Road Ahead for the Global Banks

Four years after the genesis of the global financial crisis, the global banking sector is still struggling to come to grips with the fact that regulators around the world have set out to fundamentally change the way banking operations are conducted. Here are few of the challenging fronts and how the road ahead for the global banks lies:

• Regulatory environment. In the wake of the financial crisis, numerous regulatory changes have been implemented or proposed, but the regulatory future remains unclear. Two scenarios envision a regulatory environment much like that in place today or likely under laws and rules in the pipeline. Two others imagine worlds in which regulations are much more onerous.
• Economic shift. BRICS nations such as China, India, Brazil, and other growth markets are likely to account for a larger share of the world’s economic activity, providing opportunities and challenges for banking. Two of the scenarios assume that the role of emerging markets will evolve at a relatively slow, incremental pace, while the other two assume that a shift in economic power will make this factor more significant in determining banks’ prospects over the next decade.

• Globalization. In many industries, companies now compete in a global market. While a global strategy can boost revenues, it can also put pressure on earnings and draw criticism from locals concerned about lost jobs and unfair competition. Two of the scenarios imagine worlds with an ever-growing degree of globalization and market integration. One envisions pockets of protectionism, and one anticipates a turn toward protectionism around the world.
• Type and degree of competition. Banks are facing new competitors, including institutions in emerging markets and nonbank companies such as utilities, retailers, and mobile services providers. One scenario anticipates limited impact from new competitors; one assumes non-traditional competitors will move into some of the most attractive market niches; another assumes such competition will be significant mainly in emerging markets; and one envisions a surge of competition from nontraditional banking providers around the world.
• Financial crises. Two crises have occurred in the past decade. Will these so-called black swan events be common in the future? One scenario anticipates no financial crises during the next 10 years; another envisions massive crises with worldwide impact; a third calls for smaller crises with limited impact; and the fourth envisions massive crises affecting mainly the developed world.
• Lender of last resort. Central banks have stepped in to shore up the financial system in several recent crises, most recently the credit crisis that began with the mortgage market and home-price collapse in the United States and the debt crisis in Europe. Two scenarios assume lenders of last resort will continue to provide safety nets, while two assume this source of back-up funding will no longer be available.
• Debt situation. Mushrooming government debt is a serious issue in the United States and in Europe, where in many cases governments have shouldered private sector—including bank—liabilities. Two scenarios assume this debt will be contained to manageable levels; a third envisions a moderate worsening of the situation; and the fourth assumes the situation will dramatically worsen.
• Securitization market. In the wake of the global financial crisis, production of private-label, mortgage-backed securities has all but ceased in the United States, leaving most of this market to government-sponsored entities. New regulations are designed to encourage more standardization of these and other asset-backed securities while driving trading from OTC markets to exchanges. Some experts expect this to make the securitization business less profitable. One scenario assumes the private securitization market will recover; a second assumes it will continue to be limited in scope; and the third and fourth assume it will find equilibrium somewhere in between.
• Retirement environment. Populations are aging in many developed countries, putting stress on government programs while also raising demand for retirement-oriented products and services. Two scenarios assume government-funded services for senior citizens will be financially stretched, but capable of delivering most of the services promised, while two scenarios assume many of these systems will collapse.
• Role of technology. Technological advancement is inevitable, but unpredictable. Advances in front- and back-office technology may make banking operations more efficient and improve real-time understanding of opportunities and risks. One scenario assumes advances in both front and back offices will be only incremental, while a second assumes significant advances will center on risk assessment and improving back-office operations. A third assumes technological advances will transform operations throughout the business, and the fourth assumes transformation will mainly take place in the front office.
• Customer empowerment and posture. The Internet has made it easier for consumers to shop around for financial services. It has improved price transparency, and provided easy dissemination of reviews and critiques of products and services by experts and other customers. At the same time, recent regulations are forcing credit card issuers, mortgage lenders, and other providers of financial services and products to disclose fees and contract terms more clearly. One scenario assumes a low-pressure environment for increased consumer power. Two assume the pressure will be high and that consumers will adopt an adversarial attitude toward financial providers. The fourth assumes consumers will gain power, but not feel adversarial when dealing with their banks.
• Credit protection rights. During the financial crisis, government bailouts tended to protect creditors’ rights, often making owners of bonds and debt-related securities whole while leaving equity holders with deep losses. Critics argue that in the future, creditors should share such losses. Two scenarios assume that creditors’ rights will be relatively low or diminished from current levels, and two assume they will be relatively high or as strong as or stronger than they are today.