Publication date: 25.07.2024
The impact of banking regulation on financial markets
Banking regulation, the cornerstone of financial stability, has changed significantly since the 2008 crisis. Its impact on financial markets is multifaceted, shaping the global financial landscape in profound and lasting ways.
Strengthening financial stability
The introduction of the Basel III accords has considerably strengthened the resilience of the banking sector. According to a report by the Bank for International Settlements (BIS, 2021), the major international banks more than doubled their high-quality capital between 2011 and 2020. This increase has significantly reduced systemic risk, contributing to greater stability in financial markets.
Transformation of banking business models
Regulation has prompted many banks to review their business models. A study by McKinsey & Company (2020) points out that banks have significantly reduced their proprietary trading activities, refocusing on less risky and less capital-intensive activities. This has changed market dynamics, particularly in terms of liquidity in certain segments.
Emergence of new players
Regulatory pressure on traditional banks has created opportunities for new players. According to a report by the European Banking Authority (EBA, 2022), fintechs and non-bank financial institutions have significantly increased their market share in certain segments, such as payments and SME lending. This diversification of players has stimulated financial innovation, but it also raises new regulatory challenges.
Impact on market liquidity
The effect of regulation on market liquidity is the subject of debate. A study by the International Monetary Fund (IMF, 2023) suggests that while regulation has reduced liquidity in some bond markets, it has also contributed to greater stability in times of stress. The challenge for regulators is to find the right balance between market stability and efficiency.
Compliance costs and industry concentration
The increasing complexity of regulation has led to a significant increase in compliance costs. According to a KPMG survey (2022), these costs represent on average 5 to 10% of banks' operating expenses. This pressure is driving consolidation in the sector, with smaller institutions struggling to absorb these costs.
Future challenges: emerging technologies and risks
The rapid development of financial technologies and the emergence of new risks, such as those associated with climate change, pose new regulatory challenges. A report by the Autorité des Marchés Financiers (AMF, 2024) stresses the need to constantly adapt the regulatory framework to meet these challenges, while preserving the innovation and competitiveness of the financial sector.
Conclusion
Post-crisis banking regulation has undeniably helped to strengthen the stability of the financial system. However, its impact on financial markets is complex and sometimes contradictory. While it has reduced certain systemic risks, it has also altered market dynamics and encouraged the emergence of new players and risks.
The challenge for regulators and market participants is to strike a balance between financial stability, innovation and market efficiency. In a constantly changing environment, banking regulation will have to continue to adapt to meet new challenges while preserving the ability of the financial system to support economic growth.
You can also read about:
Comments