As a result many historical strategic assumptions are no longer valid – the rules of the game have changed.
In Evolving Banking Regulation- Part Two we examine how business models are changing. There are four key dimensions to this change:
Product, customer propositions and pricing;
Balance sheet size and composition, and capital;
Legal structure, across types of business and across jurisdictions; and
Operational structure, including governance, management, organizational structure, risk management and compliance, distribution channels, payment and settlement arrangements, trade and other transaction booking, and the provision of services to support critical economic functions.
Changes in bank structure are taking many forms; with the main focus being on improving capital positions, reducing balance sheets and managing risk exposures, as well as the legal structure.
Despite these changes many Banks continue to see very low returns on assets and returns on equity and rising cost to income ratios. Many banks are struggling to cover their cost of capital, even as regulation increases the required quantum and quality of capital.
Many banks therefore are developing and implementing new business strategies. This is a massive challenge and banks need to reconsider their strategic direction, their target markets and locations, their pricing of products of services, and their ability to reduce costs such that they emerge with a viable and sustainable business model.
It is not clear that all banks will survive this process, and there are emerging signs of both market and supervisory pressures to clear out some over-capacity in the banking sector; a shift that would have significant implications for customers of banks.
Future chapters will follow during the year, focusing on conduct and culture, governance, data, market infrastructure and recovery and resolution planning.