PA study shows that banks that manage regulation effectively delivered 170% higher shareholder return over the past decade

29 May 2014

Banks that manage regulation effectively (relative to their peers) delivered 170% higher shareholder return over the last 10 years than those who didn’t, according to a study from PA Consulting Group. Despite this, many banks still see regulatory compliance as an unavoidable and unreasonable cost on their business. 

PA analysed the shareholder value delivered by eleven of the largest banks operating in the UK over the last economic cycle (10 years) and linked it to how effectively they managed regulation. PA’s analysis showed a 0.7 (out of 1) correlation between shareholder value and regulatory effectiveness.

Whilst most banks have had substantive regulatory challenges in recent years, there are still major differences in how banks perform in their management of regulation; those who spend a lot of management time and energy resisting regulation deliver lower value.

As well as analysing the impact of regulation management on the shareholder value of banks, PA analysed the impact it had across the life sciences and energy sectors. All three sectors shared a common finding that companies that embrace regulation tend to perform better than those that don’t.

Asesh Sarkar, financial services expert at PA Consulting Group, says: “Regulation is often cited as an unreasonable cost to banks and a reason for poor performance. PA’s analysis shows that, not only is this incorrect, but that those banks that manage regulation effectively deliver higher shareholder value.

“However, for many banks, understanding that compliance with the spirit and not just the letter of regulation will deliver shareholder value will require a fundamental shift in culture.” To achieve effective regulatory management and superior shareholder returns, banks must: 

• embed regulatory management in the overall business strategy

• adopt a proactive and positive approach to regulation from the top of the organisation down

• minimise enforcement action by actively engaging regulators.