Global Banking 2020

Global Banking: Looking Ahead to 2020
1. leaders of Ernst & Young’s Global Banking and Capital Markets practice and an array of Wharton faculty members and other industry experts
  1. scenario-planning exercise revealed five overarching trends that will continue to dominate the business of global banking over the next decade
    1. 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.
      1. Twelve Uncertainties
        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.
        Four Scenarios
        Business as Usual
        An environment much like today’s, including predictable changes such as current regulations in the pipeline.
        Financial Issues
        A future with additional challenges, such as a serious financial crisis and new regulatory challenges.
        New Markets
        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.
        Change, Change, Change
        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.
        What should Global Banks Do Right Now?
        1. Move into emerging markets. 2. Invest heavily in technology. 3. Develop a nimble culture.
        Six critical issues
        • Regulation • Capital and Returns • Emerging Markets • Nonbank Competitors • Technology • Focus on the Customer
Today’s Reality: Finding Growth amid Business as Unusual
1. The Basel III proposals impose different layers of capital requirements
  1. minimum of 4.5% of equity to risk-weighted assets, plus 2.5% that can serve as an additional buffer in some circumstances.
    1. his additional layer has the effect of being mandatory, because banks that fall below capital thresholds can face undesirable consequences.
2. Governance Challenges
  1. the landscape is constantly changing as new regulations are written and markets are rocked by volatility
  2. Executives and board members will also have to deal with new requirements aimed at smoothly resolving crises at individual firms
  3. The high cost of data collection and analysis has long helped drive consolidation among financial firms seeking cost efficiencies
    1. Meeting new regulatory demands will be especially difficult as banks redesign their product and service lines to meet a vastly changed market
3. Repositioning Risk Management
  1. major financial institutions took on too much risk, often without understanding how much.
    1. New regulations and pressure from these stakeholders are forcing firms to make it clear that risk management is a top priority.
4. How Level Is the Playing Field?
  1. Because bank regulations have always differed from jurisdiction to jurisdiction, the playing field never has been entirely level.
    1. As regulations continue to evolve, it is not clear whether global regulations will diverge or converge.
      1. In the United States, the Volcker Rule is intended to restrict proprietary trading
      2. European firms may be at a disadvantage because they face tougher regulatory restrictions on compensation.
        some firms could move their headquarters to Asia, where growth opportunities may be more prevalent and some regulations less onerous.
5. Technology Investments and Employee Training
  1. global firms will have to make expensive investments in information technology
    1. 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 demands
6. The Impact of Increased Regulatory Costs on Customers
  1. Regulatory requirements are becoming more costly to meet while profit margins are expected to remain narrow.
    1. banks must decide what costs to pass on to customers and whether high costs make it wise to exit certain lines of business.
      1. banks can pass higher costs on to customers will depend in part on the level of competition,
    2. banks will face additional capital requirements to offset risks associated with complexly structured products.
      1. Customer backlash has proven significant enough for some of the larger banks to retreat from campaigns to assess fees on debit cards.
7. Customer-driven and Bottom-line Approach
  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.
    1. Global banks may need to think about redoubling their efforts to serve customer needs.
      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
        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
        for some banks, today’s environment may require efforts to keep customers for the long term.
        some of them may be more customer-focused.
        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.
8. Trust, Transparency, and Institutional Relationships
  1. many institutional investors, regulators, and lawmakers questioned the banks’ efforts in selling complex, structured products
    1. they will have to rebuild trust and provide more transparency.
      1. borrowers need a high level of trust before they will take the plunge on such an innovative product
        Convincing skeptical customers to try the unfamiliar is especially challenging if the product involves a long-term commitment with high risk
9. How Do Banks Rebuild Trust in Emerging and Developed Markets?
  1. consumers in Western nations hold a poor opinion of large financial institutions, which they blame for causing the financial crisis.
    1. the crisis has affected the reputation of banks everywhere,
      1. the damage was so widespread, banks cannot simply abandon markets where they are disliked
        Surveys have shown that banks in the Asia-Pacific region suffered less reputational damage than banks in the United States
        the challenge is to keep customers satisfied while requiring them to take on their share of higher costs
10. Lessons Learned from the Financial Crisis
  1. Around the world, economic uncertainty continues to agitate markets.
    1. Banks have moved away from risky products of the past like securitizations
      1. as the push for higher yield comes, it will cause organizations to build new complex products
        will involve more risk

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