Four Reasons Bank Regulation Will Only Get Tougher

Regulators may get even stricter this year than they have been already, a veteran banking lawyer warns.

Government agencies could be motivated to step up enforcement in the coming year to quell public criticism "for not obtaining higher penalties and failing to bring charges against companies and executives," Rodgin Cohen, the senior chairman of the Sullivan & Cromwell law firm, said at the New York City Bar on Tuesday.

Cohen described four developments shaping the future of regulation during a speech at the the Regulation of Financial Services Forum.

PRESSURE TO PUNISH

The lingering public perception that banks got off too easy after the financial crisis could color regulators' mindsets.

Regulators are prone to take action against banks that fail to comply in two highly visible areas: anti-money-laundering and consumer-protection laws, Cohen says.

Enforcement agencies may also be emboldened to press criminal charges against banks in light of the recent settlements of charges that RBS Citizens Financial Group and UBS fixed the London interbank offered rate, Cohen says. The fact that markets stayed calm when subsidiaries of both banks pleaded guilty to criminal charges "may lead law enforcement authorities and others to believe no serious [economic] consequences likely to arise from criminal pleas," Cohen said.

Banks will have themselves to blame in the face of more stringent regulation, according to Cohen. "Banks keep adding fuel to the fire. Virtually every few months, there are accounts of new legal violations or improper practices by banks," he says, citing the Federal Reserve's foreign exchange price-fixing probe as a recent example.

CRACKDOWN ON DIRECTORS

Bank directors will feel more heat in 2014, Cohen says, pointing to the heightened risk-management standards released by the Office of the Comptroller of the Currency this month.

Board members are now expected to involve themselves in risk management and regulatory issues, Cohen says. "The regulatory view is that many financial and compliance problems at banks can be attributed to insufficient board oversight and involvement," he says.

"At the risk of taking a pretty blunt position, some of the provisions in the OCC's heightened standards are starting to border on beyond-realistic expectations," Cohen says. "I do worry that there is a point at which boards just cannot perform all of these tasks. You can only do so if you are prepared to have directors who really have no other significant occupation. … The cost would be to lose an incredible inventory of valuable directors."

NEW FOREIGN-BANK RULES

A recent Federal Reserve proposal signals a toughening stance toward the supervision of foreign banking organizations, Cohen says.

The proposal takes a "one-size-fits-all" approach to supervision, Cohen says. It would move large foreign banks with U.S. operations "from substantial reliance on their home countries' regulations to virtual non-reliance," Cohen said. Foreign banks with a significant presence in the U.S. could face higher capital requirements as a result.

Tighter supervision could hurt the U.S. economy, Cohen says, as well as have "an adverse impact on international trade and effective resolution."

TACKLING 'TOO BIG'

Rounding out Cohen's list of key regulatory developments were government agencies' continuing interest in smoother resolutions of failed banks and the end of "too big to fail." His outlook in these areas was cautiously optimistic.

"Solving 'too big to fail' is within reach," Cohen said. "It's a matter of will."

Requiring banks to issue long-term debt, clarifying how an orderly liquidation fund would work and reaching an international agreement on basic resolution methods would go a long way toward creating a safer financial system, he says.

"Let's face it: We were very fortunate to have escaped a catastrophe in 2008, and even then the cost was enormous," Cohen says. "The next time could be far worse."

Cohen's portrait of a rapidly-evolving regulatory environment echoed remarks made at an earlier panel that covered trending topics like the Volcker Rule and physical-commodities trading.

"There are a huge number of regulatory initiatives reshaping the banking system," Sullivan & Cromwell's Michael Wiseman said. "After the financial crisis, much needed to be done, and a lot of these initiatives make sense. But what world they're creating is not something anyone is going to know until they write the history of it."

At any rate, Wiseman said, waves of new regulation are good for his line of business.

"It is an intellectually fascinating time to be a banking lawyer," he said. "When I started out, it was a relatively boring job."