Banks That Adapt to New Global Rules Will Fare Best, Study Says

Banks that best adapt to “relentless waves” of new rules from global regulators have the greatest chance of remaining competitive, according to Boston Consulting Group Inc.

Regulatory reform has added a multitude of complex and costly rules since the financial crisis, creating barriers banks must break to remain profitable, BCG said in a report released today. Lenders that are able to “categorize, prioritize and execute” against the rules, which include higher capital requirements and leverage ratios, will have the advantage, according to the report.

“It is very much a one bank versus the other issue,” Thomas Garside, a BCG partner based in London, said yesterday in a phone interview. “Everyone has experienced their regulatory and compliance costs going up.”

Global banking has diverged into a “three-speed world,” BCG said, with emerging markets and the U.S. returning to profitability, while European banks suffer their worst year since the start of the crisis. The findings are based on data from 318 retail, commercial and investment banks representing 90 percent of worldwide industry assets.

Lenders in emerging markets need to increase their capacity to deal with expanding risk and complexity, the study found, in advance of a potential tapering of asset purchases by the U.S. Federal Reserve. European and U.S. banks must focus on costs to stay competitive, according to the report, titled “Global Risk 2013-2014: Breaching the Next Banking Barrier.”

Cutting operating costs is crucial for U.S. banks as there aren’t many more savings to wring from loan-loss provisions and capital requirements remain high, according to the report. The lenders also need to manage risk more efficiently and reconsider their business plans.

“Pre-crisis one of the struggles was convincing people that risk ought to be on the strategic agenda,” Garside said. “It’s gone from being almost a non-issue to an issue that is so big that you can’t get your arms around everything and you have to start prioritizing.”