TO ATONE for the gravest misdeeds, according to Catholic tradition, a sinner must spend seven years in purgatory. Bankers had hoped that, after seven years of penance for their part in the financial crisis, the end of wrenching overhauls forced by fierce new regulations might be nigh.

But to their dismay, the regulators’ zeal is undimmed. Far from giving banks respite, they are toughening up old rules and devising new ones, perhaps heralding a new wave of restructuring.



Take the vexed question of the level of capital banks should hold to guard against future losses.

Higher capital ratios, which force banks to fund their loans and investments more with equity and less with money borrowed from investors or depositors, are one of the main reasons returns have fallen since the crisis (see chart). Yet regulators are still tinkering. They have devised at least four new measures of the strength of banks’ balance-sheets since the crisis, including one due to be finalised by the G20, a club of the world’s biggest economies, in November. These all come on top of the higher capital standards included in the latest international agreement on banking regulation, known as Basel III.

One of the most contentious of the new tests is the leverage ratio, which will limit a bank’s loans and investments to a certain multiple of its capital, without taking into account how risky they are. Regulators in many jurisdictions have said they will adopt a maximum leverage ratio, but have not yet decided what the all-important multiple will be.

In many cases, national rules are stricter than those set in international agreements. Daniel Tarullo, a senior official at the Federal Reserve, which regulates American banks, startled the industry in early September when he suggested that the biggest ones would have to exceed another globally-agreed capital standard by perhaps as much as two percentage points.

Capital is not the only area in which regulation remains incomplete. Most novel, and least understood by senior bankers, are new rules about how their firms should be structured. Regulators want simpler set-ups, which they hope would make it easier to close or otherwise deal with banks that hit the buffers. Last month the Federal Deposit Insurance Corporation, another American regulator, rejected the “living wills” submitted by all 11 of the biggest banks.

In theory, failure to address the problem could lead to the forcible break-up of the recalcitrant titans. While that seems unlikely, mandatory changes to banks’ legal structures or yet-higher capital requirements may well be in store.

The European Union has for years been mulling an obligation for banks to “ring-fence”
different units to limit the fallout in case of trouble. Again, that may involve extra capital. The EU’s rules to cap bonuses, and British plans to “claw back” past payouts, are another headache. A new system for trading derivatives has hammered margins in a once-profitable niche.

Bankers reserve their most ardent complaints for fines, which have swollen from a trickle to an industry-shaking torrent. Regulators around the world will have squeezed $295 billion out of banks by 2016, according to Huw van Steenis of Morgan Stanley. Bank of America and JPMorgan Chase alone have already paid or provisioned $100 billion between them.

The burden has fallen most heavily on banks deemed “too big to fail” (or “systemically important” in regulator-speak). To bolster their capital to comply with new rules, many have retained profits or issued new shares, thus annoying existing shareholders. The likes of Citigroup, Barclays and HSBC, which combine thrusting investment banking with the sleepier retail sort, have been singled out for special regulatory torment by virtue of their size, complexity and funding arrangements.

Some investment-banking titans, including Morgan Stanley and UBS, are beginning to focus instead on asset managers, a business that worries regulators much less. Goldman Sachs, JPMorgan Chase and HSBC have not changed as much, but are run well enough to have made better-than-average returns.

A few big banks have simply hunkered down in the hope that the regulatory storm will soon pass over. Deutsche and Barclays are both negotiating potentially expensive settlements for misdeeds in America. They are both especially reliant on businesses such as bond-trading that will only thrive if volumes and interest rates rise markedly and regulators let the industry be.

Investors might wonder why they tolerate units that, in Barclays’ case, will deliver a 2.1% return on equity this year, by one estimate. That is well short of the group’s 11.5% cost of equity, the amount it theoretically pays shareholders.

In America, Citi is the big bank with the least cohesive strategy. Its bosses admit they are unsure of what the ultimate effect of the regulatory barrage will be, and have tweaked rather than revolutionised. Many analysts argue that its parts would be worth more separate than together.

A more gentle regulatory stance could yet emerge, for example if Republicans take over the Senate in elections in America in November. In the euro zone bank regulation will pass from national agencies to the European Central Bank, giving it more clout in global talks. It may relay arguments made by executives there that tighter global rules on bank capital are stymying Europe’s economy, which is far more dependent than America’s on bank lending.

The Bank of England this week begged American regulators to consult their counterparts abroad before imposing ruinous fines.

Yet most regulators seem to believe that big banks are a liability. A string of scandals, from JPMorgan’s $6.2 billion trading loss in 2012 to the fiddling of interest rates and currency markets, will have done little to reassure them. The fact that banks are allowing their corporate clients to lever themselves up to levels that would make even a pre-crisis banker blush adds to supervisors’ resolve to girdle the industry.