TowerGroup Urges Caution re: Financial Services Regulation

“Times are changing fast and excessive controls from central governments may spread chaos,” said Guillermo Kopp, executive director and global research fellow at TowerGroup, who co-authored the report. “Despite bouts of protectionism, growing interconnectivity and global awareness will be the drivers of innovation and structural change.”

The concerted effort by central banks to inject liquidity into the global banking system has been thwarted by the banks’ own governments. Each government has acted independently to stabilize its banking system, recapitalize its banks, and stimulate supply and access to credit domestically. However, these measures can have unintended consequences by triggering counterprotectionist responses by other governments, often with populist support.

The threat of protectionism will exist throughout 2009 and 2010, posing risks to the international competitiveness of financial institutions and the technology vendors and service suppliers that serve them, as well as to global economic recovery itself.

“Central governments need to clearly define their role, and define the regulatory changes that need to take place to remove market confusion and uncertainty,” said Rodney Nelsestuen, Research Director, Financial Strategies and IT Investments at TowerGroup and co-author of the report. “This in turn will help restore overall confidence in the financial services industry.”

Additional highlights of the research include:

• Under a narrowed definition of the financial marketplace, the number and variety of products and services available will decline, leaving the industry powerless to foster new economic wealth around the globe.
• Restrictions to the global flow of capital and access to financial services would severely undermine the role of the industry to help restore business momentum, sustain growth, and crystallize synergies between developed and emerging economies.
• Protectionist constrictions on sourcing strategies could doom financial services institutions to higher costs and stagnant operational performance.
• Failure by the Group of 20 (G-20) to build a global regulatory framework through generally agreed principles could cause each government to adopt protectionist measures as firewalls to counter the financial market's exposure and risk.
• Technology vendors and service suppliers could be victims and beneficiaries of financial protectionism, depending on the jurisdiction of their clients and the domicile of their businesses but with limited ability to manage political and business risks.

The TowerGroup Research Note, titled “Protectionism: How Good Intentions Could Spawn a Dangerous Reincarnation in Financial Services” may be purchased online at the TowerGroup Store.