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It is no secret that financial intermediaries are still struggling to adapt their business models to the heightened regulatory expectations stemming from the 2008 credit crisis. Banks in the United States have invested heavily in compliance and risk functions to meet time-sensitive Dodd Frank and Basel III deliverables that have garnered much media attention over the past several years. The annual stress-testing requirements for the nation’s largest banks (comprehensive capital analysis and review, or CCAR) and the restriction of proprietary trading activities (Volcker Rule) have been particularly impactful.

Taken together, these and other regulations have been reducing banks’ margins. In some cases, the regulatory environment has even led financial institutions to suspend previously profitable activities, due to both increased compliance costs in the form of staff and reporting, and increased return hurdles from higher capital requirements. Banks have also been evolving independently of new regulations and have learned from previous mistakes in their pricing of credit risk, funding costs, margin requirements, and capital—look no further than the failures of Bear Stearns and Lehman Brothers in the United States.

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