RBC Dexia Investor Services: Bringing financial and theory into practice

Governments and regulators have seen a clear need to respond to the global financial crisis, but how such mechanisms will work in practice has yet to be fully explained

El aumento de la regulación como resultado de la crisis internacional es inevitable dentro del sector financiero, pero queda mucho por hacer para aclarar como afectarán las buenas intenciones del legislador a las operaciones del dí­a a dí­a, comenta Gonzalo Fernández Atela de RBC Dexia Investor Services.

Increased regulation may be inevitable within the financial services sector as a result of the global financial crisis, but much has to be done to clarify how regulators’ good intentions will actually affect businesses’ day-to-day operations, says Gonzalo Fernández Atela, Chief Administration Officer at RBC Dexia Investor Services “There has been a lot of comment about the need to ‘protect against systemic risk’ but what does this actually mean? How will it affect our everyday work? There is no information despite the constant references. These are big issues for finance lawyers.”

RBC Dexia is an asset management and banking deposit institution. Today it has around $2 trillion of assets under management and operates across four continents.

He questions whether for finance businesses, reform could mean another “super-regulator” (eg another Bank of Spain) but which simply deals with bigger numbers? “The US Treasury, for example, has revealed plans for more and closer regulation. It talks of banks that are too big to fail, but what does this mean in practice. What regulation will we have and to who will it extend – some banks have been able to capitalise on the crisis, including major Spanish banks, are they now too big?” Banks know that they may assume obligations to both return deposits and lend money for long periods of time, however they also realise that if they do borrow short-term and lend longterm this brings a new element into the equation: risk of not getting paid by the people to whom they have made loans and thus being unable to return money to depositors.


“The result is that Governments around the world have established various degrees of regulation, some places are tougher than others – for example Spain – as well as creating banks of last resort, Central Banks, which until now had been perceived as protection enough.”

The issue in recent years has been however that banks have lent using mortgage collateral, which they have then grouped as loans, sliced them and placed them with other clients, he notes. On the way many have found loopholes in the regulation that has allowed them to become highly leveraged, arguably too highly leveraged.

“A parallel issue, has been the growth of the international securities markets – the creation of a ‘shadow banking system’ of non-regulated securities markets and over the counter (OTC) markets which some estimates suggest may be ten times the size of the regulated markets,” he says.

In the face of the sub prime crisis or “second depression”, regulators have therefore faced difficult choices: should public money be spent to cover private losses.

Arguably no, but the scale of these private losses has been so large that they pose systemic risk – if people sought to withdraw all their funds because they thought a bank was likely to collapse, then it would inevitably bring on that collapse, but it might also cause the entire system to collapse.

The result, he notes, is that governments around the world have met and sought to agree on certain outline regulatory principles: to promote more robust supervision and regulation of financial firms, including agencies to identify emerging risk – in order to close the loopholes; to establish comprehensive supervision of OTC markets, with closely regulated clearing and settlement systems; and to encourage simplicity and transparency in banks’ policies in order to protect consumers. All of which is well-intentioned, he says.

“Governments are seeking protections for a scenario that the past year has shown can likely happen, this is the ‘too big to fail’ issue. The unanswered question however still is what tools are required to prevent this, what degree of international standards or enhanced co-operation, and still, how will they work in practice – how big is it ‘too big’?”

Gonzalo Fernández Atela is Chief Administration Officer at RBC Dexia Investor Services in Spain, established as a joint venture in 2006 by Royal Bank of Canada and Dexia.