Behind the Scenes B
Prior to 2008-2009’s global recession, banking was in a sweet spot. The pursuit of growth by all means was the end goal, so – in the face of low interest rates – banks, fund managers and investors dipped into ever riskier assets to secure higher and higher returns, largely disregarding the corresponding risks. Irresponsible lending practices became increasingly common and chains of debt were created which, ultimately, exposed the shaky foundations of the banking system and the resultant inadequacy of the regulatory infrastructure.
In a series of articles aimed at understanding the drivers of the financial crisis, The Economist magazine put it this way: “Failures in finance were at the heart of the crash. But bankers weren’t the only people to blame. Central bankers and other regulators bear responsibility, too, for mishandling the crisis, failing to keep economic imbalances in check and failing to exercise proper oversight of financial institutions.”
The magazine came down heavily on the key players in the crisis: the banks. “The most obvious [cause of the crisis] is the financiers themselves – especially the irrationally exuberant Anglo-Saxon sort, who claimed to have found a way to banish risk when, in fact, they’d simply lost track of it.”
Years of low inflation and stable growth had
“fostered complacency and risk-taking”, said The Economist. But, post-2008, these same institutions are now facing a different world, one of low interest margins, low growth, demanding regulation and wary investors. It is a different ball game for banking and one that requires a different approach, believes Niels Peder Nielsen, management consulting firm Bain & Company’s Senior Partner in its Nordic office.
“The time is ripe for change,” believes Nielsen. “Low interest margins, low growth and a set of other macro-factors contribute to the need for banks to make quite focused choices – deliberate choices – about where they want to compete.”
Back to the drawing board
The solution, believes Nielsen, is that banking must relearn strategy. “Banks have, through the late ’90s and early 2000s, really pursued a path of indiscriminate growth. As a result of the crisis, many banks began to yield pretty blunt strategy tools like cost-cutting [and] radical portfolio restructuring. As a result, returns in
author Charles Kindleberger, Grossman notes that between 1800 and 1990, there was a financial crisis roughly every seven years – 26 in total. The question facing bankers and investors today is how the current system will respond to this latest reshaping exercise.
Bain & Company believes the appropriate response is for banks to set out a clear ambition for their organisations and determine what role they want to play in customers’ and employees’ lives, what risk appetite they want to deploy and where – from a portfolio perspective – they’re likely to win in the future. “Many things are happening in many banking markets: disintermediation, new competitors coming in and eating lazy profit pools. You now need to make choices about which geographies, which product lines and what type of customers you want to go after in the future,” says Nielsen. “What’s clear from our work is that banks are now at the point where they need to define which ground they choose to stake out and how they’re going to win in those markets.”
banking have dropped by almost one-third.” That said, those winning institutions that formulated a plan and found their way out of the crisis have been rewarded with higher returns than their competitors, says Nielsen. This has widened the gap between institutions, making it harder for the stragglers to catch up with the leaders in the field.
Yet opportunities still exist amid the shifting sands. As professor of economics Richard Grossman wrote in his 2010 book, Unsettled Account: The Evolution of Banking in the Industrialised World Since 1800 (Princeton University Press): “Crises can have profound effects on the structure of the banking system. First, crises typically lead to an immediate – and sometimes substantial – reduction in the number of banking institutions, as failed banks exit the system. Second, crises may lead to mergers, as banks that survive crises in a weakened state are absorbed by stronger firms. Third, crises frequently encourage governments to intervene in the banking sector by enacting stability-enhancing rules and regulations.”
Grossman’s research, which spans 200 years of banking history, suggests that today’s is by no means the last crisis that will push the industry towards change. Quoting economic historian and
“Many things are happening in many banking markets: disintermediation, new competitors coming in and eating lazy profit pools. You now need to make choices about which geographies, which product lines and what type of customers you want to go after in the future.”
What does this mean for consumers?
The key differentiator for winning organisations is a sharper focus on the consumer, something Donald Vangel, an advisor to the EY Financial Services Office in New York, welcomes. In a discussion with Knowledge@Wharton, the Wharton School’s business journal, Vangel hailed this as “an important element and, frankly, something of a shift”. He added: “Now, as the environment gets more uncertain, and as capital and liquidity requirements become more binding,
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