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Forensically evolving regulations

Apart from lots more networking, I attended three more sessions in this final half of the day.

One had to be Matteo Rizzi’s discussion of SWIFTcommunity.net of course. Matteo runs this community for SWIFT and was discussing progress one year on since the launch at SIBOS Boston last year. Apparently, the SWIFT site has around 125 communities running now, with the most popular being those that discuss SWIFT’s new services and products, those that talk about bank to corporate connectivity and those that allow techie geeks to share codes and thoughts with each other.

Now what would a techie geek share on a social networking site?

“Hey babe, I got this cool new wiki I’d like to plug and play with you”, or something like that I guess.

Then it was into another chat between Vocalink, First Data, Commerzbank, ANZ and the Clearing House about “do banks really need ACHs?”

As the chairman said, “I wonder if we should use the term ACHs in the plural or singular?”

Mind you, we’ve been through that debate in the SEPA area once already, and the EPC after four years realised that there would be more than one. So yes, a G-ACH (Global ACH) or PE-ACH (Pan-European ACH) is a fallacy – there will always be competition in this space.

What was more interesting was the question: are payments instruments converging? Are high and low value payments capable of being processed through the same clearing house? Could you process cards, m-payments, credits, debits, high and low value all through the same pipe?

The answer to that one has to be yes.

So why is that not happening.

I guess John Chaplin of First Data gave the best answer with the view that logically card processing firms should be the converged clearing operation, as they understand real-time payments and how to integrate clearing, authorisation, identification and verification all in real-time at the point of payment.

But the card firms cannot process each other’s card payments today, let alone stretching to other payments instruments, so they will not spread into a converged payments processing system.

Meanwhile, the current ACHs do not have the real-time competencies or capabilities, investment fund or cross-border and global ambitions, to try to compete with the card systems real-time services.

That’s why there is not a real-time payments processor today … unless you take Marion King’s point, from Vocalink, that due to the UK’s Faster Payment Program, Vocalink do now offer real-time payments processing for mobile, credit, debit and any other low-value payment you want to consider.

Nice one Marion … the challenge is now to build scale to take that regionally and then globally.

It was then on to another debate: “was the credit crisis predictable or a black swan”?

What surprised me with this one is that everyone asked me to tell them what a black swan was.

Surely, it’s obvious?

A black swan is just a white one with black feathers.

Nah, to be serious I was referring to Nassim Taleb’s book “The Black Swan” which, in light of the events of this year, says that no-one predicts that there will be a Black Swan until they see one. Then everyone rationalises that a Black Swan was obvious and clear.

20/20 hindsight is a wonderful thing.

My own view again is that the credit crisis was darned obvious, and folks were telling me about systemic risk in the markets back in 2004 – 2005. They saw the leveraged scale of operations of single stream investment banks and wondered whether they had hedged their risks effectively. They wondered whether the globally connected technologies of investment firms with highly complex derivatives products could be tracked effectively. And they wondered whether the counterparty risks involved would implode, just as Long Term Capital Management, Salamons and others had almost imploded the markets in the past.

But these naysayers were ignored or trampled upon as being doom merchants.

Times were good, profits were great and no-one wanted a whinging warbler saying, “you don’t wanna do that” over their shoulders.

Strangely enough, this is no different to any issues of boom and bust in financial markets in the past. The pro-cyclicality as it’s called.

Nothing has changed … but it will.

My own expectation is that “forensic regulation” will emerge.

Forensic regulation will pick over the bones of the carnage of this crisis and identify the key factors that contributed to such a scale of devastation, from risk models and rating agencies that failed, to corporate governance and counterparty dealings that were too opaque.

The result will not be new legislation or regulation, but evolutionary regulation.

The panel called this Basel Three, but I would rather call it Basel 2.1.

After all, in a world of Web 2.0 communities, we should be evolving regulations to plug the holes, not creating a whole new regime that means we throw out the investments made in our very recent implementations of Basel II, MiFID, the CRD and more.

Forensically evolving regulatory and supervisory structures.

That’s what we need.

Meanwhile, I think I could do with some supervisory structures for our activities this evening as I’ve seen so many examples of embarrassing late night activities at previous shows, that a little restraint will do no-one any harm.

Something that the future investment banking world should bear in mind.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Chris
    Given lack of convergence in incumbent retail payment systems, don’t the new/evolving e-money platforms represent the future for retail payment tools that readily adapt to customer needs/wants?
    As to “forensically evolving regulatory and supervisory structures”: while regulators should be flexible and use prescriptive regulation as a last resort, realistically, they must always lag well behind what’s actually happening in the markets. It’s the risk takers themselves who have to accept responsibility for understanding and managing their risks. Trouble is, those efforts too seem to have more lag than the risk takers realised. To survive, you clearly need to be able to learn and adapt faster and faster and faster…

  • Chris
    Given lack of convergence in incumbent retail payment systems, don’t the new/evolving e-money platforms represent the future for retail payment tools that readily adapt to customer needs/wants?
    As to “forensically evolving regulatory and supervisory structures”: while regulators should be flexible and use prescriptive regulation as a last resort, realistically, they must always lag well behind what’s actually happening in the markets. It’s the risk takers themselves who have to accept responsibility for understanding and managing their risks. Trouble is, those efforts too seem to have more lag than the risk takers realised. To survive, you clearly need to be able to learn and adapt faster and faster and faster…