Lehman Brothers was the US’ fourth biggest investment bank and was devastatingly impacted by the subprime-induced financial crisis that swept through the global financial markets like wildfire and irrevocably launched the world’s worst economic crisis since the Great Depression of the 1930s. 

From a financial services point of view, the result of this was a raft of reforms and new regulations for the financial sector and banks in particular (which is still ongoing). An article in the Financial Times on 31 August 2018 stated, “A decade on, there seems to be widespread faith that many of the structural problems that facilitated the crisis have been fixed.”

It is without a doubt correct that the structural problems that enabled the subprime debt crisis in the US to evolve into a global financial crisis needed to be fixed, and under no circumstances was it okay that anyone should have lost their home, savings and livelihood as a result of decisions they were not even aware of, let alone had any say in, but have all the regulations that have emerged since then actually served their purpose?

For Serge de Cillia, CEO of the Luxembourg Bankers’ Association (ABBL), it is all about consequences, intended or not. The fact that, in many cases industry input has not been, and indeed is often still not, sought prior to a new piece of regulation getting to the transposition stage is a serious problem.

“Politicians need to be seen to be taking action, and this is absolutely correct. However, without industry input they cannot always anticipate the consequences of their directives--and consequences there are, for banks and clients.”

Not only that, he added, “In Luxembourg, the legislation often comes late. PSD2 (Payment Services Directive) and Mifid (Markets in Financial Instruments Directive) II, for example. The transition period passed the deadline. This meant that, on the day they entered into force, the industry had no legal base to work with. We had to apply the conditions of the European directive and hope that they did not change too much when they became national law.”

This, de Cillia said, makes the entire process extremely costly and complex. If industry applies the terms of the directive and then, in fact, there are changes when the law is adopted, it could result in banks having to start the process again requiring additional investment. “Consultations with industry players are key as they can anticipate the consequences of any changes.”

Serge de Cillia was keen to point out that, “This also has implications for clients. We have to take the financial intelligence of clients into account and educate them as to why our services to them have changed or have become more complicated and costlier. Although client protection is the ultimate goal, many nevertheless resent the fact that we cannot offer them what we could before. The client often does not understand the new rules, especially with regards Mifid, GDPR (Global Data Protection Regulation) and AML (Anti Money Laundering). They see it all as so much bureaucracy and red tape.”

The FT article mentioned above also stated, “The world’s policymakers have introduced a slew of regulation to reduce banks’ leverage--the amount of borrowed money, as opposed to shareholder equity, that they use to underpin their lending. Rules on the levels of liquid funding banks must hold in reserve have toughened, too.” 

According to Luxembourg financial supervisory authority the CSSF, Luxembourg’s solvency ratio for 2017 was 25.9%. “This is very robust, Luxembourg is a good and safe place, but this costs money.” said de Cillia. 

“50% of Luxembourg banks have fewer than 100 staff, yet they must comply with the same rules as the big international banks. Proportionality linked to risk profile is needed to ensure these are not overwhelmed by the costs of compliance, which are in the region of €500 million per year, industry-wide in Luxembourg.”

He also noted that the industry, in all its parts, “pays 100% of the running costs of the CSSF, there is no contribution from the government. It is the same situation for the insurance regulator the CAA.”

It seems that it all comes down to an understanding of what banks do, how they add value. “Put simply, banks take client deposits and use them to finance the economy,” said de Cillia. So, if banks take deposits and first have to cover the costs of regulation, compliance and their own supervision, how much is left to invest in the running of the economy?

According to the CSSF, Luxembourg banks’ results for 2017 declined by 15.4%, largely due to the costs of compliance.