Three years after the nadir of the banking crisis of 2008, the business of banking is undergoing massive change as governments and regulators strive to return stability to the banking system and avoid the future provision of taxpayer support to failing banks.
The multiple issues raised by the crisis are converging into one core and very fundamental question: what will be the future shape of the banking business in the developed world? Faced with a raft of untested new initiatives, uncertainty over the direction and effectiveness of bank regulation, a potentially very uneven global playing field, the possibility of drastic restructuring, and the prospect of much reduced profit levels, banking is facing a very challenging future. Add to the mix the impact of this 'new normal' of profitability on investor sentiment with its increasing appetite for risk, and the need to nevertheless operate in a political climate of public anger and retribution, and you have a unique set of conflicts that mean that banking is facing a perfect storm of uncertainty and threat.
But one thing is certain: bankers, investors and others need to plan now for the future, and key strategic decisions to ensure a sustainable future have to be made. Risk, Regulation and Profitability: Reconciling Banking's Key Strategic Challenges defines and analyses the core issues, balances and weighs conflicting views, and assesses likely impacts and outcomes to provide unique and insightful strategic input in troubled times.
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Key strategic issues addressed by Risk, Regulation and Profitability: Reconciling Banking's Key Strategic Challenges include:
• Corporate governance: To what extent can the traditional elements of corporate governance, in particular boards of directors, play a role in mitigating future threats to banking stability? What has been the actual record of such governance in the recent crisis? Has banking become too complex and fast moving for these individuals?
• New supervisory and regulatory measures: How likely are such measures such as the new Basel III, coupled with national legislation such as Dodd-Frank in the US and the creation of new regional entities in the EU, to significantly improve the identification and resolution of individual bank and systemic problems?
• Strategic measures being taken or considered by bank management to reduce risk: For example, what might be the future profile of investment banking and other high-risk businesses in the light of the possible application of the Volcker rule and similar measures to separate them from those supported by taxpayers?
• The outlook for reconciling loss mitigation and achieving satisfactory investor returns: How confident is the industry regarding the future of risk mitigation, and what are the key variables in this effort? What are the major gaps or issues to be addressed in the loss mitigation effort? How likely is a satisfactory resolution of the investor/regulatory dialogue at a return on investment acceptable to both sides?
• Case studies of success in bank risk management: While considerable attention has been paid to failures in bank risk management, a number of banks have demonstrated sustained success in reconciling the regulatory and public interest in banking safety with investors’ need for earnings growth and satisfactory return on capital. The report examines in detail such success stories across a number of business models and geographies as well as the lessons to be drawn from them.
The report provides a balanced, composite view of the considerations involved in this strategic planning. In a rapidly evolving process of global re-regulation, it assesses the impact of what has been agreed, what is still to be agreed, and provides an indication of the likely future outcomes.
The focus of this report
New supervisory and regulatory measures
Strategic measures to reduce risk
Case studies of success in bank risk management
Views on the outlook for re-regulation
CHAPTER 1: THE CORE ISSUES ADDRESSED BY RE-REGULATION
1.1 More – and ‘better’ – capital
1.2 The central importance of government support to failing banks
1.3 Creating an appropriate resolution regime to avoid taxpayer funding
1.4 Too Big To Fail
1.5 The issue of bank funding
1.6 A level bank playing field: super-equivalence and other global regulatory issues
CHAPTER 2: THE EFFECTIVENESS OF CORPORATE GOVERNANCE IN BANKING
2.1 The purpose of corporate governance
2.2 The effectiveness of governance in practice
2.3 Possible means of improving corporate governance
2.4 Summary of corporate governance
CHAPTER 3: GLOBAL RE-REGULATION: A WORK IN PROGRESS
3.1 Global measures: capital adequacy and liquidity
3.1.1 Capital adequacy
3.2 National measures: resolution regimes
3.2.1 Resolution regimes: the ring-fencing solution
3.3 Summary of global re-regulatory measures
CHAPTER 4: STRATEGIC RESPONSES TO DATE BY THE BANKS
4.1 Macro developments across the banking sector
4.2 The transformation of the investment banking business
4.3 Changes in retail banking
4.4 The role of banks versus non-banks
4.5 Summary of strategic responses by the banks
Chapter 5: SUCCESS STORIES IN RECONCILING INVESTOR EXPECTATIONS AND BANKING SAFETY
5.2 BNP Paribas
5.2.1 Business model
5.2.2 Risk management
5.2.3 Strategy evaluation
5.3 JPMorgan Chase
5.3.1 Business model
5.3.2 Risk management
5.3.3 Strategy evaluation
5.4 Banco Santander
5.4.1 Business model
5.4.2 Risk management
5.4.3 Strategy evaluation
5.5 Standard Chartered Bank
5.5.1 Business model
5.5.2 Risk management
5.5.3 Strategy evaluation
5.6 Svenska Handelsbanken (SHB)
5.6.1 Business model
5.6.2 Risk management
5.6.3 Strategy evaluation
5.7 Toronto Dominion Bank
5.7.1 Business model
5.7.2 Risk management
5.7.3 Strategy evaluation
5.8 Wells Fargo
5.8.1 Business model
5.8.2 Risk management
5.8.3 Strategy evaluation
CHAPTER 6: THE LIKELY EFFECTIVENESS OF THE NEW REGULATORY MEASURES
6.1 The value of more capital and new liquidity rules
6.2 The issue of regulatory uncertainty
6.3 Does re-regulation go too far?
6.4 Focus on adverse consequences
6.5 The new regulations don’t solve the basic problems
6.6 Summary of effectiveness of the new regulations
CHAPTER 7: OUTLOOK FOR THE FUTURE
7.1 It is too early in the re-regulation process to make many sound observations
7.2 The trend toward basic retail and commercial banking
7.3 Banking will lose its share of the overall financial sector to non-banks active in risk-taking
7.4 The ideal of a level regulatory playing field in banking is unrealistic
7.5 Differentiation of strategy and returns will be a feature of the new banking environment
7.6 Views for the future of banking
CHAPTER 8: CONCLUSIONS
8.1 Increasing the effectiveness of corporate governance
8.2 The ‘new normal’ profitability of banking and its consequences for bank investors and bank strategies
8.3 Lessons from the case studies
8.4 The outcome of efforts to restructure banking
8.5 Effective supervision: the missing link
LIST OF FIGURES
Figure 1.1: The evolution of core capital
Figure 1.2: Comparative default/failure rates, 1990–2009
Figure 1.3: The three pillars of banking wisdom
Figure 1.4: Growth in banking system assets relative to GDP, 1990 to date
Figure 1.5: Funding: European bank senior bonds vs. non-financial corporates, 2005 to date
Figure 3.1: Net stable funding ratio
Figure 3.2: Net stable funding ratio by region (%)
Figure 3.3: Ring-fencing – in the regulators dreams, and in reality
Figure 5.1: BNP Paribas geographic and business profile
Figure 5.2: JPMorgan 2010 net income against performance targets
Figure 5.3: Breakdown of Santander profits by geographic market
Figure 5.4: Standard Chartered’s earnings growth, 2001–10
Figure 5.5: SHB’s annual growth in equity and dividends
Figure 5.6: TD Bank’s superior return on risk-weighted assets
Figure 5.7: Wells Fargo Tier 1 common equity ratio
Figure 8.1: Projected ROEs in European banking
Arrow Financial Corporation
Barclays Bank Espana
BlackRock Investment Management
Boston Consulting Group
European Banking Authority
Financial Services Authority
Freeman & Co.
Keefe, Bruyette and Woods
Loughborough University (Professor David Llewellyn)
Promontory Financial Group
Risk and Regulation Consulting Ltd
State Street Bank
University of North Wales (Professor Philip Molyneux)
“Much has been written about the causes of the financial and banking crises. In his new report ‘The Future of Banking: Reconciling Risk, Profitability and the Public Interest’ Steve Davis analyses some of the less frequently cited causes such as:deficient bank governance, regulatory shortcomings and the drive for unrealistic profitability. He uses these same factors to offer a view – as only he can and not always very comforting! – about the future and how bank managements, regulators and investors will need to respond”. Sir Win Bischoff, Chairman, Lloyds Banking Group
"An excellent, comprehensive, and highly readable report. Steven Davis is an accomplished and internationally renowned analyst of bank trends bringing to the task a wealth of experience both as a banker and banking consultant. Davis considers the key dimensions of bank strategy, corporate governance, the evolving regulatory and supervisory regime, and risk management strategies, and offers a wealth of valuable insights. The analysis is powerfully informed by a series of powerful case studies of banks which have been successful in risk management and strategy rather than, as with most previous studies, on what went wrong. This timely report gives an in-depth analysis of banks that have achieved success in their models over an extended period. In the process, the author considers the key issue of how to reconcile loss mitigating strategies whilst at the same time achieving satisfactory investor returns. The penetrating discussion is also greatly informed by a series of structured interviews with bankers, analysts and supervisors.
This report is a tour de force and the analysis that Davis presents will be of real value to bankers, supervisors, bank analysts and academic scholars. It is a must-read." Professor David T Llewellyn,oughborough University, and Vienna University of Economics and Business
.“Drawing on insight from senior industry managers, this report offers a compelling and comprehensive view of the post-crisis retail environment” Roberto Nicastro, global retail head, UniCredit
"A fascinating analysis - offers valuable insights and a thorough overview of current issues."
Yves Robert-Charrue, Member of the Executive Board, Head Investment Solutions Group, Bank Julius Baer & Co Ltd.
Steven I Davis has spent his career in the banking and financial services sector as a senior executive, strategy consultant, author, analyst and teacher. He is a graduate (magna cum laude) of Amherst College and of the Harvard Business School.
His 20-year career in international banking commenced at JPMorgan, where he managed a Paris-based research and M & A unit. For Bankers Trust Company, he ran a venture capital subsidiary in New York and later the bank’s European businesses from a London headquarters. Subsequently he set up and managed for six years the London-based merchant banking subsidiary of First International Bancshares of Dallas, Texas.
Since establishing Davis International Banking Consultants (DIBC) in 1980, he has managed several hundred strategy assignments for commercial and investment banks, global fund managers, insurers and other financial institutions. In 1993, he headed a DIBC team which advised the Norwegian Ministry of Finance on the restructuring of the country’s banking sector during the Nordic banking crisis. In addition, he and his colleagues have prepared over 60 research reports on the financial sector for publication by investment banks and other clients.
Mr. Davis is also the author of 14 books and reports published on best practice in the financial services sector.