Navigating the Regulatory Ebb: How Banks Can Thrive Amid Uncertainty

Uncertainty. Ambiguity. Volatility. We are running out of terms to describe our economic conditions. It’s safe to say this new phase of uncertainty is causing disquiet and caution. Regulatory agencies are trimming workforces (or being forced to). New rules are being delayed, like the US Treasury clearing rule, some rules are being reshaped like Basel III Endgame, and some proposals may die on the vine, like the SEC’s predictive data analytics proposal to govern the use of artificial intelligence. 

The general tone in the first 100 days of this US administration indicates that there will be less onerous application of the rules. But does this potential for less scrutiny really mean tailwinds for investment banks, prime brokers, and other sell-siders? Further, how will the headwinds of volatility and new trade policy affect sell-siders' strategies and risk resilience?

2020s: A regulatory supercycle?

Doing business in the US means institutions must be agile as new administrations bring in new ideas about oversight of our financial systems. Historically, financial regulatory changes have gone through "ebbs and flows," including a few door-to-door renovations of the US financial systems, in the 1930s, 1970-80s, and 2007-2012. These reversals of fortune followed major disruptive economic events. The 2020 pandemic gave us a new kind of disruptive event that put the pedal to the metal on digitization of capital markets. The Gensler-led SEC pushed hard on setting sensible guardrails for a newly digitally transformed financial system, in what some referred to as a US banking regulatory supercycle.

Now, the US is in an oversight ebb due to current policymaking. The majority-led House Committee on Financial Services delivered an unequivocal message on March 31: “The SEC should withdraw the following final and proposed rules...” beginning with the cybersecurity risk rule on down to guidance on Open-End Fund Liquidity Risk and Reporting of Securities Loans. The Managed Funds Association joined the fray asking for delaying mandates for Treasury trade clearing and reducing disclosure requirements for private funds. Speaking to the American Bankers Association, US Treasury Secretary Scott Bessent appealed to community bankers’ demand for regulations tailored to their size and risk profile with a promise to “ensure that Main Street matters more in bank regulation.”

The severity of the trade policy changes and regulatory retrenchment may catalyze new business models for US market participants. On April 7, Goldman Sachs raised its estimated chances of a recession by 10 points, to 45%. If that happens, there is no precedent in our history. Jihad Dagher of the IMF wrote, “The interplay between politics and financial policy over these cycles deserves further attention. History suggests that politics can be the undoing of macro-prudential regulations.” Sell-side institutions are operating in a novel environment and should be prepared for anything. This starts with prioritizing data-driven risk management.

Pendulum swings to data-driven oversight

In this environment of less direct US regulatory supervision, agencies’ approach will become more data-dependent. Currently, regulators often have a physical presence inside large banks, engaging directly with compliance and other leaders. If regulators have fewer bodies on-site, institutions may likewise want fewer employees involved in this process.

Even with a less onerous application of rules and regulations, firms will need to provide data on what’s happening at their institution. Hundreds of regulatory reports still have to be filed on a daily, weekly, and monthly basis around transactions, exposures, leverage, etc. Does this new environment mean sell-siders can relax standards on compliance? No. Can they be less conscious about liquidity and risk management? Never.

See our earlier article for more on enabling advanced risk management techniques: Insight-Driven Treasury: Managing Capital and Liquidity.

Risk management for a new world order

Seizing the moment in late March, the big global banks collectively called for less supervision, lighter reporting requirements, and new capital rules. The current situation is an event of volatility and profound uncertainty that will potentially change sell-side business models, due to a reshuffling of international alliances. For 25 years, capital has flowed freely around the world. The pandemic supply chain crisis instigated a movement toward deglobalization. Now, a trade war may engineer a new isolationist world order that modifies the flow of capital and goods.

The markets are operating in an unpredictable atmosphere. As of now, banks are generally in good shape. But eventually, something is likely to happen to markets that will impact banks, every other business, and the entire economy, either a valuation driven, liquidity driven, or credit driven event. It will be a ringing bellwether moment that signals that things have been priced to reflect the new world order. We may not realize until months after the clanging starts.

Liquidity has become an issue already as large institutional investors unloaded illiquid private equity funds in “a race to find liquidity,” as reported by the Financial Times on April 6. On April 18, the Wall Street Journal reported on dealmaking disruption in private equity, one of the street’s “most consistent profit engines”. Banks’ primary concern has to be keeping their houses in order, and access to great data is a central prerequisite. Data is going to be the heartbeat of this risk management-first paradigm.

The premium on quality financial data has never been higher

Treasury desks that thrive in this inscrutable environment are the ones that understand their exposures and their opportunities enough to capitalize on volatility and fund their banks in the most efficient manner. If treasury is trying to pull information from closed data architectures and cannot do so until end-of-day, the bank is at a disadvantage. If you're working across multiple jurisdictions globally and you don't have easy access to that information, you're at a disadvantage. If you don't understand the rules that apply to your sources of capital, you cannot get the most efficient uses of capital. Sell-siders that don't have a data ecosystem that makes the most current and reliable data accessible are hamstrung.

Why modern data infrastructure is now mission-critical

We have said again and again that modern data infrastructure and centralized data management is essential during normal conditions to drive informed decision-making and enhance operational and treasury functions. During five- and six-Sigma events, a bank’s data becomes a mission critical bulwark against losses. When we say “data,” we are talking about everybody within an institution having access to accurate, timely, consistent data from which they can make informed decisions. Nobody at the treasury level, regulatory level, business unit level, or accounting should be denied immediate access to knowledge. Senior executives are making decisions and trying to understand risks and exposures that are critical to normal functioning.

Preparing for the regulatory flow tide to return

Disruption is here and sell-siders now do business in an intermediate period in which risk mitigation becomes more urgent than from where the next dollar of revenue comes. However, the capital markets will come out to the other side focused again on driving revenue. As Rahm Emanuel said, “You never want a serious crisis to go to waste.”

Institutions can navigate this transition by addressing core data challenges — disparate systems, incomplete datasets, and legacy infrastructure that limit agility. Brokers and banks that forge a connected, modern data ecosystem during the “regulatory ebb” will be the ones that avoid scrambling when the regulatory "flow tide" returns. Building a system with good data now will set firms up for revenue growth once the uncertainty subsides.