Regulatory oversight has intensified over the past few years forfinancial institutions around the world, and it's starting to havean impact on these institutions' business.

The Basel III framework will require banks to maintain a Tier 1capital reserve equivalent to 7 percent of the value of theirrisk-weighted assets, and to maintain liquid assets equivalent to30 days' worth of cash outflows. Solvency II places new capitalrequirements on insurance providers. In the United States, theDodd-Frank Act requires periodic stress testing for many financialservices providers, as well as placing tight restrictions onderivatives trading. At the same time, the European MarketInfrastructure Regulation (EMIR) and Markets in FinancialInstruments Directive (MiFID) are changing the regulatory landscapefor European financial markets.

As lawmakers and regulators continue to sort out the details ofthese and other rules, many banks have begun reconsidering theirrisk management and compliance processes. The actions they take mayresult in changes to the pricing of their products and/or services,as well as changes to the portfolio of products/services they offercustomers.

A recent survey by Deloitte of chief risk officers, or theirequivalent, in global financial services companies found that 87percent of these organizations are feeling significant impacts ofthe regulatory reforms in the major jurisdictions in which theyoperate. Nearly two-thirds are noticing an increase in the cost ofcompliance. More than half are holding higher levels of capital,and 37 percent are maintaining higher liquidity, to comply with newregulations. And 48 percent are adjusting their products linesand/or business activities. (See Figure 1.)

Survey respondents cite several factors as driving thesechanges. Almost three-quarters now meet with regulators morefrequently than they used to, and more than half have enhancedtheir IT infrastructure. Only 5 percent of respondents have made nochanges to the ways in which they manage regulatory concerns. (SeeFigure 2, below.)

Only time will tell how regulatory reforms in the financialservices sector will affect banking and insurance customers overthe long term. But it's likely that prices will rise and choiceswill decline, at least in certain financial services productlines.