It’s uncertainty that drives fear, and in this economy there seems to be a lot of both.

According to an Ernst & Young 2010 survey, which was released Tuesday, 72% of global banking executives reported that regulatory uncertainty was the biggest challenge around risk management faced by their organizations and 80% say costs to manage new regulations are going to rise.

As regulatory oversight becomes stricter, banks are preparing for the new rules to impact their business. The new regulations that are coming out of the G20, International Monetary Fund and Europe, as well as those set by local regulators, are forecasted to impose further restrictions on capital, liquidity, risk management and compensation practices.

Ernst & Young's survey indicated that 80% of banking executives plan to spend significantly more to manage increased regulatory requirements and strengthen risk governance. The survey, based on interviews with senior executives in global banking and capital markets institutions, was conducted from October through January by Broderick & Co., an independent market strategy firm. Thirty nine senior executives from 30 institutions globally were interviewed, including 10 in North America, 12 in Europe and eight in Asia.

“As banks get back to business, recovering and adapting to the new market environment requires navigating the triple threat of new regulatory requirements, rethinking risk strategies and grappling with rising costs, Diane Sinhuber, leader of Ernst & Young's Financial Services practice, said in a press release. “Right now, caution seems to be the sentiment among executives, who remain concerned about the recession's depth and pace of recovery. This makes planning and decision-making - both short- and long-term - extremely difficult.”

And costs will continue to rise over the next 18 months and into the future as executives increase the amount of time and number of systems dedicated to dealing with new regulations.

“Based on what I have heard from a lot of bankers from banks of all sizes, the word regulatory risk has been mentioned far more frequently than it has been in the past,” Wayne Abernathy, an executive vice president for financial institutions policy at the American Bankers Association, said in an interview Tuesday: “A lot of banker’s concerns, if you boil them all down, are around uncertainty. Bankers say they can operate under any rules if they know what they are. They can come up with a model to deal with economic risk, but they can’t come up with a model to deal with regulatory risk.”

Abernathy said bankers are seeing more rules and tools to deal with risk in the legislation, but they don’t see much that’s actually reducing risk. “Many bankers say the risks are actually increasing,” he said.

Executives have been busy trying to raise capital levels and ratios, rebalancing portfolios and reassessing market strategies to prepare for the changes. The good news is that the increased focus on risk is good for the industry.

“Slowly we're seeing organizations mobilize to identify and address deficiencies,” Sinhuber said. “The challenge, however, is that these efforts to stabilize and strengthen the industry, come at a cost."

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