By Tomek Jankowski
The 1980s and '90s were decades of deregulation in financial services, but the 2008-2009 global financial crisis definitely brought us into an era of reregulation. This is, of course, good news for consultants because the new regulations have a broad range of implications for banks, impacting everything from governance and accounting to their investments and their pricing models.
Toss in changing customer behavior and the rise of non-traditional, third party competitors in several traditionally bank-dominated product lines, and banks today feel like they're under siege.
Which brings us to the Volcker Rule. Named after former Federal Reserve Chairman Paul Volcker, the Volcker Rule is a part of the 2010 Dodd-Frank Act and is controversial for a couple reasons. First, it tries to reduce the potential for conflicts of interest for banks and their clients, and secondly it separates the investment banking, private equity and proprietary trading functions of banks from their consumer lending units.
(Proprietary trading—when banks trade from their own accounts for their own profit rather than on behalf of clients—is seen as a major contributor to the economic crisis of 2009.)
Banks see both of these provisions as restrictions, which limits their ability to make a profit in what are already extraordinarily lean times for banks. These rules aren't really new; the Depression-era Glass-Steagall Act of 1933 maintained a firewall between these functions for 66 years, until it was struck down in 1999.
But banks see another problem with the Volcker Rule: The Federal Reserve recently told them that they have two years, until July, 2014, to become compliant with the Volcker Rule—even though important parts of the Volcker Rule haven't been written yet. Though technically already law, armies of politicians, lobbyists and activists are still waging battle for or against the Volcker Rule, to the extent that as of early April, 2012, its very future seemed in doubt.
And then came the scandal. In early May, 2012 J.P.Morgan announced it had lost possibly as much as $2 billion in a bad credit default swap bet. The scandal certainly gave plenty of ammunition to those who championed the Dodd-Frank Act and the Volcker Rule. While it is far from clear what form it will take, the reality is the Volcker Rule is now unlikely to go away.
Consulting firms, with their expertise in shepherding financial institutions through fundamental and revolutionary organizational change hold the keys to the solutions for besieged banks, from back office operations to redesigning product lines and better understanding customer needs, and harnessing the technology to tie all of this together. There is a lot for consulting firms to do, and indeed, the banking sector carried many firms through the immediate dark post-2009 years when most other clients were slashing discretionary budgets.
But even more important, with any significant change comes significant opportunity—not just for consultants, but for banks as well. While the process is painful, this is an opportunity for banks to reinvent themselves and their services, and to align themselves with a very different market environment.
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