The growing burden of domestic and international regulation is the biggest risk facing the world's banks in the coming year as new rules impose additional costs and create a false sense of security.

Regulations designed to reduce the likelihood of bank runs have not only increased in frequency, but have also come to share more and more common features irrespective of the country they apply to since the Federal Deposit Insurance Corporation was launched in USA in 1933 to insure the country's bank deposits. The first step to making regulation of the banking system international was taken in 1988 with the signing of the Basel Accord (Basel I) on minimum regulatory capital requirements. It has since been ratified by upwards of a hundred countries. As recently as June 2004, international coordination of banking regulation was further strengthened when the New Basel Accord (Basel II) was agreed to. This latest agreement revises the definition of minimum regulatory requirements of capital to better adjust real bank risk. Two new risk typesmarket and operations riskare brought in alongside traditional credit risk, and there is an emphasis on the importance of official and private supervision to reduce bank risk. The argument put forward by the central banks to justify these stringent controls on bank risk is that there is a need to strengthen supervisory mechanisms in line with increasingly competitive banking systems, one of the hallmarks of Western banking.

This enhanced regulatory pressure has led, for the first time ever, to concerns about regulation topping the annual poll elaborated by the Center for the Study of Financial Innovation (CSFI). According to the last poll, the growing burden of domestic and international regulation is the biggest risk facing the world's banks in the coming year as new rules impose additional costs and create a false sense of security.

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