Events like COVID-19, the Ukraine War, and a spike in Geopolitical Tensions have significantly impacted the financial sector in recent years. Financial institutions now have to deal with problems including inflationary pressures, monetary policy normalization that is happening quickly, and increasing fragmentation.
Key factors influencing how banks manage shocks while maintaining stability are identified in the recently released Banking and Capital Markets Transformation Map. The COVID-19 epidemic marked the end of a period of relative stability for the financial industry, and further shocks—the start of the Ukraine War, supply chain disruptions, and a rise in geopolitical tensions—tested its resilience.
Low interest rates and easy access to credit, according to the World Economic Forum’s Global Risks Report 2023, are no longer available. With substantial implications for financial institutions, we have entered a new macroeconomic period that is defined by low growth, low investments, and low levels of collaboration.
The banking industry currently has to deal with pressures from inflation, a quick adjustment of monetary policy, and increasing fragmentation.
Banking issues have gotten worse
The year 2023 saw significant shifts in the financial sector. The three overarching factors that have supported this business in recent years—a technological revolution, the sustainability agenda, and geopolitical tension—have all escalated in ways that call for new commitments, wiser strategy, and increased agility.
The risk environment has expanded, increasing the number of scenarios that are feasible and requiring expenditures in resilience at the sacrifice of efficiency. The failure of Silicon Valley Bank and the compelled sale of Credit Suisse are only two recent dangers to financial stability that have caused regulatory agencies to review their current procedures.
The banking industry is facing the dual challenge of managing current shocks and short-term volatility while guaranteeing long-term stability and growth, and we’ve identified five significant themes that are affecting this process. Which are:
1) The panorama of financial risk
The era of accommodating monetary policies is past, and banks must now put their attention back on reliable financing sources and mending damaged trust-based relationships with depositors. In addition, regulatory processes will probably undergo some changes in response to the early 2023 banking turmoil.
There are doubts regarding the scale and complexity of business models, incentive structures, and decision-making, and there is argument that mandated ratios and resolution plans for large banks did not serve their intended purpose. Therefore, it is almost probable that the operating environment for banks and capital markets will involve higher capital requirements and supervisory monitoring.
Policies will probably be revised, and regulatory changes may widen the scope to cover fintech and non-bank financial organizations. Unavoidably, the industry will undergo change due to the anticipated regulatory reform as well as the still unstable geopolitical environment.
Banks pursued a convergent globalization model for many years, but the sector is now facing decoupling and a reduced margin for ideological neutrality. Global corporations may be forced to take sides in tech battles, cold wars, and at least one locally centered hot war.
This could make some established business models unprofitable and result in a new set of responsibilities for international, regional, and national lenders. Unfortunately, it appears that the industry is suffering from chronically high tension, which has an impact on both strategy and risk management.
2) Finance and sustainability
Environmental, social, and governance (ESG) practices and sustainability have come under increased scrutiny in recent years. Renewing the responsibilities that capital markets and banks play in igniting societal and environmental transformation is necessary.
With substantial anti-ESG backlash from influential sources on one side and accusations of greenwashing on the other, this argument has also taken on political and populist dimensions. This environment creates a decision point for banks.
Between those who approach sustainability as a surface exercise that is defensive and compliance-oriented and those who embed sustainability into their organizational purpose, identity, and strategy, there needs to be a clearer line drawn.
There is little tolerance for confusing messages or half-measures for those pursuing the latter. They will have to put much more effort into implementing and promoting ESG practices where they are most needed.
There are still a lot of related opportunities for the capital markets, such as carbon trading and green and blue bonds, as well as untapped potential for professionals in derivatives and securitization to create sustainability-related investment products that can attract funding from a variety of sources.
3) Accounting software
Startling automation advancements have shifted consumer behavior and undermined industry barriers throughout the Fourth Industrial Revolution. Multiple rounds of this occurred, giving banks little downtime in between periods of transition.
big portions of the banking front end are now self-driven via applications, while big portions of the back end are made up of cloud computing services from third parties. While others, like blockchain, tokenization, and smart contracts, continue to struggle to gain more practical relevance, new technologies such as quantum computing continue to emerge on the horizon.
The role of banks and conventional capital markets in intermediation may shift as a result of central bank digital currencies (CBDCs). However, the end of an era of almost cost-free funding marked a turning point for technological advancement.
The adoption of any technology should not begin with theoretical futurology but with concrete use cases intended to address particular problems. Given the probable involvement of state actors during times of geopolitical unrest, the risk of cyberattacks has also considerably increased.
Banks must strike a balance between efficiency and resilience; they must ensure effective defenses against cyber theft, even when it involves social engineering rather than merely technological flaws.
4) Business plans for banks
Global macro factors caused both established players in the market and recent entrants to have more varied business models.
Traditionally a top investment bank, US-based Goldman Sachs has scaled back on a costly, years-long foray into consumer banking; Swiss-based UBS has abandoned a proposed $1.4 billion acquisition of robo-adviser Wealthfront; US-based Citigroup has chosen to wind down its consumer banking presence in multiple markets, including China; and UK-based HSBC has abandoned a 40-year effort to penetrate the US domestic retail banking market.
Global banks have frequently chosen to sell their onshore businesses to local and regional players when repositioning. However, this gap in business models is expected to persist, not least because of rivalry with major internet companies that don’t adhere to the same regulatory standards.
5) A talent for money
Individual banks must employ more innovative methods for attracting, keeping, and developing people if they are to remain competitive in this difficult market. They must provide a clearer connection between their goal and their intended course of action.
For instance, the Organization for Economic Co-operation and Development identified banking and insurance as “jobs of the past” in Canada in a poll conducted in 2020. If banks are serious about forging closer ties with its talent, they must reframe their mission, taking into account both their environmental and social impact.
Banks will also need to provide more possibilities for learning and development as the industry competes more fiercely for the top talent that fintech and digital companies are also looking to recruit.
It’s challenging to strike this balance, particularly in a highly regulated sector like banking, but banks would be wise to prioritize communications and leadership abilities.