1.1 leaders of Ernst & Young’s Global
Banking and Capital Markets practice
and an array of Wharton faculty
members and other industry experts
1.1.1 scenario-planning exercise revealed five
overarching trends that will continue to
dominate the business of global banking
over the next decade
126.96.36.199 Regulation will be more onerous than in the past; Emerging markets will
account for a far larger share of global economic activity, presenting both
challenges and opportunities for cross-border banks traditionally based
in developed countries; Business conditions will continue to be more
volatile and unpredictable than in the years prior to the financial crisis;
Profit margins will be narrower than in the pre-crisis era andTechnology
will act as a double-edged sword.
188.8.131.52.1 Twelve Uncertainties
184.108.40.206.1.1 1. Regulatory environment. 2. Economic
shift. 3. Globalization. 4. Type and degree of
competition. 5. Financial crises. 6. Lender of
last resort. 7. Debt situation. 8. Securitization
market. 9. Retirement environment. 10. Role
of technology. 11. Customer empowerment
and posture. 12. Credit protection rights.
220.127.116.11.1.1.1 Four Scenarios
18.104.22.168.22.214.171.124 Business as Usual
126.96.36.199.188.8.131.52.1 An environment much like today’s, including
predictable changes such as current
regulations in the pipeline.
184.108.40.206.220.127.116.11 Financial Issues
18.104.22.168.22.214.171.124.1 A future with additional challenges, such
as a serious financial crisis and new
126.96.36.199.188.8.131.52 New Markets
184.108.40.206.220.127.116.11.1 A world beset with even greater
difficulties, such as a sovereign-debt
crisis. But also a situation that presents
new opportunities from widespread
growth in emerging markets.
18.104.22.168.22.214.171.124 Change, Change, Change
126.96.36.199.188.8.131.52.1 A setting characterized by extensive disruption and
opportunity, including financial crises, opportunities
in emerging countries, and competitive challenges
from nontraditional banking providers such as
utilities and retailers.
184.108.40.206.1.1.2 What should Global Banks Do Right Now?
220.127.116.11.18.104.22.168 1. Move into emerging markets.
2. Invest heavily in technology.
3. Develop a nimble culture.
22.214.171.124.1.1.3 Six critical issues
126.96.36.199.188.8.131.52 • Regulation • Capital and Returns
• Emerging Markets • Nonbank Competitors
• Technology • Focus on the Customer
2 Today’s Reality: Finding Growth
amid Business as Unusual
2.1 The Basel III proposals impose
different layers of capital
2.1.1 minimum of 4.5% of equity to
risk-weighted assets, plus 2.5% that can
serve as an additional buffer in some
184.108.40.206 his additional layer has the effect of
being mandatory, because banks that
fall below capital thresholds can face
2.2 Governance Challenges
2.2.1 the landscape is constantly changing as new regulations
are written and markets are rocked by volatility
2.2.2 Executives and board members will also have to deal with new requirements
aimed at smoothly resolving crises at individual firms
2.2.3 The high cost of data collection and analysis has long helped
drive consolidation among financial firms seeking cost
220.127.116.11 Meeting new regulatory demands will be
especially difficult as banks redesign their
product and service lines to meet a vastly
2.3 Repositioning Risk Management
2.3.1 major financial institutions took on too much
risk, often without understanding how much.
18.104.22.168 New regulations and pressure from these
stakeholders are forcing firms to make it clear that
risk management is a top priority.
2.4 How Level Is the Playing Field?
2.4.1 Because bank regulations have
always differed from jurisdiction to
jurisdiction, the playing field never
has been entirely level.
22.214.171.124 As regulations continue to evolve, it is not clear
whether global regulations will diverge or converge.
126.96.36.199.1 In the United States, the Volcker Rule is intended to restrict
188.8.131.52.2 European firms may be at a disadvantage because they
face tougher regulatory restrictions on compensation.
184.108.40.206.2.1 some firms could move their headquarters to
Asia, where growth opportunities may be more
prevalent and some regulations less onerous.
2.5 Technology Investments and Employee Training
2.5.1 global firms will have to make expensive
investments in information technology
220.127.116.11 Many banks that now need improved systems to better interact with
customers face funding issues because they recently have invested
heavily to upgrade back-office systems to meet regulators’ new
2.6 The Impact of Increased Regulatory Costs on Customers
2.6.1 Regulatory requirements are becoming more costly to meet while
profit margins are expected to remain narrow.
18.104.22.168 banks must decide what costs to pass on to customers
and whether high costs make it wise to exit certain lines
22.214.171.124.1 banks can pass higher costs on to customers will depend in
part on the level of competition,
126.96.36.199 banks will face additional capital requirements to offset risks
associated with complexly structured products.
188.8.131.52.1 Customer backlash has proven significant enough
for some of the larger banks to retreat from
campaigns to assess fees on debit cards.
2.7 Customer-driven and Bottom-line Approach
2.7.1 banking executives may see retail customers shifting assets
from large banks to smaller, regional firms or to brokerages
and mutual fund companies that offer banking services.
184.108.40.206 Global banks may need to think about redoubling
their efforts to serve customer needs.
220.127.116.11.1 banks need a high-resolution view of the revenue and profits
produced by each line of business as well as the risks they take
18.104.22.168.1.1 firms that focused on the bottom line tended to emphasize
the short term, investing heavily in lines of business such as
proprietary trading that offered significant short-term gains
22.214.171.124.1.2 for some banks, today’s environment may require
efforts to keep customers for the long term.
126.96.36.199.1.2.1 some of them may be more
188.8.131.52.1.2.2 Others will be more willing to compete on the basis of cost and the bottom line.
And they will attract the customers that are not that interested in special
treatment, but rather in the lowest possible fees or prices for their products.
2.8 Trust, Transparency, and Institutional Relationships
2.8.1 many institutional investors, regulators, and lawmakers
questioned the banks’ efforts in selling complex, structured
184.108.40.206 they will have to rebuild trust and provide
220.127.116.11.1 borrowers need a high level of trust before they will
take the plunge on such an innovative product
18.104.22.168.1.1 Convincing skeptical customers to try
the unfamiliar is especially challenging
if the product involves a long-term
commitment with high risk
2.9 How Do Banks Rebuild Trust in Emerging and
2.9.1 consumers in Western nations hold a poor
opinion of large financial institutions, which
they blame for causing the financial crisis.
22.214.171.124 the crisis has affected the reputation of banks everywhere,
126.96.36.199.1 the damage was so widespread, banks cannot simply
abandon markets where they are disliked
188.8.131.52.1.1 Surveys have shown that banks in the Asia-Pacific region suffered
less reputational damage than banks in the United States
184.108.40.206.1.1.1 the challenge is to keep customers satisfied
while requiring them to take on their share of
2.10 Lessons Learned from the Financial Crisis
2.10.1 Around the world, economic uncertainty continues to agitate markets.
220.127.116.11 Banks have moved away from risky products of the past like securitizations
18.104.22.168.1 as the push for higher yield comes, it will cause
organizations to build new complex products