Research suggests that in a world with multiple capital constraints, e.g., a leverage ratio and a risk-based capital, banks face incentives to do the same thing rather than 7 2/5  BIS central bankers' speeches  specializing in areas where they each have a natural competitive advantage.7 This type of academic work provides a conceptual framework for understanding how optimizing behavior against multiple constraints might lead banks to pursue similar strategies and become more homogenous over time. Interest Rates A second dominant theme over the post-crisis period has been unconventional monetary policy, both in the U.S. and around the world, which has direct implications for the profitability and returns of U.S. commercial banks. The low rate environment experienced through 2015, for example, constrained bank earnings, particularly net interest income earned through traditional banking activities over this period. More recently, current and expected future returns on equity for large banks have improved, in part reflecting higher interest rates and net interest margins, as well as other factors such as lower tax rates and expectations for a stronger economy. Despite recent improvements, earnings pressures over most of the post-crisis period have pushed banks to reassess business strategies. For example, some banks attempted to enhance returns by building capacity and reach in new businesses; some looked to benefit from scale and scope activities by leveraging existing infrastructure, technology, and processes to offer a broader set of services at lower cost; some looked to reduce risk through greater diversification, and others pulled back from activities outside of their core focus.

Similarly, after the BCCI and Bearings crisis, the Bank of England introduced a series of financial regulations and also handed over its supervisory functions of  BIS Review 6/2007  1  financial institutions to the Financial Services Authority set up in 1998, with the primary objective of regulating financial markets in a meaningful manner. How has Sri Lanka fared? Sri Lanka’s financial sector is not insulated completely from global changes and their impacts. The financial authorities in Sri Lanka also faced the challenge of maintaining the overall financial system stability while trying to ensure that financial markets and intermediaries operate prudently and competitively. So they brought in necessary regulations. Over the last few decades, Sri Lanka also reduced the level of statutory pre-emptions, dismantled the complex structure of administered interest rates, laid down capital adequacy requirements, introduced prudential norms and liberalized entry norms for domestic and foreign banks. Most of these measures have the backing of specific legislation, under which the Central Bank has issued financial regulations. So, financial regulations are not a one-way street to tighten conditions but also to open up and promote competitiveness. Financial regulations are like traffic lights which stop financial intermediaries from going at the same speed in terms of mobilizing funds, borrowing, lending, introducing innovative products, taking risks and engaging in speculative activities. When they have to stop at the traffic lights, financial intermediaries not only in Sri Lanka but also elsewhere, complain that they are over-regulated.