This second part of the series looks at bank structure, and the search by many banks for a viable and sustainable future in a world where new regulatory, market and commercial pressures are driving business model change.
This report focuses on bank structure, and the search by many banks for a viable and sustainable future amidst increasing regulatory and commercial pressures. What bank models work in this new environment and how can banks factor in the higher costs of doing business, constraints on balance sheet composition, business activities, legal and operational structure; and supervisory intervention all at the same time. Banks face a variety of economic and commercial pressures, including the weak economic environment, low interest rates, market over-capacity, strong competition, technological change, low margins and high cost bases.
Some of the commercial and operational synergies on which many bank business models were based are being undermined by these pressures, especially at universal and cross-border banks. Many of their strategic assumptions are therefore out of date – the rules of the game have changed and the business model now needs to change accordingly.
Changes in bank structure have taken many forms, however, balance sheet restructuring has not affected the very low returns on assets and returns on equity of many European banks. Many banks are struggling to cover their cost of capital, even as regulation increases the required quantum and quality of capital. Many banks therefore need to develop and implement viable and sustainable business strategies. This is a massive challenge for these banks, particularly if they cannot rely on an eventual economic recovery to bring their RoE up to at least their cost of equity.
Banks need to reconsider their strategic direction, their target markets and locations, their pricing of products and services, and their ability to reduce costs. 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. The end result – as already seen in investment banking – could be a smaller number of larger banks, with implications for banking concentration and for the systemic importance of these larger banks.
All this will also have implications for the customers of banks. A repositioning and re-pricing of products and services by banks may benefit some customers, but overall the result is likely to be that products and risk management services will become more expensive and less readily available, for individuals consumers, for SMEs, for large corporates, and for infrastructure financing.