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Simplicity is a complex issue

Simplicity is a complex issue

Monolithic financial organisations selling complex products are no longer seen as the future of banking.

Over concentration

But with the European banking industry experiencing an intense phase of concentration in the last 20 years, size remains a factor. It’s a factor that has become more pronounced in recent years as a result of the financial crisis, particularly in some countries such as Belgium, Ireland and Spain. Even if regulators take other factors into account the size of a banking institution and its interaction with other players has become a key element in the definition of symmetrical risk.

While this concentration of banking services through acquisitions, issuer services or asset management roles has led to significant synergies between related trades and core activities such as deposits and loans, the evolution of such financial conglomerates has introduced structural complexity to how banks operate.

Product Complexity

But complexity not only exists in the operational structure of banks, it also exists in the innovation of banking products and services. Indeed it can be argued that much of the increase in banking performance up to 2007 was due to such financial innovation.

And while levels of product innovation have been supported by deregulation and a favourable monetary policy, there is a further argument that demand played a large role in increasing the level of innovation and complexity of products offered.

Regulatory Tsunami

Yet as banks simplify operations, there is a question mark over what impact the regulatory landscape will have. The regulatory tsunami faced by the banking industry since the outbreak of the sub-prime crisis was an attempt by politicians and regulators to ensure such a crisis does not occur again.

But is a regulatory system that relies on taxpayer buy-in and involves complex financial instruments to underpin guarantees of non-failure an adequate answer? The new regulations implemented, particularly in Europe and the United States have introduced an extraordinary amount of complexity into the banking sector.

Charles de Boisriou, Global Head of Financial Services, Partner based in Paris

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