Azerbaijan, Baku, March 13 / Trend /
Summarized and edited by Gunel Mammadova, Assurance Manager, Ernst & Young and
Turgay Teymurov, Assurance Partner, Ernst & Young
Global banks face a challenging future. Regulations are mounting. Competition from emerging markets and non-banking companies is getting stronger. The need to invest in cutting-edge information technology is growing. What's more, some traditional lines of business are shrinking even as funding costs rise and consumer trust in banks is plummeting. With all of these challenges, what strategies should executives at global banks use to succeed over the next decade?
To answer that question, Ernst & Young and Knowledge@Wharton undertook a year-long scenario-planning process. This study was a topic of Ernst & Young's first thought leadership in e-book format. The report called "Global Banking 2020: Foresight and Insights" looks at what banks should do now to prepare for the banking industry in the year 2020.
"The report is forward thinking both in its content and approach, as we're the only Big Four organization producing co-branded thought leadership with a leading business school," says E&Y's Global Banking and Capital Markets Leader Bill Schlich.
The undertaking brought together leaders from Ernst & Young's Global Banking & Capital Markets practice with faculty members from the Wharton School of the University of Pennsylvania, along with executives of large banks with global operations. Through a series of discussions led by Decision Strategies International, a firm specializing in scenario planning, the group developed views of four possible and widely varying futures ranging from, in the following order, relatively static to incredibly dynamic: Business as Usual, Financial Issues, New Markets, and Change, Change, Change.
Scenario one: Business as Usual
An environment much like today's, including predictable changes such as current regulations in the pipeline.
This scenario assumes that the future regulatory environment would be virtually unchanged from that of recent years because proposed mandates would be rolled back or watered down; that the shift in economic power and opportunity from developed to high-growth emerging countries would be modest; that there would not be significant competition from new sources such as nonbank firms; and that there would not be a strong turn toward protectionism.
Moreover, there would be no further financial crises, lenders of last resort would be available if needed, government and related private-sector debts and retirement systems would remain manageable, and the securitization market would recover.
There would be no dramatic technology-driven changes and little change in consumer empowerment. There would be fewer credit-protection rights than there are today.
Scenario Two: Financial Issues
A future with additional challenges, such as a serious financial crisis and new regulatory challenges.
This scenario envisions a world more challenging than today's but only in some respects. Compared to the Business as Usual scenario, the key difference would be a massive and widespread financial crisis and more burdensome regulation, but lenders of last resort would be capable of effective action.
Government debt and retirement services would remain manageable, and there would not be a significant shift in economic power to emerging markets. Among the modest changes would be the development of some protectionism, but only in pockets, and an increase in customer empowerment with an adversarial attitude toward banking providers.
There would be more competition from nontraditional providers but only in a few niche markets. The securitization market would remain constrained, and credit-protection rights would strengthen.
Scenario Three: New Markets
A world beset with even greater difficulties, such as a sovereign-debt crisis. But also a situation that presents new opportunities from widespread growth in emerging markets.
In this scenario, challenges are more severe, though not as difficult as in the final scenario. Among the most troublesome conditions would be a moderate collapse in government debt and a collapse of retirement systems in the developed world. There would be new opportunities from a significant shift of economic power to emerging countries, where domestic banking institutions would provide significant competition to institutions based in the developed world.
On the other hand, protectionism would not be serious, and the regulatory environment would be much as it is today with its emphasis on preparing for and avoiding numerous risks. There would be a financial crisis with only limited impact, though lenders of last resort would not be able to provide effective safety nets.
Technological change would be extensive, transforming both front- and back-office operations. Customers would have greater power than they do today, but would not have an adversarial attitude toward banks. Credit-protection rights would be relatively low. The securitization market would continue to be constrained.
Scenario Four: Change, Change, Change
A setting characterized by extensive disruption and opportunity, including financial crises, opportunities in emerging countries, and competitive challenges from nontraditional banking providers such as utilities and retailers.
This scenario would provide a dramatically changed environment. Regulation would be burdensome, the economic shift toward growth markets would provide great opportunities and challenges, and there would be a turn to protectionism in many countries. There would be widespread competition from nontraditional providers.
There would be a massive financial crisis in the developed world and lenders of last resort would be unable to provide much help. The government-debt situation would be severe and the developed world's retirement systems would collapse. Customer empowerment would be high and customers would have an adversarial attitude toward financial institutions.
Credit-protection rights would be strong and the securitization market would be somewhat healthier than it is today. Technological change would be dramatic but would mainly affect the front office.
What Should Global Banks Do Right Now?
Participants devised a variety of strategies global banks might undertake to meet the challenges unique to each scenario. A bank that considers all four possibilities will be well-prepared for the next decade, even if actual events do not precisely match any of the four scenarios. The report identifies numerous strategies global banks might implement over the next decade in light of the four possible futures. Three stand out for immediate attention, even as many features of the future remain cloudy:
1. Move into emerging markets. Most participants called for a significant investment in emerging markets by offering a mix of retail and wholesale products as well as services tailored to each country. Because it can take many years to develop business relationships, establish brands, and create relationships with regulators in emerging markets, banks should establish beachheads and launch joint ventures with domestic firms as soon as possible.
2. Invest heavily in technology. Global banks will need highly sophisticated information technology to wring costs from front- and back-office operations, to meet regulators' tougher reporting requirements, to satisfy customer demands for new ways to conduct transactions, to compete with nonbanking firms handling transactions and other financial services, and to provide real-time insight into which lines of business have, or could have, the best risk-adjusted returns.
3. Develop a nimble culture. The business climate will continue to be unusually volatile and uncertain over the next decade, with returns likely to be significantly lower than in pre-crisis years. Meanwhile, access to the capital markets will be uncertain. To be among the winners, a global bank should adopt a governance structure and culture that enables quick decisions and timely action. Banks should maintain unusually large reserves to assure they have resources to weather crises and quickly act on opportunities.
Visit http://kw.wharton.upenn.edu/ey-global-banking/global-banking-2020/ to read more about this study