented Volker Rule, were structurally transformative. Enforcement of Basel III (even with the recent easing) also promises both structural changes and increased oversight; stricter capital requirements will change the business, and the presence of international regulators will get in the way.

Two types of regulators: Paul Volker, former Fed Chairman & author of the Volker rule, and Richard Cordray, current director of the CFPB

Banks can plan, but not prepare for structural change. For example, the Durbin amendment has come under censure for provoking banks to raise deposit account and card fees to make up for lost income fromm merchant swipe fees. Before the implementation of the Durbin amendment, it wouldn’t have made economic sense to switch from merchant to consumer fees; that would have meant foregoing an easy source of income to piss off customers.  After the implementation Durbin amendment, of course, it wasn’t legal to keep charging merchants.

Oversight increases however, affect efficiency; and efficiency is something that can always be improved.  Businesses of all sorts constantly strive to make processes repeatable, scalable, and rational, through better and clearer division of labor, employee training, improved management techniques, and, especially now, implementation of better technology.  Institutions with better processes to begin with will nine times out of ten be able to better deal with new demands of regulation.

That’s where Andera’s paperless solutions can help. Many banks today still rely on paper documentation to be compliant, which only makes it harder to adjust to new reporting requirements, an argument made by this Bank Technology News article in September. (Of course, as the Bank Technology News article notes, you need to take any arguments from a vendor with a grain of salt 🙂