New risks created by Dodd-Frank will have banks more focused on compliance in 2013, expanding budgets. This will likely increase costs for corporations.
According to the “2013 Financial Services Industry Compliance Benchmark Study” by risk and compliance company SAI Global, most bank compliance officers say dealing with new regulations and mitigating the associated risks will be there top priority this year.
The study said that as a consequence of the increasing impact of the Dodd-Frank legislation, “the commitment of resources needed to address compliance requirements is also expanding for many financial services firms.” The study noted that almost 60 percent of survey respondents said their compliance program budgets are increasing in 2013, with more than 20 percent noting “a significant increase.”
Corporations, despite exemptions from new regulations from Dodd-Frank to Basel III, have long known that prices for bank services will rise as the expense of expanding compliance budgets trickles down to the bank’s corporate clients. Some analysts have predicted that Basel III alone could push costs up 30-40 percent in the next year or so. That means all the new regulations will impact the cost and availability of banking services from cash management to trade finance to credit. It also means banks will be more selective in picking partners (see related story here).
According to Chatham Financial, the cost drivers of new Basel III capital rules alone include: CVA risk capital charges, which add a capital charge to cover the risk of mark‐to‐market losses on expected counterparty risk to OTC derivatives; efforts to address general “wrong‐way risk” in OTC derivative contracts (wrong-way risk, according to ISDA, occurs when exposure to a counterparty is adversely correlated with the credit quality of that counterparty); and the asset value correlation multiplier, which addresses the higher degree of correlation in large financial institutions’ credit quality.
Moody’s Investor’s Service noted in 2012 that the direct cost of implementing Dodd-Frank will keep rising. “Not only are individual banks investing more in technology and incurring costs to meet higher capital standards, but they’re also facing significant constraints on how they generate revenue,” Moody’s said. It’s likely then that in order to avoid significant reductions to their profitability, banks will in turn “turn” to their healthier corporate clients.