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LONDON: The growing burden of domestic and international regulation is the biggest risk facing the world's banks in the coming year as new rules impose additional costs and create a false sense of security, according to a survey of financial executives.
The Centre for the Study of Financial Innovation (CSFI), a thinktank, found overwhelming agreement in its annual poll that excessive regulation is perceived as the biggest threat to the financial sector.
The survey is further evidence of the growing backlash against the wave of regulations introduced following various corporate scandals.
Companies on both sides of the Atlantic have complained about the burden imposed by the Sarbanes-Oxley reforms of corporate governance in the US, which has prompted some smaller groups to cancel their US stock market listings. But this is the first year that concerns about regulation have topped the CSFI's annual survey.
The survey last year identified complex financial instruments such as derivatives as the main risk facing banks, while regulation was ranked sixth. This year's poll -- based on responses from 440 bankers, regulators and other financial services experts around the world -- highlights a broad list of new regulations including reforms introduced on Wall Street by Eliot Spitzer, the New York attorney-general; new regulations in the European Commission's financial services action plan; and the overhaul of capital adequacy rules for banks under the Basel II framework.
Respondents to the survey complained that the cost of complying with regulations was undermining profitability and could force marginal competitors out of the business. However, they also warned that the increased volume of regulation could give banks a false impression of safety.
There is an unreal world that regulation creates," said David Lascelles, co-director of the CSFI. "There is a heavy compliance burden, and banks end up thinking that as long as they're satisfying regulations, they will be okay."
The study found the consensus about excessive regulation was strongest among bank executives, although it was also identified as the main risk by insurers, fund managers and stockbrokers.
Only the 25 regulators who participated in the poll took a different view, identifying hedge funds as their main concern.
The study showed a high level of concern about the growth of complex new financial instruments and the availability of cheap credit, with derivatives and credit risk both ranking alongside hedge funds in the top five risks facing banks.
Decreasing concerns included the valuation of equities, which has dropped from seventh two years ago to 18th in the current study.
Worries about terrorist attacks also declined, with the risk to business continuation ranked 19th.
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