Business as usual? Hardly, for anyone working in finance

SINCE the financial crisis, business secretary Vince Cable has taken to the airways on a regular basis to criticise a supposed culture of business as usual in the City, suggesting that the government must get ever-tougher to counter the fact that hardly anything has changed for banks.

Nothing could be further from the truth.

HSBC chairman Douglas Flint put it succinctly in his appearance before the Treasury Select Committee (TSC) in June.

“It is staggering when you look back at what has been achieved by the policy framework in the last 18 months,” he said and, begging for a minute to speak, proceeded to reel off a list of new regulations that have contributed to a complete overhaul in global and national regulation.

Before he had finished his list, he was interrupted: “That is a very long minute,” commented TSC chair Andrew Tyrie.

Flint was pointing out that the Independent Commission on Banking (ICB), which publishes its final report in ten days, is behind the times when it comes to chopping up and changing the banking sector: most of the regulatory agenda has already been decided – and with unprecedented speed.

British Bankers Association chief Angela Knight told City A.M.: “I’ve been in the financial world since the 1990s and the quantity, degree and speed of regulation has never been as great as it has been over the last two to three years… It’s the easiest thing in the world to say there’s been no change but it’s completely wrong.”

The speed of the changes has left banks scrambling to catch up: most fundamentally, they are charged with revamping their business models in order to make decent returns while holding many times more and higher-quality capital.

As City A.M. reported on Wednesday, McKinsey estimates that these changes alone will more than halve average returns, forcing banks to lay off staff, shut down parts of their business and rethink others.

Here, we have compiled a summary of the most important changes either already in effect or being phased in over the coming years. There are many more that won’t fit within the constrains of a mere double-page spread – the Dodd Frank Act alone is over 1,000 pages.

But it will hopefully serve to dispel the popular notion that nothing has changed in the City. For bank bosses, it is all change.

SHRINKING RETURNS: HOW REGULATION WILL HIT PROFITS

McKinsey estimates of the effect of regulations on average investment bank returns.

Basel 2.5 capital rules
This beefing up of Basel II changes the calculations banks must make to work out their capital levels. It will dent returns by seven per cent.

Counterparty credit risk changes
Basel III changes to the way that banks must calculate counterparty-credit risk will cost banks another three per cent in returns.

Basel III capital ratios
The shift in the minimum required capital ratios in Basel III will cost another two per cent in returns.

Liquidity and funding costs
Basel III rules governing bank funding will shave another one per cent off returns, taking them down to just seven per cent.