Regulation Deliberation

Tuesday, we learned the US Treasury sold its final stake in AIG, resulting in a tidy profit of about $23 billion. (Though we aren’t exactly holding our breath waiting for a check for our share of the profits.) Interesting enough, but to us, this demarcates just how far we’ve come since the 2008 credit crisis. Overall, the Financials sector is far healthier now than most would have surmised possible even just four years ago. Recall: After 2008, many fears circulated about a supposed lack of financial regulation and fear of failing institutions, sparking a push for new rules proponents hoped could prevent a similar future crisis. But in our view, new or more regulation isn’t necessarily better and, in many cases, is worse.

Too many new rules implemented too fast can prove to carry vast unintended consequences. Yet, while it’s undeniable we have new regulation globally—and a considerable amount of it, with many parts still pending—the implementation of crisis-inspired regulation has been generally delayed and much discussed. Hence, the sudden implementation of very harsh new rules carrying broad macroeconomic fallout is a scenario we’ve avoided to date. And since surprises tend to impact markets’ longer-term direction more than long, drawn-out and widely discussed issues, years of regulatory deliberation are something of a plus relative to expectations. Deliberations we’ve certainly had, and more seem to be in the cards after reviewing this year’s regulatory news.

Take, for example, Basel III banking standards. Originally published in 2009 and expected to be fully implemented by 2012, this regulation was intended to better manage risk and financial supervision after 2008. But it’s now December 2012, and in many important parts of the world like the US, UK, EU and China, Basel III implementation has officially been pushed back—in some cases to the end of 2013 or early 2014. (Mexico adopted the standards and became one of the first to implement Basel III this fall, while most of the G20 hasn’t. Simply, Mexico’s banks largely skirted major impacts in 2008 and seem to be able to implement with few effects.) Multiple issues globally seem to be behind the delay. For example, Basel III’s liquidity coverage ratios are still being debated, including whether asset-backed securities can count toward meeting minimum liquidity requirements. Then there’s the fact US regulators had (as of last month) around 1,000 comment letters from the industry to peruse.

European regulators have their own issues to resolve involving Basel, but that’s also not an isolated issue. There’s the much ballyhooed banking union and EU superregulator, which seems to be drawing a lot of attention recently, as other stories regarding the eurozone have seemingly receded a touch. Yet creating these sweeping regulatory changes is proving quite a challenge, and to call it slow going is an understatement.

Back stateside, the reams of paper comprising Dodd-Frank’s many rules and studies aren’t fully implemented either—and in some areas haven’t started (and perhaps won’t at all). Meaning Dodd-Frank’s many mandated studies seem largely poised to achieve a grade of incomplete thus far. You see, roughly two thirds of the rules haven’t been finalized. One prominent example, even at a (comparatively) measly 300+ pages, Dodd-Frank’s Volcker Rule is so vaguely written it hasn’t been finalized, and its implementation date’s been delayed two years to July 21, 2014. Overseas swap rules will likely be delayed, too, but here only another six months. Officials assert “a phase-in of [Dodd-Frank] regulations [will] be announced before Jan. 1,” 2013, but even if they make that goal, chances are low any strict schedule will be adhered to. And even if they do, several Dodd-Frank-born rules have been dismantled after creation by court rulings.

Overall and on average, it seems special (often national) interests are slowing the pace and creating hurdles to even drawing up regulatory agreements, much less implementing them. Now, it’s true: The mere existence of these to-be-completed pieces of regulation could continue to serve as a headwind for Financials firms. But a headwind is preferable to a sharp, sudden downdraft—continuing to move slowly can help mitigate the risk of sudden rule changes and allow more time for all to understand the rules and the things they regulate.