AFTER THE bank rescues in 2008 and 2009, bankers and traders braced themselves for a flood of new rules and regulations.

They were pleasantly surprised when most governments shied away from swift action in favour of careful study and talk of global co-operation.

As more than a year elapsed, the financial sector began to relax. Prominent institutions started to fight back against the proposals they hated most, including EU efforts to rein in hedge funds and banking regulators’ efforts to tighten capital rules.

Now that period of calm is over and the long-feared regulatory tsunami has arrived.

Consider the events of the past four days. Two EU bodies approved versions of the hedge fund directive that the industry calls unworkable. German regulators unnerved the markets with a partial ban on naked shortselling. The new UK government said it wanted to impose a bank tax and US lawmakers inched closer to passing the toughest financial reform Bill since the 1930s.

Nor is the flow of regulatory change likely to let up.

The Basel Committee on Banking Supervision is aiming to adopt new capital and liquidity rules by the end of the year, the EU is crafting new rules for derivatives, and global banking taxes are likely to be on the agenda when the Group of 20 nations meet next month and in November, even if the politicians still have not agreed whether to tax bank balance sheets or transactions.

The German move on shortselling has especially spooked investors because they fear it is just the first of a rash of uncoordinated interventions aimed more at domestic politics than at fixing the financial system.

The sector’s ability to influence the debate seems to grow weaker as pressure builds on politicians.

The US financial services Bill being shepherded by US senator Chris Dodd has only become tougher as it moves through the amendment process.

A much-debated section that would force banks to spin out their swaps desks has stayed in, despite repeated promises that it would be diluted or taken out.

The debate over the EU directive on alternative investment fund managers has also gone badly for hedge funds and private equity firms in the year since the first draft was unveiled.

Later versions added restrictions on pay and new powers to a planned pan-European regulator. – (Copyright The Financial Times Limited 2010)