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When Doing “Less Badly” Isn’t Enough

Linking regulation with strategy in the post-Dodd-Frank era


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As financial institutions begin to implement the hundreds of provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and restructure their business models to comply with Basel III’s rigorous new capital standards, there is general consensus that almost every major financial institution will be challenged to effectively, and profitably, navigate through the next five years.

The avalanche of new regulation, combined with stricter enforcement, is challenging many financial institutions, both strategically and operationally. Many industry observers anticipate substantially lower returns on equity, as compliance costs and complexity increase and revenue streams contract.

Some see the largest institutions getting smaller, with a diminution of traditional businesses, such as trading or mortgage origination. Many observers agree that the new regulatory structure will reduce known systemic risks, yet some fear “a forest for the trees” mentality in which emerging threats go unnoticed as the industry seeks alternative sources of value.

Despite this bleak outlook, financial institutions that proactively confront the new regulatory environment, take proactive and resolute restructuring measures, and increase institutional transparency, may not only do “less badly” than the competition, but also may stand a chance to become winners in the long-term.

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