The new regulatory landscape for banks is almost complete. Banks are now moving towards implementation of the new requirements, as well as compliance. In a new survey of the industry, banks are asked about their current efforts to implement rules in line with regulatory frameworks, as well as wider efforts to boost ROE, which has flagged in recent years.
The global financial crisis, and the resultant near complete collapse of the global financial system – saved by taxpayers – has seen new regulatory frameworks put in place to reduce risk to the financial system as a whole and shift some of the cost of risks to their shareholders, rather than taxpayers.
In a new report from EY, titled ‘Global Banking Outlook 2017: Uncertainty is no excuse for inaction’, the consultancy firm considers current trends within the wider banking industry, from the effect of new regulations to wider transformations of their operations.
2016 was a turbulent year, no less so for the financial services sector and their operations. The start of the year was shaped by falling commodity prices and concerns around slowing global growth, while the middle and later quarters saw disruption from geopolitical events, with EU referendum result in the UK and the US election outcome in the US.
Regulatory efforts too were being completed during 2016, and, while banks now know the wider implications of policies and frameworks, implementation and compliance remains a key factor for the near terms.
Over recent years, during which the banking system has been transforming, banks across most developed nations and Europe have tended to have returns on equity below the cost of equity. While in emerging nations ROE has fallen steadily, from almost 16% in 2012 to 12.5% last year. The US has operated slightly above the cost of equality, at around 11% ROE.
The challenging operating environment and new regulatory landscape mean that banks have mostly undergone strategic reviews to improve their operations in line with changing demands. The reviews have seen them make a range of sometimes difficult strategic decisions, from divesting out of non-core assets, to rationalising products and services.
To better understand the current trends shaping the strategic priorities of banks, the firm asked survey respondents to identify their top three priorities for reshaping their operations. The top listed is ‘simplifying/restructuring business operations or legal entities’, cited by 43% of respondents, followed by ‘developing partnerships with industry disruptors/Fintech companies’, noted by 39% of respondents (FinTech companies themselves too are keen to join forces), while ‘developing partnerships or joint ventures with other financial organisations’ comes in at 24% of respondents.
Differences are noted between strategically important banks and smaller players however. For systemically important banks (G-SIBs) developing partnerships with industry disruptors/FinTechs is more important than at non-G-IBs, at 68% and 40% respectively, while ‘simplifying/restructuring business operations or legal entities’ is considered a key priority for G-SIBs (64%) but generally not for non-G-SIBs (33%).
While the key regulatory frameworks are now well defined, banks will need to be proactive in implementing processes and other internal procedures to meet the respective criteria, aside from more general questions of remaining in compliance with the new rules. Other issues, particularly cyber security, too create risk conditions for businesses.
EY also asked banks to indicate their top three priorities for protecting their wider operations from risks. According to the results G-SIBs are the most concerned about enhancing their cybersecurity/data security’ (86%), followed by ‘complying with consumer regulation issues and/or dealing with remediation’ (81%), finally,’ managing the threat of financial crime’ takes third spot as picked by 78% of respondents.
Non-G-SIBs however, are more concerned about ‘managing reputational risks, including conduct and culture risks’ (68%), followed by ‘meeting capital, liquidity and leverage ratio requirements’ at 61%.
The low ROE at many banks has seen them seek ways to optimise their operations across a range of functions. G-SIBs tend to be focusing on ‘optimising customer channels’ (74%), ‘rationalising their physical footprint’ (63%) and ‘strategic efficiency and cost reduction’ (62%). Non-G-SIBs are more focused on ‘strategic efficiency and cost reduction’ (62%), ‘optimising customer channels’ (60%) and ‘leveraging new technologies efficiently’ (56%).
In terms of growth strategies, strategically significant banks are focused on ‘investing in customer-facing technology’ (62%), ‘recruiting and retaining key talent’ (59%) and ‘developing new products and services’ (35%). Non-G-SIBs are more focused on driving growth through the ‘recruitment and retaining of key talent’, 64%, ‘investing in new customer-facing technology’, 60%, and ‘developing new products’, 41%.
Karl Meekings, Lead Analyst at EY Global Banking & Capital Markets, remarks, “The key to success will be building a better ecosystem, not a bigger bank. Institutions must look for alternative ways to be organised and to operate; to have a much thinner spine than they have today.”