First, will the regulatory burden force smaller banks to merge in order to afford the larger staffs and therefore further concentrate the financial institutions’ structure to fewer and larger banks? And, second, has the complexity of managing governance, regulation and compliance made the few huge institutions, in fact, too big to manage?
Congress is currently debating the issues raised by the Volcker Rule, fueled by a growing public cry to split trading and banking. Putting the size and structural issues aside, the JP Morgan Chase situation in London and the Barclays criminal indictments in Japan also raise the question as to whether the complexity of the regulations make the mega banks too big and complex to manage.
Both the London and Tokyo regulatory failures can be blamed on ineffective compliance policies, procedures, the responsibility of the board of directors and chief executive officer, and the lack of controls and adequate communications within the units charged with compliance and between those staffs and the business units. The same can be said for the failures in the Libor rate setting cases. None of the named banks were organized for effective control of far flung and loosely managed trading units.
Banks paying over $12 billion in fines in 2012 is inexcusable and the major impact has been on shareholders’ equity and innocent managers, and has resulted in the loss of loaning power. In every case, the guilty financial institutions can boast of well-defined policy manuals, codes of conduct and well stated principles on ethics. So where did things go wrong?
Policies from the board find their way in procedures for every possible regulatory issue. Boards have added a Compliance Committee in some cases and the Chief Risk Officer often reports to both the CEO and the board. However, policies detailed and elegant will always fail unless the organization’s culture of discipline focuses on the regular monitoring of the effectiveness of every unit charged with compliance to external regulatory requirements. This discipline must focus on frequent monitoring and testing by each of the several staff units charged with oversight of the business units.
Finding individuals with extensive experience with the new Dodd-Frank rules is difficult and market demands are high. Staying up on training existing and newly acquired staff is a challenge for banks, big and small, and the regulators’ examiners who spend their time in the banks and have little time for keeping up on training needs. In total the costs and complexities of the growing regulatory demands are probably more than most organizations can cope with without larger and better trained personnel. The compliance picture at the implementation level is difficult at best.
More and better training and far better communications are needed. The smaller and tighter an organization, the easier it is to manage and carry out those functions.
Perhaps the boards and shareholders themselves should be asking, “Have we become too big to manage?’’
James is executive director of the Center for Global Governance, Reporting and Regulation at Pace University’s Lubin School of Business in New York City. James is also program director of Pace University’s Certified Compliance and Regulatory Professional certificate program.