Banks — Their conflicting roles and regulatory evolution

Banks have a large role to play in society, to drive growth and be the fuel that drives the economy. Some of a banks’ key business priorities could seem conflicting when viewed at a distance. On one hand, they are expected to take risks: lend money to entrepreneurs/SMEs, contribute to the expansion plans of companies, enable people to buy things on loan, etc. In fact, Basel-3 had introduced a concept called Counter-Cyclical Capital Buffer (CCCB) wherein banks are required to set side aside a higher portion of their capital during good times when loans are growing rapidly so that credit can be extended during bad times when there is distress in the economy. On the other hand, they are expected to manage risk very well and protect shareholders' equity and depositors’ money: not take excessive risk on new types of ventures, be cautious on unsecuritized loans, etc.

Looking at another conflicting nuance. There is an impetus for banks to grow and diversify their asset base. This strengthens their balance sheet to weather economic cycles and gives them the ability to fund large billion-dollar infrastructure programs. Earlier there was the notion of ‘Too big to fail’ when one looked at big global banks and banking consolidation was considered good. After the 2008 financial crisis, this notion changed. A big bank is now considered to pose a systemic risk…