Market opinion | Bob McDowall
A broken model
Against the backdrop of regulation and volatile markets can the ‘one-stop shop’ universal banking model that has defined the industry for the past two decades survive? If so, who will be the main players and if not, what will take its place, asks Bob McDowall.
Universal banks offered an array of diversified financial services straddling the boundaries between consumer, commercial, and investment banking. The credit crunch in 2007/8 identified the interdependencies of credit, liquidity, and market risks in national and global financial systems that have had devastating effects when they were incorrectly assessed and inadequately managed for risk.
The credit crunch has exposed the weaknesses of the risk-based pricing models employed by some universal banks. The continuing credit crunch motivated a number of banks to forsake the universal banking models. Moreover the effects of the credit crunch combined and some high level governance and compliance failures have combined with pressures from legislators, regulators and shareholders to force universal banks to review their future business models and organisational structures. There are a number of significant challenges to the universal banking model:
Political pressures Politicians are in the driving seat in terms of steering the future agendas of the banking industry because tax payers have bailed out both banks and the banking system. Through support measures such as quantitative easing and increased taxes, savers, investors and taxpayers sense they have been disadvantaged by governments’ support measures to banks. Those measures have not resulted in banks re-engendering financial and economic growth. Politicians have the support of the electorate and the taxpayers in setting the agendas for the banks.
Legislative pressures
The political agendas for banks is reflected in a range of legislation covering matters as diverse as corporate governance, remuneration, more extensive financial disclosure and reporting, banking and systemic risk reduction. The legislative emphasis and priorities may differ in each jurisdiction but the legislation does reflect the Political demands for increased control and oversight of the sector.
28 Best Execution | Autumn 2012
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