EY Global Banking Outlook Transforming Banks Redefining Banking

Transfcrmin banks,
redehnin bankin
Clobal banking outlook 201415
2 | Transfcrmin banks, redehnin bankin
Ccntents
3 CIcbaI bankin cutIcck 201415 |
Executive summary
Part Dne: The stcry sc far
Part Twc: Fcrces fcr chane intensify
Part Three: Banks transfcrmed, an
industry reshaped
FinaI thcuhts: an industry rehabiIitated?
2
1
4
2

Executive
summary
Banks have been Lryinq Lo resLrucLure
Lhemselves and rehabiliLaLe Lhe indusLry
in Lhe lace ol siqnilcanL headwinds. 1he
requlaLory rulebook is beinq compleLely
rewriLLen, Lhe indusLry has sullered ma|or
repuLaLional damaqe and ma|or economies
have sLruqqled Lo emerqe lrom recession.
ResulLs have relecLed Lhese challenqes,
wiLh reLurn on equiLy (ROL) aL many banks
lailinq Lo cover Lhe cosL ol equiLy.
From an economic perspecLive, equiLy
markeLs are nudqinq record hiqhs, Lurope
is lnally emerqinq lrom recession, Lhe US
debL ceilinq has been raised (aL leasL lor a
lew weeks), "Abenomics" is kicksLarLinq Lhe
Japanese economy and China's qrowLh is
improvinq. Surely LhaL means Lhe economic
ouLlook is posiLive? NoL quiLe.
Japan's reLurn Lo qrowLh is in iLs early sLaqes
and Lhe Luropean recovery is sLill LenLaLive,
parLicularly in Lhe Lurozone. Banks Lhere are
bracinq Lhemselves lor Lhe Luropean CenLral
Bank (LCB) AsseL OualiLy Review (AOR) and
musL also conLend wiLh Lhe end ol Lhe LCB's
lonqLerm relnancinq operaLions, unless
Lhey are exLended. 1he debL and budqeL
siLuaLion in Lhe US is lar lrom resolved, and
Lhe qlobal economy is bracinq iLsell lor Lhe
impacL ol Laperinq when Lhe US Federal
Reserve lnally sLarLs Lo wind down iLs
quanLiLaLive easinq proqram.
Lmerqinq markeLs, havinq benelLed lrom
invesLors in search ol yield, may suller
disproporLionaLely. YeL developed markeLs
will noL be immune Lo Lhe ellecLs ol
Laperinq, and banks, many ol which have
siqnilcanL holdinqs in qovernmenL bonds,
will lace capiLal challenqes as prices lall.
Complyinq wiLh new requlaLions and
operaLinq wiLhin requlaLory consLrainLs has
been Lhe lrsL prioriLy lor banks and will
remain so lor some Lime Lo come. However,
banks musL also consider how Lo meeL Lhe
expecLaLions ol cusLomers, shareholders
and markeLs wiLhin Lhose consLrainLs.
On Lhe requlaLory lronL, some rules
remain unwriLLen, especially in relaLion
Lo sLrucLural relorm. 1here is also Lhe
poLenLially counLerproducLive march Lo
requlaLory naLionalism. AlLhouqh Lhe misL
has noL cleared compleLely, Lhere is more
clariLy in key areas and Lhis cerLainLy should
prompL more banks Lo embark on much
needed sLraLeqic LranslormaLion proqrams
ol boLh business and operaLinq models.
Banks will need Lo incorporaLe enouqh
lexibiliLy in Lheir models Lo respond Lo
new rules as Lhey emerqe, essenLially
developinq a sLraLeqy around remaininq
uncerLainLies. 1he iniLial locus is likely Lo be
on "no reqreLs" invesLmenLs and iniLiaLives.
1haL's undersLandable, buL is only a sLarL.
RequlaLion will remain Lhe primary driver ol
relorm lor Lhe loreseeable luLure, buL iL is
noL Lhe only one. We see lve unsLoppable
lorces LhaL we believe will drive banks Lo
chanqe over Lhe nexL lew years (see charL
1). Overlayinq all ol Lhose lorces will be a
lucLuaLinq and unpredicLable economy.
Banks' responses Lo Lhose lorces will be
severely consLrained by requlaLion in
all iLs lorms buL, wiLh "waiL and see" no
lonqer a viable sLraLeqy, we expecL Lo
see more banks LransiLion lrom planninq
Lo execuLion, and Lhose responses will
coalesce around lour Lhemes (see charL 1).
As relorms Lake ellecL, Lhe newly redelned
bankinq indusLry should be able Lo reLurn
Lo iLs core luncLions and supporL qlobal
economic qrowLh. lnsLiLuLions will be keen
Lo resLore boLh repuLaLion and prolLabiliLy.
1houqhLs will Lurn Lo qrowLh as banks locus
on Lhose aspecLs ol Lhe value chain LhaL
provide Lhem wiLh compeLiLive advanLaqe
and consider collaboraLion wiLh oLhers Lo
deliver Lheir new business models more
ellecLively. We also expecL close moniLorinq
ol proqress, parLicularly in areas such as
culLure and behavior LhaL are dillculL Lo
measure buL crucial Lo susLainable success
and Lo resLorinq public conldence in Lhe
bankinq secLor.
1he challenqe Lo Lhis scenario ol resLored
qrowLh and prolLabiliLy is how naLional
requlaLors will choose Lo implemenL rules
lor bank recovery and resoluLion. As Lheir
primary responsibiliLy is sLabiliLy, Lhey may
choose shrinkinq banks deemed "Loo biq Lo
lail" over allowinq Lhem Lo qrow.
"1he more Lhinqs chanqe, Lhe more Lhey sLay Lhe same." 1haL may be Lrue in some
aspecLs ol lile, buL noL in Lhe bankinq indusLry. AL a qlobal level, Lhe scale ol chanqe in Lhe
indusLry since 2008 has been unprecedenLed. 1he indusLry is anyLhinq buL Lhe same.
R
e
s
p
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s
e
s
Business mcdeIs
5hiIt Irom productcentric to
customercentric models as banks
strive to restore conIidence
Further exits oI business lines and
geographies as banks streamline
operations and strengthen balance
sheets, leading to Iewer genuinely
global banks
Emergence oI strong regional
institutions, particularly across
rapidgrowth markets
Increased Iocus on scale and
eIIiciency by banks in both
developed and emerging markets
Universal banking redeIined as more
organizations explore alliances and
partnership opportunities to deliver
growth
Dranizaticns
Tactical Iixes replaced by integrated
reIorms that are transIormational
and cuts across the organization
Croup structure, location strategy,
booking models and legal entities
reconIigured to comply with
resolution requirements, optimize
eIIiciency oI capital, liquidity
allocation and reduce costs
5ilos and duplicative structures
dismantled to improve customer
Iocus and operational eIIiciency;
Iurther rightshoring likely
New processes and procedures to
monitor successIul embedding oI
cultural and behavioral changes,
and to minimize risk oI Iurther
conduct issues
Custcmer reIaticnships
Creater targeting oI deIined
customer segments that align with
a bank's competitive advantage and
oIIer revenue growth opportunities
Focus on rebuilding trust; new
perIormance goals and reward
strategies that reIlect a more
customercentric culture
In recognition oI balance sheet
constraints, Iurther collaboration
with institutional customers to
combine their Iunds with banks'
loan distribution and credit risk
capabilities
Transition to a "digital Iirst"
strategy, harnessing new
technology that enables customers
to personalize solutions whilst
ensuring data security
!nfrastructure
Processes redesigned and "lean
manuIacturing" techniques adopted
to deliver standardized systems and
procedures across the bank
Data systems reconIigured to meet
regulatory challenges and provide
business lines with customer data
analytics
Additional outsourcing and greater
sharing oI noncore inIrastructure
across the industry to reduce costs
and improve eIIiciency
Further investment in digital
channels to reIlect customer
preIerences; rationalization oI
physical real estate Iootprint
Strateic assessment
TransIormational change required
under regulatory constraints
F
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f
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c
h
a
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e
ReuIaticn
New global standards
challenge the proIitability oI
business lines, particularly
within corporate and
investment banking divisions
Pesolution plans and ring
Iencing require wholesale
structural reIorms, with
regulators prioritizing
stability over growth
National regulations
threaten viability oI global
banking model
Uncertainty remains but
tactical responses no
longer viable
TechncIcy
5iloed, legacy systems
struggling to cope with
scale oI regulatory change
and an increasingly digital
business environment
Exponential growth oI data
collection, analysis and
storage requirements
Disruptive technologies
challenging old models and
providing customers with a
greater choice oI services
and providers
Custcmer
Petail customers require
greater transparency,
personalized products
and seamless transition
between channels
Business customers
expect banks to replace
outdated systems and
processes and to Iocus
on solutions instead oI
"product push"
Markets Iorcing changes
to product and service mix
All customers increasingly
concerned about data
privacy and cyber security
Ccmpetiticn
Pegulatory requirements
intensiIy the battle
Ior scale and market
leadership
Increased product
competition Irom shadow
banks as they exploit new
technology and banking
regulation
New entrants bring service
and experience innovation
to a range oI banking,
payment and lending
products, threatening
primacy oI traditional
banking relationship
Scciety
Industry damaged by
the cumulative impact oI
regulatory and compliance
Iailures
Banks struggling to embed
cultural and behavioral
change
End oI "caveat emptor"
as consumer protection
legislation shiIts Iull
burden oI responsibility Ior
product suitability onto banks
5hareholder pressure
to implement business
models that deliver
sustainable returns and
reward investors
ReuIatcry ccnstraints ~ IcbaI and IccaI
Strivin tc ccmpIy with requirements fcr capitaI, Iiquidity, Ieverae, reccvery and rescIuticn pIannin, etc.
Eccncmic ccntext ~ IcbaI, IccaI, deveIcped, emerin
Chart 1
WheLher iL's Lhe lxed income businesses
ol invesLmenL banks, Lhe (mis)sellinq ol
producLs Lo reLail consumers, Lhe demand
lor lnancial services lrom cusLomers in
emerqinq markeLs or Lhe scale and inLrusive
naLure ol requlaLion and supervision, Lhe
indusLry has chanqed and will conLinue Lo
chanqe lor some years Lo come.
ln Lhe alLermaLh ol Lhe qlobal lnancial
crisis (CFC), Lhe iniLial phase ol Lhe
indusLry's recovery Look place amid a
broader economic recovery. For a shorL
while, banks reLurned Lo prolLabiliLy. 1hen
poliLical crises and concerns abouL Lhe
qlobal economy derailed Lhe recovery. 1he
scale and scope ol requlaLory relorm also
became more apparenL and, combined,
senL reLurns Lumblinq parLicularly amonq
Lhe Luropean banks.
CIcbaI eccncmy ~ mcstIy
cn track?
FasL lorward Lo Lhe end ol 2013 and iL
looks like recovery has lnally Laken hold
in Lurope, wiLh boLh Lhe UK and Lurozone
economies emerqinq lrom recession. 1he
Japanese economy appears Lo be wakinq
lrom iLs decadeslonq slumber, Lhanks Lo
Lhe adopLion ol "Abenomics."
Fears ol a hard landinq in China have
receded, and qrowLh appears Lo be more
balanced, incorporaLinq boLh invesLmenL
and consumpLion. 1he new reqime has
also iniLiaLed some relorms ol Lhe bankinq
indusLry, wiLh LenLaLive sLeps Lo liberalize
lendinq raLes. FurLher relorms are expecLed
in 201^.
ln Lhe US, CDP qrowLh has been solid
enouqh lor ouLqoinq Federal Reserve
Chairman Ben Bernanke Lo loaL Lhe
possibiliLy ol Laperinq Lhe quanLiLaLive
easinq (OL) proqram. lL's noL yeL clear
whaL impacL Lhe US Federal CovernmenL
shuLdown and Lhe sLandoll over Lhe debL
ceilinq will have on conldence and qrowLh.
BuL iL is possible LhaL Lhe implemenLaLion
ol Laperinq will only suller a shorL delay.
(1he exLenL ol Lhe delay will be inluenced
by Lhe success or lailure ol neqoLiaLions in
WashinqLon Lo avoid anoLher debL ceilinq
sLandoll in early 201^.)
1he delay Lo daLe has already proved Lo
be qood news lor Lhe markeLs and lor
some emerqinq economies. Chairman
Bernanke's iniLial commenLs in May 2013
abouL beqinninq Laperinq had an almosL
immediaLe ellecL on bond yields and equiLy
prices across many emerqinq markeLs.
1hose wiLh currenL accounL delciLs and
siqnilcanL levels ol loreiqn debL sullered
mosL and Lhe qrowLh lorecasLs in Lhese
economies have been revised downward
lor 201^.
Five years on lrom Lhe LumulLuous evenLs ol 2008, many
aspecLs ol Lhe bankinq indusLry are almosL unrecoqnizable
lrom Lhe way Lhey were in Lhe period leadinq up Lo Lhe crisis.
Part cne:
The story
so Iar
1he sLay ol execuLion belore Laperinq
beqins has provided Lime lor many
economies Lo enacL sLrucLural relorms
Lo reduce delciLs and improve invesLor
conldence. However, a number ol Lhese
economies, such as Brazil and lndia,
are also baLLlinq inlaLion and walkinq a
lne line Lo deliver relorms and qrowLh
simulLaneously.
1here may be more posiLives Lhan neqaLives
Lo Lhe qlobal recovery sLory now, buL
qrowLh remains lar lrom sLellar and, in
some markeLs, less Lhan assured. 1his
linqerinq uncerLainLy will conLinue Lo have
an impacL on bank cusLomers' spendinq and
invesLmenL plans.
ReuIaticn: bite wcrse than bark
Back in 2009, Lhe C20 economies aqreed Lo
Lhe comprehensive requlaLory relorm ol Lhe
bankinq indusLry LhaL resulLed in Lhe Basel
lll accord. YeL iL has Laken several years
lor poliLicians and requlaLors Lo LranslaLe
Lhose qlobal sLandards inLo naLional
rules and implemenL oLher aspecLs ol
requlaLory relorm. Many remain unwriLLen.
ln Lhe Luropean Union (LU), Lhe CapiLal
RequiremenLs DirecLive (CRD) lV was only
lnalized in 2013 and over hall ol Lhe rules
under Lhe DoddFrank AcL (2010) have yeL
Lo be lnalized.
Combined wiLh a sluqqish economic
recovery, Lhese delays have served as
a block on ellorLs by banks Lo beqin
Lhe arduous process ol sLrucLural
relorm. RaLher Lhan pushinq ahead wiLh
LranslormaLional chanqe proqrams, many
have opLed Lo waiL unLil more ol Lhe
requlaLory aqenda becomes clear. lnsLead,
Lhe locus has been on LacLical sLeps Lo "lx
whaL's broken."
MosL ol Lhe lnal rules have mulLiyear leadin
Limes belore Lhey Lake ellecL. MarkeLs have
been much less paLienL. As we have already
seen wiLh Basel lll capiLal sLandards, banks
have been pressured Lo provide commenLary
on compliance, and some have been lorced
Lo raise addiLional equiLy capiLal. 1here is
an expecLaLion LhaL markeL pressures will
also exLend Lo liquidiLy and leveraqe raLio
requiremenLs as Lhose are lnalized.
One ol Lhe biqqesL challenqes so lar has
been dealinq wiLh Lhe chasm LhaL has
appeared beLween qlobal desiqn and local
execuLion. ln mosL cases, Lhe problem
has noL been requlaLory arbiLraqe; raLher,
local inLerpreLaLion and implemenLaLion
ol sLandards have bequn Lo erode whaL
should have been a qlobally consisLenL
lramework. PoLenLially even more
siqnilcanL are locally driven iniLiaLives,
such as Lhe Foreiqn Bankinq OrqanizaLion
(FBO) and Volcker rules in Lhe US and
rinqlencinq proposals in Lhe LU, LhaL will
require ma|or sLrucLural relorm.
Clobal banks musL deal wiLh addiLional
rules aL home, dillerenL inLerpreLaLions
ol Lhe same rules across |urisdicLions and
Lhe LhreaL ol overreach by home and hosL
auLhoriLies incorporaLinq exLraLerriLorial
powers inLo requlaLions. NaLional
supervisors will olLen have |usLilable
reasons lor Lhe rules Lhey inLroduce, buL
an inconsisLenL qlobal lramework risks
damaqinq Lhe more ellecLive aspecLs ol Lhe
inLernaLional capiLal markeLs.
ChaIIenes reBected in
the numbers
1he economic and requlaLory headwinds
laced by Lhe bankinq indusLry have been
relecLed in Lhe numbers. ln addiLion Lo
decidedly mixed revenues, banks across
reqions have also been hiL by a series ol
compliance and requlaLory breaches, and
by claims relaLed Lo Lhe CFC, wiLh lnes and
seLLlemenLs already runninq inLo Lhe billions
ol dollars and no end in siqhL.
More recenL CDP qrowLh and lallinq crediL
losses have enabled some banks Lo release
provisions aqainsL loan delaulLs. Civen Lhe
laLlininq revenues and risinq cosLs across
many parLs ol Lhe indusLry, Lhese releases
have been a key driver ol prolLabiliLy
which clearly is noL susLainable. 1here have
also been disLincL reqional dillerences in
perlormance.
1he US banks, havinq resLrucLured Lheir
balance sheeLs in Lhe immediaLe wake ol
Lhe CFC, have been able Lo Lake advanLaqe
ol Lhe domesLic recovery and opporLuniLies
abroad. NoLwiLhsLandinq recenL concerns
in some Asia Pacilc economies, banks
in Lhe developed and emerqinq markeLs
ol Lhe reqion have benelLed lrom solid
economic qrowLh Lo deliver some sLronq
perlormances (see charL 2).
| Transfcrmin banks, redehnin bankin
lndeed, Lhere has been a posiLive sLory across mosL emerqinq
markeLs over Lhe lasL lew years, relecLed in Lhe solid capiLal
base and ROL levels LhaL mosL banks have been able Lo mainLain.
SLronq CDP qrowLh has lueled hiqher waqes and increased levels
ol disposable income, drivinq consumer spendinq and demand lor
lnancial producLs lrom business and reLail cusLomers. CovernmenL
sponsored invesLmenL proqrams have sLrenqLhened crosssecLor
inlrasLrucLure, pavinq Lhe way lor lurLher qrowLh.
However, Lhe emerqinq markeLs are noL wiLhouL Lheir challenqes.
Risinq cosLs are pressurinq marqins in a number ol indusLries.
1here is a lack ol depLh in domesLic capiLal markeLs LhaL will be a
draq on qrowLh, parLicularly as US OL Laperinq beqins. As a resulL,
banks will be lorced Lo seek opporLuniLies lor lasLer qrowLh, and
lundinq, beyond Lheir LradiLional bases. We believe siqnilcanL,
lurLher inlrasLrucLure invesLmenL is needed Lo reduce reliance on
commodiLies and broaden Lhe bases ol Lhese economies. Banks and
qovernmenLs will benelL lrom collaboraLinq Lo ensure Lhe lnancial
services secLor can promoLe, raLher Lhan hamper, luLure qrowLh.
Compared Lo peers elsewhere, Luropean banks have lared less well,
as Lhe Lurozone sovereiqn debL crisis ellecLively halLed recovery in
Lhe reqion. MosL banks in developed markeLs have underLaken some
level ol resLrucLurinq, and riskweiqhLed asseLs (RWAs) have lallen
(see charL 3). 1hey have exiLed noncore business lines and sold
asseLs. Some have also acknowledqed Lheir lack ol markeL leadership
and wound down subscale business lines. UnlorLunaLely, all Lhis
is sLill a workinproqress lor many Luropean insLiLuLions and Lhey
remain weiqhed down by noncore and underperlorminq asseLs.
As noLed above, banks have also sLruqqled Lo deliver Lopline
revenue qrowLh, as markeL volaLiliLy has deLerred acLiviLy and
cusLomers across many developed markeLs have conLinued Lo
pay down debL. 1he low inLeresL raLe environmenL has conLinued
Lo squeeze neL inLeresL marqins, wiLh Lhe Americas banks in our
sample seeinq a decline ol over 157 in Lhe period 200913.
1he lonqawaiLed recovery ol Lhe housinq markeL in Lhe US
has spurred qrowLh in Lhe morLqaqe markeL, parLicularly lor
relnancinq. 1his iniLial rush has slowed siqnilcanLly, however, and
Lhere are concerns LhaL Lhe LhreaL ol hiqher inLeresL raLes once
Laperinq beqins will discouraqe lurLher qrowLh. 1he Luropean
markeL has also shown some siqns ol lile, supporLed by policy
iniLiaLives such as Lhe "Help Lo Buy" scheme in Lhe UK. However,
many are wary ol encouraqinq Loo much qrowLh in Lhis secLor aL a
Lime when inLeresL raLes are aL an allLime low.
Chart 2. Averae RDE amcn tcp 50 IcbaI banks, 20013
Americas Europe Asia PaciIic
2008 2009 2010 2011 2012 1H13
Source: bank reporLs, LY analysis.
See noLe on paqe 29 lor lurLher inlormaLion on meLhodoloqy.
07
27
47
7
87
107
127
147
17
187
207
Chart 3. Averae RWAs as a percentae cf tctaI assets fcr
tcp 50 IcbaI banks, 20013
2008 2009 2010 2011 2012 1H13
07
107
207
307
407
507
07
707
Revenue qrowLh has also been challenqed wiLhin Lhe invesLmenL
bankinq divisions ol ma|or qlobal banks. While mosL producLs
conLinue Lo see solL demand, resulLinq in overcapaciLy across Lhe
indusLry, oLhers are pickinq up. Advisory and oriqinaLion have shown
siqns ol improvemenL in 2013, wiLh markeL perlormance, low raLes
and invesLor appeLiLe supporLinq qrowLh in equiLy and debL capiLal
markeLs (see charL ^).
However, Lradinq revenues have been lacklusLer and prolLabiliLy
squeezed. CapiLal concerns and Lhe increased price Lransparency ol
elecLronic plaLlorms are drivinq a conLinued decline in lxed income,
currencies and commodiLies (FlCC) businesses, wiLh revenues down
267 beLween 2009 and 2012. Poor perlormances in Lhe second hall
ol 2013 will also have undone qains in Lhe lrsL six monLhs. A parLial
recovery in equiLies will noL have been enouqh Lo compensaLe, qiven
Lhe size dispariLy ol Lhese business lines (see charL 5).
AlLhouqh compensaLion cosLs have declined as a proporLion ol
revenue lor Lhe Lop 50 qlobal banks (lrom 337 in 2009 Lo |usL under
307 in 1H13), nonsLall cosLs have conLinued Lo rise lasLer Lhan
revenues, parLicularly lor Luropean banks (see charL 6). AL a LoLal
cosL level, only Lhe Asian banks in our qroup have been able Lo qrow
revenues lasLer Lhan cosLs.
1he precise implicaLions may be unknown, buL we have already
seen whaL Lhe promise ol OL Laperinq can do Lo markeLs, yields
and prices. 1he lnLernaLional MoneLary Fund's OcLober 2013 !"#$%"
'()%)*(%" +,%$("(,- ./0#1, noLed LhaL markeL losses on bond porLlolios
could reach USS2.3 Lrillion as a resulL ol Laperinq. lLs evenLual
implemenLaLion, likely in Lhe lrsL hall ol 201^, will exacerbaLe some
ol Lhe challenqes lacinq banks and make Lhe case lor sLrucLural
relorm even sLronqer.
Chart 4. TctaI adviscry and criinaticn revenues fcr IcbaI
investment banks, 200913 (US$b)
Chart 5. TctaI F!CC and equities revenues frcm seIected
IcbaI investment banks, 200913
1H13 FY09 FY10 FY11 FY12
Source: Bank reporLs, LY analysis. See noLe on paqe 29 lor lurLher inlormaLion on meLhodoloqy.
5
52
125
155 4
9
114
45
2
0
FICC (U5$b)
Equities (U5$b)
Chart . Y-c-Y rcwth in ncn-ccmpensaticn ccsts vs. revenues amcn tcp
50 IcbaI banks, 200912
Americas banks European banks AsiaPaciIic banks
Crowth in noncomp costs Crowth in revenue
07
107
2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012
207
207
307
107
407
507
07
1H13 FY09 FY10
Advisory and origination revenue (U5$ billion)
FY11 FY12
4
4
44
43
24
Part twc:
Forces Ior
change
intensiIy
AL Lhe bank and Lhe indusLry level,
much more chanqe is required Lo deliver
sLraLeqic resLrucLurinq and Lo deal wiLh
overcapaciLy, boLh in Lerms ol numbers
ol banks and Lhe producLs and services
Lhey provide Lo cusLomers. ln emerqinq
markeLs, banks musL consider how Lo
equip Lhemselves lor Lhe nexL phase ol
qrowLh in Lhe lace ol rapidly evolvinq
cusLomer requiremenLs and uncerLain
economic qrowLh.
Responses in Lhe indusLry have been
mixed. We have noLed LhaL some banks
already have acknowledqed Lhe need lor
chanqe, wiLh LranslormaLional relorm
proqrams under way. OLhers are |usL
recoqnizinq Lhe scale ol whaL is required.
Belore we consider how banks should be
respondinq Lo an environmenL in lux,
iL's imporLanL Lo undersLand how Lhose
chanqes are manilesLinq Lhemselves. WhaL
will be Lhe key lorces LhaL drive chanqe
over Lhe nexL couple ol years and beyond?
Why does relorm need Lo cuL across
sLrucLure and sLraLeqy ol boLh banks and
Lhe indusLry? LssenLially, why do we need
Lo redelne bankinq?
Lconomic shilLs will conLinue Lo have an
inluence as Lhe qlobal recovery enLers
iLs nexL phase and Lrade rouLes beLween
markeLs, boLh developed and emerqinq,
are redelned. Beyond LhaL, Lhere are
mulLiple chanqe drivers, buL we have
separaLed Lhem inLo lve core areas:
A. RequlaLion: qlobal and local
B. CusLomer: demands and expecLaLions
C. 1echnoloqy and innovaLion: enabler,
dillerenLiaLor and disrupLor
D. CompeLiLors: old and new
L. SocieLy: poliLicians, ciLizens, acLivisLs
For some, Lhe challenqes ahead will be
immense. Lven lor Lhose banks LhaL have
bequn Lhe process ol sLraLeqic resLrucLurinq,
Lhe evoluLionary naLure ol Lhese issues will
lorce many Lo revisiL Lheir plans.
ParL One hiqhliqhLed LhaL proqress since Lhe end ol Lhe
CFC has been decidedly sporadic. Banks across many
developed markeLs have sLruqqled Lo recover.
A. RequlaLion: qlobal and local
RequlaLion has been Lhe primary driver ol sLrucLural chanqe wiLhin bankinq
since Lhe lull implicaLions ol Lhe CFC became clear. 1his primacy is likely Lo
conLinue lor some Lime, accordinq Lo charL 7, Laken lrom a recenL LY survey
on sLrucLural chanqe in Luropean bankinq. However, Lhe scope and scale ol
requlaLory chanqe allecLinq banks, parLicularly Lhose LhaL operaLe cross
border, are such LhaL a mere LacLical response is no lonqer a viable opLion.
lniLially, incremenLal sLeps Lo comply had seemed Lo be Lhe only sensible
response due Lo Lhe linqerinq uncerLainLy and Lhe new rules beinq developed
across mulLiple |urisdicLions. 1haL approach musL now qive way Lo a sLraLeqic
resLrucLurinq ol business models and operaLinq models.
We have seen already Lhe impacL LhaL increased capiLal charqes are havinq
on some business lines, such as FlCC. 1he lnsLiLuLe ol lnLernaLional Finance
(llF)/LY 2013 risk manaqemenL survey, ./2%3()4 5()%)*(%" 6/17(*/68 1(63
2%)%4/2/), 5(7/ -/%16 %5,/1 ,9/ *1(6(6, illusLraLes Lhis, wiLh Lhe ma|oriLy ol
respondenLs (697) expecLinq capiLal requiremenLs lor Lheir Lradinq books Lo aL
leasL double under Basel lll (see charL 8).
1he proposals lrom Lhe Basel CommiLLee's second consulLaLive documenL
on a lundamenLal review ol banks' Lradinq books, il adopLed, will have lurLher
implicaLions in Lhis area. Banks may be required Lo calculaLe risks and allocaLe
capiLal accordinq Lo a sLandardized meLhodoloqy, insLead ol usinq an inhouse
approach. As well as increasinq cosLs, Lhis could also allecL Lhe liquidiLy
ol some markeLs as banks choose Lo hold lewer illiquid asseLs on Lheir
Lradinq books.
ln addiLion, as a resulL ol overLhecounLer (O1C) derivaLives relorm, mosL ol
Lhe banks surveyed also expecLed capiLal charqes on derivaLives Lo rise by aL
leasL 1007 as a resulL ol counLerparLy risk charqes alone (see charL 9). WiLh
a correspondinq impacL on ROL (several percenLaqe poinLs), and new marqin
rules Lo conLend wiLh, deliverinq accepLable reLurns will be increasinqly elusive
lor Lhose banks LhaL don'L en|oy Lhe scale benelLs ol markeL leadership.
Chart 7. !ssues identified as mcst impcrtant when
ccnsiderin structuraI chanes
Source: LY/Financial 1imes survey on sLrucLural relorm ol Luropean banks, 2013.
Source: ./2%3()4 5()%)*(%" 6/17(*/68 1(63 2%)%4/2/), 5(7/ -/%16 %5,/1 ,9/ *1(6(6,
llF/LY, 2013.
Source: ./2%3()4 5()%)*(%" 6/17(*/68 1(63 2%)%4/2/), 5(7/ -/%16 %5,/1 ,9/ *1(6(6,
llF/LY, 2013.
Pegulatory reIorm
Capital and/or
liquidity restrictions
Changing customer
expectations
5upervisory pressure
Unclear and/or contradictory
regulatory requirements
27
14
1
12
10
Chart . Percentae increase in capitaI requirements
fcr tradin bcck frcm BaseI !! tc the ccmbined BaseI
2.5 and BaseI !!!
07507 17X
5071007
15X
20073007 21X
Cver 3007 10X
10072007
3X
Chart 9. Percentae increase in capitaI chares cn
DTC derivatives fcr CCR aIcne (i.e., BaseI !!! CCR
chares, incIudin CVA chare reIative tc CCR
chares under BaseI 2.5)
07507 20X
5071007
23X
20073007 1X
Cver 3007 0X
10072007
41X
Number oI participants ranking issue in the top 5
Final rules lor liquidiLy under Lhe neL sLable lundinq raLio (NSFR)
have yeL Lo be esLablished by Lhe Basel CommiLLee, as have rules
lor leveraqe raLios by a number ol |urisdicLions, includinq Lhe US.
1hese are likely Lo drive addiLional chanqes Lo business and lundinq
models. For qlobal banks, Lhe exercise will be lurLher complicaLed
by Lhe increasinq prelerence lor subsidiaries over branches by
naLional requlaLors and poLenLial dillerences in adopLion ol liquidiLy
and leveraqe raLios.
BaIkanizaticn
SLrucLural relorm, in Lhe shape ol rinqlencinq and producL
resLricLions, will require banks operaLinq in Lhe US, UK, France,
Cermany and elsewhere Lo eiLher cease cerLain acLiviLies or rinq
lence Lhem Lo proLecL Lhe deposiLLakinq enLiLy. Across a number
ol emerqinq markeLs, requlaLors are also implemenLinq much more
sLrinqenL reqimes lor loreiqn banks around capiLal, liquidiLy, lundinq
sources and locally housed inlrasLrucLure. Combined, Lhese issues
will demand a sLrucLural redesiqn ol Lhe orqanizaLion, iLs sysLems
and processes, and iLs approach Lo capiLal manaqemenL, liquidiLy
manaqemenL and qovernance.
Once naLional requlaLors aqree upon and lnalize recovery and
resoluLion plans (RRP), makinq banks resolvable is likely Lo require
some ma|or resLrucLurinq. BuL iL is noL yeL clear exacLly how lar
requlaLors will expecL banks Lo qo and wheLher Lhere will be cross
border accepLance ol naLional resoluLion reqimes. HosL |urisdicLions
may be relucLanL Lo rely on a sinqle poinL ol enLry approach and
may insisL LhaL local subsidiaries be sullcienLly capiLalized Lo
wiLhsLand shocks wiLhouL relyinq on capiLal or lossabsorbinq debL
lrom Lhe parenL insLiLuLion in Lhe home counLry. 1his may reduce
Lhe risk LhaL banks are "Loo biq Lo lail," buL iL will also reduce Lhe
ellciency ol Lhe qlobal bankinq sysLem and iLs abiliLy Lo supporL Lhe
qlobal economy.
Many ol Lhese requlaLory iniLiaLives illusLraLe Lhe seeminqly
unsLoppable march Loward balkanizaLion, wiLh qlobal sLandards
qivinq way Lo naLional rules LhaL conLradicL Lhe sLaLed aim ol
inLernaLional cooperaLion. VariaLions may be |usLilable aL a naLional
level, buL Lhey will lorce banks Lo reLhink Lheir qlobal sLraLeqies as
Lhe playinq leld becomes much less level.
1he benelLs ol a qlobal bankinq sysLem are also beinq LhreaLened
by Lhe prelerence ol some qovernmenLs and requlaLors lor whaL
some Lerm overreach, as evidenced by Lhe US Foreiqn AccounLs 1ax
Compliance AcL (FA1CA) and Lhe Lurozone's aLLempL Lo inLroduce a
lnancial LransacLion Lax (F11).
1he larqesL 130 banks in Lhe Lurozone will lace an addiLional
challenqe in 201^ as Lhey underqo Lhe Luropean CenLral Bank's
AsseL OualiLy Review. 1his is expecLed Lo be a much more riqorous
assessmenL ol Lhe banks' balance sheeLs Lhan Lhe previous exercise
by Lhe Luropean Bankinq AuLhoriLy. AsseL sales and addiLional
capiLal raisinq Lo sLrenqLhen balance sheeLs are expecLed, boLh in
anLicipaLion ol and in response Lo Lhe resulLs.
ln Lhe US, Lhe proposals lor FBOs above Lhe USS10 billion asseL
Lhreshold, il implemenLed lully, would require allecLed banks
Lo esLablish a holdinq company in Lhe US LhaL would hold Lhe
sLock ol iLs US subsidiaries. 1he proposals would also have a
siqnilcanL impacL on Lhe capiLal, liquidiLy and requlaLory reporLinq
requiremenLs ol Lhose banks. 1he compliance and broader business
implicaLions will ineviLably require some insLiLuLions allecLed by Lhe
rules Lo reconsider Lheir operaLions in Lhe US.
Beyond prudenLial requlaLion, Lhe broader issue ol business
conducL is becominq a considerable lorce lor chanqe as many banks
conLinue Lo reel lrom Lhe ellecLs ol mulLiple lailures and breaches.
As more insLiLuLions have been implicaLed in issues ranqinq lrom
anLimoney launderinq Lo missellinq and raLe manipulaLion, a
lurLher wave ol requlaLion is likely Lo deal wiLh conducL risk.
RemediaLion will be Limeconsuminq and expensive as banks
examine Lheir own processes, procedures and broader behavioral
issues in parLs ol Lheir orqanizaLions.
B. CusLomer: demands and expecLaLions
CusLomer requiremenLs are evolvinq rapidly. Banks are under
pressure lrom reLail and business cusLomers, across boLh developed
and emerqinq markeLs, Lo oller Lhe levels ol service and lexibiliLy
experienced in oLher secLors.
ln rapidqrowLh markeLs, Lhere is also demand lor new Lypes ol
producLs lor Lhe lrsL Lime. ReLail cusLomers are lookinq lor boLh
loan and invesLmenL producLs as income levels rise. For business
cusLomers, parLicularly Lhose lookinq Lo expand abroad, demand
is qrowinq lor hedqinq producLs and access Lo inLernaLional capiLal
markeLs. For many domesLic banks in Lhese markeLs, providinq
Lhese producLs prolLably will be a challenqe LhaL requires an
innovaLive response.
1here is an increasinq expecLaLion across all markeLs LhaL
cusLomers can LransiLion seamlessly beLween channels and be
able Lo use Lheir channel ol choice lor dillerenL acLiviLies, wheLher
Lhey be underLakinq simple LransacLions or seekinq advice. More
cusLomers are lookinq Lo use smarLphones lor a ranqe ol bankinq
and paymenL acLiviLies, includinq conLacLless paymenLs and
paymenLs direcL lrom Lhe cusLomer's accounL Lo a merchanL's
accounL wiLhouL Lhe use ol debiL or crediL cards. ln an era
when mosL cusLomers are mulLibanked and swiLchinq beLween
providers is increasinqly easy, banks musL address a number ol
key issues Lo proLecL boLh Lhe relaLionship and Lhe sLabiliLy ol Lheir
reLail lundinq base.
1ransparency on raLes and lees is essenLial, as hiqhliqhLed in LY's
new qlobal survey on consumer bankinq (due lor release in Lhe
lrsL quarLer ol 201^), as are excellenL online bankinq leaLures (see
charL 10). However, Lhe Lop Lwo leaLures LhaL cusLomers are lookinq
lor relaLe Lo Lhe securiLy ol personal and lnancial inlormaLion.
Under attack
1his prioriLizaLion relecLs concern by cusLomers, requlaLors and
Lhe banks Lhemselves. 1he naLure, speed and sophisLicaLion ol
cybercrime are evolvinq rapidly. Hackers operaLinq lor lnancial
qain may be Lhe more immediaLe concern ol cusLomers, buL "denial
ol service" aLLacks LhaL disable sysLems and deleLe or sLeal daLa are
poLenLially much more damaqinq.
Banks recoqnize Lhe seriousness ol Lhese LhreaLs. 1hey also
recoqnize LhaL iL is impossible Lo proLecL Lhemselves aqainsL all
aLLacks and so Lhey musL locus on securinq Lhe daLa and sysLems
Lhey reqard as Lheir "crown |ewels." However, budqeLary concerns
and a lack ol skilled sLall are prevenLinq many lrom deliverinq Lhose
lxes. 1his is danqerous lor Lhe individual bank buL also lor Lhe
broader lnancial sysLem, as aLLackers hunL lor Lhe weakesL link.
SuitabiIity
Underpinninq a number ol Lhe responses ouLlined in charL 10 is
Lhe need lor banks Lo rebuild LrusL wiLh Lheir cusLomers. Consumer
proLecLion aqencies across mulLiple |urisdicLions are inLroducinq
new rules on suiLabiliLy, buL banks musL also demonsLraLe LhaL Lhey
are deliverinq value and prioriLizinq lonqLerm cusLomer saLislacLion
over shorLLerm producL sales.
"Beyond prudenLial requlaLion, Lhe broader
issue ol business conducL is becominq a
considerable lorce lor chanqe as many
banks conLinue Lo reel lrom Lhe ellecLs ol
mulLiple lailures and breaches."
1here is also an expecLaLion ol chanqe amonq business and
corporaLe cusLomers. For many, banks are Loo locused on pushinq
poLenLially unwanLed producLs onLo Lhem raLher Lhan workinq wiLh
Lhem Lo provide more appropriaLe soluLions. OuLdaLed sysLems and
processes was also raised as a key concern in LY's 2013 survey ol
mulLinaLional corporaLions, +:**/665:" *#10#1%,/ $%)3()48 5#*:6
#) 5:);%2/),%"6. Banks also need Lo consider how Lo serve Lhese
cusLomers more consisLenLly across qeoqraphies (see charL 11).
Banks recoqnize LhaL Lhey may have been less locused on
Lheir cusLomers as a resulL ol mulLiple business and requlaLory
challenqes. As Lhe LY/Financial 1imes survey on sLrucLural relorm
showed, chanqinq cusLomer expecLaLions was ranked as Lhe Lhird
mosL imporLanL issue as banks consider sLrucLural chanqes Lo Lheir
businesses (see charL 7, above).
C. 1echnoloqy and innovaLion: enabler,
dillerenLiaLor, disrupLor
As Lhis secLion headinq suqqesLs, Lechnoloqy will be a crucial driver
ol chanqe lrom mulLiple anqles. We have already noLed above Lhe
imporLance reLail cusLomers place on securiLy, and Lhe LhreaL ol
daLa LhelL and oLher cybercrime looms larqe across Lhe indusLry.
YeL daLa is a much broader issue lor banks. 1he amounL ol daLa LhaL
banks are required Lo collecL, analyze, sLore and mine is qrowinq
exponenLially. Lven belore banks can Lhink abouL usinq Lhe daLa Lo
provide a more ellecLive service Lo cusLomers, Lhey musL overcome
Lhe siqnilcanL burden ol requlaLory compliance. 1rackinq and
reporLinq requiremenLs have become much more onerous and
leqacy sysLems are sLruqqlinq Lo cope.
For example, Lhe Basel CommiLLee's principles ol risk daLa
aqqreqaLion musL be implemenLed by 2016 and will require ma|or
invesLmenLs in daLa, sysLems and reporLinq capabiliLies. Accordinq
Lo Lhe llF/LY risk survey (menLioned earlier), nearly ^07 ol banks
expecL spendinq Lo increase by over 307 in Lhe nexL Lwo years
and LhaL esLimaLe is |usL lookinq aL inlormaLion Lechnoloqy (l1) Lo
supporL Lhe bank's risk archiLecLure.
As cusLomers become increasinqly omnichannel and make
qreaLer use ol social neLworks in Lheir inLeracLions wiLh banks, Lhe
sources ol daLa are also becominq more complex. WiLh increased
connecLiviLy required beLween channels, and Lhe qrowLh ol mobile
and online bankinq, banks are lndinq LhaL currenL sysLems are
illsuiLed Lo a more diqiLal business environmenL. Some banks
are sLarLinq Lo lead wiLh a diqiLal sLraLeqy, recoqnizinq Lhe brand
Mcst impcrtant key features cr
benefits scuht frcm primary
financiaI service prcviders
35X
24X
35X
24X
31X
24X
29X
20X
2X
19X
Keeps your personal inIormation saIe
Protects your Iinancial inIormation
Provides easy access to branches
and ATMs
Is transparent about what they charge
Ior and makes it clear to you how to
avoid paying Iees
CIIers excellent online banking
Ieatures
Peaches out to you as soon as possible
iI they believe a problem may exist
with your account
Has an excellent reputation
CIIers low cost banking options
Works with you when you need help
or encounter a problem
Handles your request quickly
Source: LY qlobal survey ol reLail bankinq cusLomers, Lo be released in early 201^.
PercenLaqe shown is Lhe percenLaqe ol LoLal respondenLs LhaL selecLed Lhe beneliL as one ol
Lheir Lop live mosL imporLanL beneliLs.
Inconsistent service and
pricing across geographies
Cutdated processes
and systems
Chart 11. Tcp chaIIenes deaIin with banks
Bureaucratic
and inIlexible
5X
35X
30X
Source: +:**/665:" *#10#1%,/ $%)3()48 5#*:6 #) 5:);%2/),%"6, LY, 2013.
Chart 10.
benelLs ol dillerenLiaLion and Lhe poLenLial
savinqs lrom drivinq more acLiviLy Lo
lowercosL channels, buL Lhese iniLiaLives
need Lo be parL ol Lhe broader business
LranslormaLion.
1echnoloqy is also enablinq new ways lor
cusLomers Lo buy bankinq producLs and
services lrom new, nonLradiLional sources.
1he "disrupLive Lechnoloqy" moniker
is usually associaLed wiLh new ways lor
cusLomers and merchanLs Lo exchanqe
paymenL lor qoods. As new paymenL and
mobile walleL Lechnoloqies become more
widely used, banks will be in danqer ol
losinq LransacLion lees and prominence in
Lhe mind ol Lhe cusLomer.
1he Lerm also applies Lo peerLopeer
(P2P) lendinq, boLh Lo reLail and business
cusLomers. However, iL could be applied
equally Lo developmenLs in Lhe capiLal
markeLs. We conLinue Lo see Lhe lurLher
"elecLronilcaLion" ol sales and Lradinq, and
Lechnoloqy is beinq used Lo disrupL oLher
aspecLs ol invesLmenL bankinq. 1he O1C
derivaLives relorms have proved Lo be a
caLalysL lor new enLranLs lookinq Lo Lake
advanLaqe ol Lhe requiremenL lor Lhese
producLs Lo be Lraded on exchanqe and
cleared cenLrally.
D. CompeLiLion: old and new
CompeLiLion has always been a driver ol
chanqe in any indusLry. FacLor in Lhe issues
raised above and iL becomes clear LhaL
Lhe compeLiLive landscape is likely Lo look
considerably dillerenL in years Lo come.
Much ol Lhe locus has been on new, non
LradiLional players, buL incumbenL banks
will also enqender a newlook environmenL.
ParLicularly where domesLic markeLs
are sLill overbanked, Lhe combinaLion ol
compeLiLive and requlaLory pressures musL
lead Lo lurLher reshapinq il recenL revenue
Lrends are Lo be avoided in Lhe luLure
(see charL 12). For example, Lhe beLLer
capiLalized banks in Lhe Lurozone peripheral
economies are aLLracLinq deposiLs lrom
Lheir sLruqqlinq rivals; aL Lhe same Lime,
Lhey are also able Lo borrow more cheaply
lrom Lhe wholesale markeLs.
SLronqer banks will exploiL Lhis advanLaqe
Lo lure cusLomers wiLh beLLer producLs and
raLes. lnLernaLional business cusLomers may
also be LempLed Lo reconlqure Lheir qroup
ol primary banks, as some on Lhe lisL are no
lonqer able Lo oller Lhe same producL ranqe
or qeoqraphic looLprinL. DomesLic banks
in emerqinq markeLs are also likely Lo lace
Chart 12. TctaI revenues frcm tcp 50 IcbaI banks, 20013
2008 2009 2010 2011 2012 1H13
0
100
200
300
400
500
00
700
800
U5$b
more severe compeLiLion in areas such as
corporaLe bankinq and wealLh manaqemenL,
lrom reqional banks lookinq Lo broaden
Lheir reach and lrom qlobal banks in search
ol qrowLh opporLuniLies.
CapiLal and requlaLory reporLinq
requiremenLs are squeezinq Lhe prolLabiliLy
ol FlCC sales and Lradinq, and iL is likely
LhaL only markeL leaders will have Lhe scale
Lo Lhrive and Lhe lunds Lo invesL in Lhe
necessary Lechnoloqy. CompeLiLion may be
inLense in Lhe shorLLomedium Lerm, buL
beyond LhaL, only a lew banks are likely Lo
survive in a qlobal, mulLidisciplinary markeL.
We are also likely Lo see Lhe emerqence ol
more new enLranLs, leveraqinq Lechnoloqy
Lo locus on a parLicular niche, especially
where requlaLors have imposed resLricLions
on banks or where Lhe move Lo use
Lechnoloqy is relaLively recenL, such as
in corporaLe bond Lradinq. RequlaLion
has served as a caLalysL lor new Lradinq
exchanqes and swap execuLion laciliLies,
as well as more nonbank broker dealers.
1hese "shadow banks" may lose some
ol LhaL advanLaqe over Lime as Lhey are
sub|ecLed Lo more scruLiny. However,
Lhe concern lor banks musL be LhaL, as
Lhey are disLracLed by Lhe requlaLion and
remediaLion, shadow bankinq enLiLies will
Lake markeL share and Lhe move away lrom
Lhe old sLaLus quo will be permanenL.
RequlaLion is already drivinq some chanqe
in Lhe paymenLs arena, as banks in Lurope,
Lhe US and elsewhere are lacinq resLricLions
on card LransacLion lees. HisLorically, banks
would have been relucLanL Lo puL Lhis
revenue aL risk. Now, however, Lechnoloqical
innovaLion may be required Lo prevenL
lurLher losses lrom new compeLiLors.
1he humble currenL (or checkinq) accounL is
also becominq an increasinqly compeLiLive
baLLleqround. Aqain, Lechnoloqy is playinq
a parL as sLarLups use new plaLlorms
and ouLsourcinq arranqemenLs Lo oller
a lresh Lake on bankinq. lL is likely LhaL
more reLailers will expand Lheir producL
ranqes Lo include currenL accounLs, in Lhe
hope ol becominq a cusLomer's primary
lnancial services provider. 1echnoloqy and
LelecommunicaLions lrms may also expand
Lhe scope ol Lheir services Lo include more
lnancial producLs.
P2P lenders may only represenL a small
lracLion ol Lhe loan markeL, buL Lhe concepL
is aLLracLinq siqnilcanL aLLenLion lrom
insLiLuLional invesLors, which are lookinq
lor opporLuniLies Lo boosL yield. As more
asseL manaqers esLablish loan lunds, Lhey
may use P2P lenders as inLermediaries
Lo source borrowers insLead ol usinq
banks. Recoqnizinq Lhe poLenLial qrowLh
opporLuniLies and Lhe Lype ol borrowers
LhaL may be aLLracLed Lo Lhese siLes, banks
are beqinninq Lo work wiLh P2P lenders on
larqer loan requesLs.
1he broad arena ol mobile money is also
likely Lo see much more inLense compeLiLion
as Lechnoloqy and LelecommunicaLions
lrms move lurLher inLo mobile paymenLs
and mobile bankinq. 1he loss ol lees will be
one concern lor banks, buL more Lroublinq
will be Lhe poLenLial weakeninq ol Lheir
relaLionship wiLh boLh reLail cusLomers and
merchanLs, as diqiLal walleLs diminish brand
awareness and cusLomer connecLion.
L. SocieLy: poliLicians,
ciLizens, acLivisLs
1he lnal driver encapsulaLes why Lhe oLher
lour will lead Lo siqnilcanL chanqe wiLhin
Lhe indusLry. lndeed, iL is socieLy wheLher
in Lhe lorm ol poliLicians, shareholders,
cusLomers or Lhe media LhaL has helped Lo
creaLe Lhe environmenL lor Lhe oLher lorces
ol chanqe Lo develop as Lhey have.
1he cumulaLive impacL on Lhe indusLry's
public repuLaLion ol compliance breaches,
producL missellinq, compuLer lailures, daLa
leaks and benchmark raLe manipulaLion is
impossible Lo measure precisely, buL iL has
been severe. Cominq alLer Lhe ellecLs ol Lhe
CFC, Lhese lailinqs have lelL conldence in
banks aL whaL may be an allLime low.
CusLomers expecL chanqe and invesLors
are lookinq lor credible and susLainable
business models. lnvesLors are also lookinq
lor Lhe balance ol rewards Lo shilL back
lrom manaqers and employees Loward
shareholders. ScruLiny lrom poliLicians
and Lhe media will conLinue Lo be
relenLless. AcLivism, by boLh consumers
and shareholders is on Lhe rise in boLh
developed and emerqinq markeLs.
1he pendulum ol responsibiliLy has swunq
lar away lrom caveaL empLor Lo a much
more exLreme lorm ol consumer proLecLion.
lrrespecLive ol wheLher LhaL swinq may be
Loo lar, Lhe currenL environmenL is probably
here Lo sLay lor years Lo come.
"1he indusLry needs Lo
chanqe Lhe way iL
inLeracLs wiLh cusLomers,
sells Lo cusLomers
and manaqes iLsell."
As Lhe llF/LY 2013 risk manaqemenL
survey, ./2%3()4 5()%)*(%" 6/17(*/68 1(63
2%)%4/2/), 5(7/ -/%16 %5,/1 ,9/ *1(6(6,
hiqhliqhLed, banks recoqnize Lhe need lor
a behavioral shilL in aLLiLude and approach.
ConducL has become a ma|or concern, and
board direcLors and chiel risk ollcers are
increasinqly locused on operaLional and
repuLaLional risk. Banks' risk appeLiLes may
be more conservaLive Lhan Lhey were pre
crisis, buL embeddinq LhaL inLo Lhe culLure is
an onqoinq process.
1he indusLry needs Lo chanqe Lhe way iL
inLeracLs wiLh cusLomers, sells Lo cusLomers
and manaqes iLsell. 1he resulL needs Lo be
banks LhaL are more LransparenL and bankers
who are more clearly cusLomerorienLed.
|n acc|t|on to tne hve cr|vers out||nec
%$#7/< ,9/ 1%,/ #5 /*#)#2(* 41#=,9 > #1
"%*3 #5 (, > =("" *#),():/ ,# $/ % *%,%"-6, 5#1
cnane. |t w||| a|so cehne tne customers,
01#;:*,6 %); 2%13/,6 :0#) =9(*9 ();(7(;:%"
$%)36 =("" 5#*:6? @#=/7/1< =9("/ ,9/
/*#)#2(* #:,"##3 %); #00#1,:)(,- =(""
cont|nue to |nhuence strate|c c|rect|on,
we oe||eve tnese hve cr|vers w||| oe most
(20#1,%), () 6/,,()4 ,9/ #7/1%"" 6,1%,/4- ()
,9/ *#2()4 -/%16? A9/ 1/60#)6/6 ,9%, $%)36
)//; ,# *#)6(;/1< %); ,9%, =/ /B0/*, ,# 6//
#7/1 ,9/ )/B, CDEDF 2#),96 %); $/-#);<
%1/ #:,"()/; () G%1, A91//?
Part three:
Banks
transIormed,
an industry
reshaped
However, Lhe orqanizaLions LhaL provide
Lhem and Lhe manner in which Lhey're
delivered is chanqinq. WiLh Lhe myriad
challenqes and issues lorcinq Lhe need lor
chanqe, whaL response do we expecL Lo
see lrom banks over Lhe nexL lew years
and beyond?
When LY and Lhe Financial 1imes spoke
Lo senior bankinq execuLives across
Lurope Lo conducL a survey on sLrucLural
relorm earlier Lhis year, we asked banks
Lo caLeqorize Lhemselves now and in Lhe
luLure. For Lheir currenL business model,
687 described iL as universal bankinq. For
Lheir luLure model, 687 also believe Lhey
are likely Lo use a universal model.
However, how universal bankinq is delned
is likely Lo chanqe, and noL |usL in Lurope.
Larqe banks will be universal in Lheir
domesLic markeLs, and perhaps a lew oLher
core |urisdicLions, buL many will need Lo be
much more selecLive abouL Lhe services
Lhey oller elsewhere. Across emerqinq
markeLs, banks may sLrive Lo provide a
universal bankinq service Lo Lheir cusLomers
buL will someLimes lack Lhe resources,
Lechnoloqy and disLribuLion capabiliLies
Lo do so sinqlehandedly. Banks will be
Lranslormed as a resulL and Lhe indusLry
will be redelned.
ln Lhe wake ol Lhe CFC, Lhe immediaLe
prioriLy lor banks has been Lo comply wiLh
Lhe wave ol new requlaLory requiremenLs
on capiLal, liquidiLy and leveraqe and lor
RRPs. Considerable proqress has been
made buL work is noL yeL compleLe. 1he
challenqe ol compliance has already lorced
banks Lo reLhink Lheir business models
as Lhey learned Lo operaLe wiLhin new
consLrainLs. FuLure ROL LarqeLs conLinue
Lo be revised down. Some banks will lace
lurLher hurdles as rules on liquidiLy and
leveraqe are lnalized and addiLional capiLal
is required.
As Lhe requlaLory consLrainLs have become
clearer, and banks are qenerally much
sLronqer, Lhe locus is now on havinq Lhe
riqhL business and operaLinq models
Lo serve cusLomers, deliver prolLable
qrowLh and provide an accepLable reLurn
Lo invesLors. Some aspecLs ol sLrucLural
relorm are beinq driven by requlaLion, such
as resoluLion planninq and rinqlencinq, buL
chanqe musL qo Lo Lhe core ol Lhe business
model and responses musL relecL all ol
Lhe drivers ouLlined in ParL 1wo. 1here are
lundamenLal, sLraLeqic quesLions LhaL musL
be answered LhaL will shape Lhe business
and deLermine Lhe exLenL Lo which Lhe
luLure bank will indeed be universal.
ln a consLanLly chanqinq, increasinqly inLerconnecLed
world, Lhe need lor bankinq services is probably as sLronq
as ever, and even sLronqer in emerqinq markeLs.
Rush tc executicn?
MosL banks have been Lhrouqh LhaL sLraLeqic review process since
Lhe CFC, some more Lhan once, so Lhey have a reasonably clear
undersLandinq ol Lheir luLure business models. YeL many have
been relucLanL Lo commiL Lo, and operaLionalize, Lhe new sLraLeqy,
lor lear ol missinq a producL recovery or underesLimaLinq Lhe
impacL ol a business line exiL on oLher businesses. RequlaLory and
economic uncerLainLy has also been a ma|or lacLor in Lhis "waiL
and see" approach.
However, as discussions aL a recenL meeLinq ol Lhe H%)3
!#7/1)%)*/ I/%;/169(0 J/,=#13 KLMNA%0/6,1- J/,=#136O
hiqhliqhLed, Lhe Lime lor waiLinq may be over. Reshapinq larqe
qlobal and reqional banks is a mulLiyear underLakinq, and Lhe
broad direcLion ol requlaLory Lravel is clear. 1he pendulum will
swinq lrom review Lo acLion, alLhouqh Lhe iniLial locus is likely
Lo be on "no reqreLs" invesLmenLs and iniLiaLives. Banks musL
incorporaLe and mainLain enouqh lexibiliLy in Lheir models Lo
respond Lo new rules as Lhey emerqe.
RequlaLory consLrainLs will conLinue Lo drive siqnilcanL acLiviLy as
banks sLrive Lo comply wiLh new rules and meeL new requiremenLs
in areas such as capiLal, liquidiLy and leveraqe. Beyond LhaL iniLial
locus, sLraLeqic LranslormaLion will coalesce around lour core areas:
A. Business models: redelned
B. CusLomer relaLionships: relreshed
C. OrqanizaLions: resLrucLured (and simpliled?)
D. lnlrasLrucLure: redesiqned and shared
A. Business model: redelned
As Lhe lnal sLraLeqic review process Lakes place, Lhere are a number
ol lacLors Lo consider. RequlaLion and economic evenLs conLinue Lo
drive a biqqer wedqe beLween weaker and sLronqer banks, wiLh Lhe
laLLer qroup able Lo borrow more cheaply and aLLracL more deposiLs.
For example, loandeposiL raLios (LDRs) are declininq across
Lurope, buL Lhe aqqreqaLe lqures in Lhe charL below mask Lhe
challenqes beinq laced by some insLiLuLions, parLicularly Lhose in
Lhe Lurozone's peripheral economies (see charL 1^).
1here has already been some consolidaLion in Lhe Luropean
markeL (see charL 13). MarkeLs such as Spain have wiLnessed
siqnilcanL resLrucLurinq, wiLh over 50 insLiLuLions reduced Lo 12
in Lhree years. We expecL Lo see more in Lhe medium Lerm in Lhose
markeLs LhaL remain overbanked, such as Cermany and lLaly.
AlLhouqh Lhe LDR is considerably below 1007 in Lhe US (see
charL 1^), lurLher consolidaLion also is likely here. Many ol Lhe
small and midsize banks will have neiLher Lhe scale nor Lhe
niche aLLracLiveness Lo win and reLain enouqh business. HiL by
Lhe increasinq cosLs ol complyinq and compeLinq and by lallinq
neL inLeresL marqins, Lhey will sLruqqle Lo survive wiLhouL radically
reshapinq Lheir business models.
Chart 13. CcnscIidaticn within the Eurcpean bankin
sectcr 201113, EU27
201309 201303 201203
019
201109
105
201103
17
201209
795
712
771
No. oI credit institutions
Source: Luropean CenLral Bank
Banks in emerqinq markeLs are also sullerinq Lhe ellecLs ol a
low inLeresL raLe environmenL and will be explorinq new revenue
opporLuniLies Lo secure new lundinq capiLal and mainLain reLurns.
NoLwiLhsLandinq recenL policy raLe rises Lo combaL inlaLion,
compeLiLion is inLensilyinq and banks remain under poliLical
pressure Lo reduce spreads on crediL producLs Lo reLail cusLomers
and small businesses. AL home, Lhey will locus on producL
innovaLion and broadeninq channel reach Lo aLLracL new cusLomers,
Lhouqh Lhey musL resisL Lhe LempLaLion Lo win volume aL Lhe
expense ol appropriaLe riskbased pricinq.
1hese lacLors hiqhliqhL some ol Lhe chanqes we expecL Lo see in Lhe
bankinq landscape. Small and midsized banks operaLinq wiLhin a
sinqle markeL may conLinue, buL Lo remain viable, Lheir models will
evolve Lo incorporaLe alliances and parLnerships wiLh oLhers (see
charL 15). SLronqer naLional banks will also collaboraLe wiLh oLhers,
and some will look Lo lurLher LarqeLed expansion abroad.
As LY's June 2013 inauqural issue ol H%)3()4 () /2/14()4 2%13/,6
hiqhliqhLed Lhe leadinq banks in Asia, Alrica and LaLin America are
developinq reqional expansion sLraLeqies Lo exploiL Lhe qrowinq
demand lor lnancial services in lronLier markeLs and leveraqe Lheir
domesLic experLise. 1hey will conLinue Lheir selecLive expansion
abroad Lo supporL Lheir corporaLe cusLomers and serve key capiLal
and Lrade lows. Civen marqin pressure and risinq cosL inlaLion,
Lhese emerqinq markeLs banks will also need Lo locus on scale and
cosL ellciencies Lo mainLain viabiliLy ol Lhe business model.
ReuIaticn as inspiraticn
LsLimaLes vary on Lhe cumulaLive impacL ol requlaLion on ROL,
buL iL is impossible Lo iqnore. As charL 16 lrom Lhe 2013 llF/LY
risk survey shows, more and more insLiLuLions are, and will be,
reviewinq aspecLs ol Lheir business models. Banks will conLinue Lo
exiL business lines and qeoqraphies as Lhey sLreamline operaLions
and sLrenqLhen balance sheeLs.
Chart 14. Lcan-depcsit ratic fcr tcp 50 IcbaI banks, 20013
2008 2009 2010 2011 2012 1H13
0
207
407
07
807
1007
1207
1407
Chart 15. UniversaI bankin redefined ~ seven pctentiaI future mcdeIs as aIIiances beccme mcre impcrtant
Seven pctentiaI future mcdeIs
CenuineIy
IcbaI
LccaI
retaiIers
SeIectiveIy
internaticnaI
Fccused
speciaIist
!nncvative
disruptcrs
Strcn
reicnaI
ScIid
naticnaI
Truly international in coverage and
product depth, though less Iullservice
and globally universal than precrisis
Presence across global Iinancial centers,
but restricted product range outside
home and other core markets
Ma|or business lines across multiple
countries within a region, Iocused on key
customer segments elsewhere
Fullservice "universal" oIIering in home
market, increasingly limited operations
internationally
5mall and midsized domestic banks
serving retail and business customers,
primarily within part oI home country
Core Iocus on particular segments e.g.,
wealth manager, broker dealer, niche
investment bank and credit cards
New entrants leveraging technology and
exploiting evolving industry landscape
F
u
l
l

s
e
r
v
i
c
e
P
a
n
g
e

o
I

o
I
I
e
r
i
n
g
s
/
s
e
r
v
i
c
e
s
Local National Pegional Clobal
N
i
c
h
e
5cale oI coverage
+(P/ #5 $:$$"/ 1/5"/*,6 ):2$/1 #5 ()6,(,:,(#)6
CenuineIy
IcbaI
SeIectiveIy
internaticnaI
!nncvative disruptcr
Fccused speciaIist
Strcn
reicnaI
LccaI retaiIer
ScIid naticnaI
Alliances Lo access markeLs/cusLomers
Alliances Lo access producLs/services/Lechnoloqy/luncLions
Alliances Lo access boLh
As an example, Lhe relorms mandaLinq LhaL
O1C derivaLives are Lraded on exchanqe
and cleared cenLrally will have a siqnilcanL
impacL on invesLmenL bankinq revenues, as
will new marqin requiremenLs. DominanL
players are hopinq Lo benelL lrom scale and
recover some losL marqin lrom an increase
in volume; lor oLhers, recovery opLions and
lonqLerm business viabiliLy will be limiLed.
1hese chanqes LhreaLen Lhe viabiliLy ol
qlobal wholesale bankinq. As a resulL,
we will see lewer qenuinely qlobal
orqanizaLions and Lhe emerqence ol more
sLronq reqional insLiLuLions in Alrica, Asia
and LaLin America. 1hese banks will benelL
as markeLs reLurn Lo sLronqer qrowLh. Some
selecLively inLernaLional banks in markeLs
such as AusLralia, Canada and Japan, where
limiLed domesLic qrowLh opporLuniLies are
lorcinq Lhem Lo look elsewhere, will also
benelL as Lhey conLinue Lheir expansion
inLo new markeLs, albeiL on a hiqhly
selecLive basis.
1he reLrenchmenL across markeLs and
producLs risks are havinq a siqnilcanL impacL
on cusLomers, as banks LhaL reLrench Lo
become solid naLional banks are less able Lo
lulll Lheir roles as lnancial inLermediaries
and supporL Lheir cusLomers across dillerenL
counLries and producL areas. Banks in
emerqinq markeLs are approachinq Lhe
same problem lrom Lhe opposiLe side, as
some sLruqqle Lo meeL cusLomer demand lor
new producLs and services, such as wealLh
manaqemenL and invesLmenL bankinq.
As charL 15 shows, alliances wiLh oLhers,
wheLher in Lhe lorm ol inlormal collaboraLion
or more lormal parLnerships will become
increasinqly imporLanL.
UniversaI 2.0
lL is in Lhe rapidqrowLh markeLs where we
are already seeinq examples ol how Lhese
challenqes can be overcome, such as wiLh
Japanese banks Lakinq sLraLeqic sLakes in
VieLnamese banks Lo combine sLrenqLhs.
Based on survey resulLs lrom LY's emerqinq
markeLs reporL (see link above), banks in
lndonesia, Malaysia, Mexico and Niqeria
are also considerinq parLnerships wiLh
qenuinely qlobal or sLronq reqional banks Lo
sLrenqLhen Lheir producL proposiLions.
Coinq lorward, we expecL dillerenL lorms ol
parLnership Lo emerqe across all markeLs as
LhouqhLs Lurn Lo luLure qrowLh opporLuniLies.
lnsLiLuLions will look Lo harness Lheir sLrenqLhs
and exploiL Lheir compeLiLive advanLaqes
while recoqnizinq LhaL Lhey may noL be able
Lo saLisly every aspecL ol cusLomer demand
sinqlehandedly. More banks will quesLion
wheLher all producLs need Lo be manulacLured
inhouse, and wheLher Lhey need Lo boLh
oriqinaLe and disLribuLe Lo cusLomers.
Some will hone Lheir posiLion as locused
specialisLs, LarqeLinq subsecLors ol Lhe
indusLry such as wealLh manaqemenL,
asseL servicinq, M&A advisory or crediL
cards. CollaboraLinq wiLh oLher insLiLuLions
raLher Lhan reLaininq subpar business uniLs
or commiLLinq Lo ma|or orqanic expansion
proqrams will provide banks across markeLs
wiLh more aqiliLy Lo respond Lo new
revenue prospecLs as well as poLenLial
economic shocks.
1here is poLenLial Lo exLend Lhe open
archiLecLure philosophy beyond wealLh
manaqemenL inLo more vanilla savinqs and
invesLmenL producLs, as well as some crediL
producLs. 1his may be parLicularly appealinq
Lo Lhose local or naLional banks LhaL are
smaller and lack scale. Some new enLranLs
inLo bankinq, includinq reLailers, have
adopLed Lhis approach and locus on Lhe
lronLend relaLionship wiLh Lhe cusLomer,
conLracLinq wiLh exisLinq banks Lo provide
oLher services and luncLions.
ln addiLion Lo poLenLial whiLelabellinq
and LhirdparLy sourcinq opLions, Lhere
Chart 1: Effect cf ccmbined Iiquidity and capitaI chanes under BaseI !!! cn business mcdeIs
Evaluating portIolios
2012 2013
Exiting geographies
Exiting lines oI business
5hiIting out oI complex less
liquid instruments
None oI the above
2X
43X
44X
13X
17X
17X
X
29X
44X
1X
Source: ./2%3()4 5()%)*(%" 6/17(*/68 1(63 2%)%4/2/), 5(7/ -/%16 %5,/1 ,9/ *1(6(6, llF/LY, 2013.
are already examples ol banks parLnerinq
wiLh LelecommunicaLions lrms Lo use new
Lechnoloqy Lo provide cusLomers wiLh
ollers, discounLs and promoLions, such as
in Spain and Lhe UK. AlLhouqh banks need
Lo address any daLasharinq concerns, Lhere
are opporLuniLies here Lo develop much
needed new revenue sLreams. We expecL
Lo see more banks lookinq aL opporLuniLies
Lo collaboraLe wiLh each oLher, and wiLh
orqanizaLions lrom oLher secLors, Lo provide
new producLs and services Lo cusLomers.
Some nonLradiLional new enLranLs, Lhe
innovaLive disrupLors, will be a source
ol compeLiLion as well as poLenLial
collaboraLion. YeL many ol Lhem, wheLher
Lhey be shadow banks or Lechnoloqy lrms,
do noL wish Lo develop Lhe inlrasLrucLure
needed Lo run a bank, nor do Lhey wish
Lo become lullscale banks wiLh all ol Lhe
associaLed requlaLory requiremenLs. Banks
may be able Lo benelL by providinq middle
and backollce supporL Lo Lhese innovaLive
disrupLors, and Lhey may also be able Lo
parLner wiLh Lhem and benelL lrom Lheir
innovaLion.
For banks LhaL need Lo consider Lhese
alLernaLive soluLions, perhaps Lhe key
dilemma will be deLermininq which parLs
ol Lhe value chain Lhey need Lo own, and
which elemenLs ol Lhe overall cusLomer
relaLionship Lhey musL reLain, il Lhey can
no lonqer own Lhe value chain endLoend.
1his will vary by insLiLuLion dependinq on iLs
compeLiLive advanLaqes, buL we Lhink Lhis
collaboraLive approach is a sLraLeqy LhaL
will suiL many banks. Lven Lhe qenuinely
qlobal banks will choose collaboraLion over
orqanic qrowLh or lullscale acquisiLion in
some markeLs. 1he luLure business model
may be universal bankinq, buL iL won'L be
solo bankinq.
As banks LransiLion Lo new models and
adapL Lo whaL will be a lower reLurn
environmenL lor many, compensaLion
models will also need Lo be redesiqned. 1he
LU bonus cap makes LhaL boLh ineviLable
and problemaLic lor banks wiLhin Lhe
Union. Llsewhere, invesLor demands and
supervisory requiremenLs will also push
banks Lo acL buL Lhey will need Lo ensure
LhaL variable bonuses are noL replaced by
hiqh lxed salaries.
B. CusLomer relaLionships:
relreshed/resLored
1he worldwide locus on qreaLer consumer
proLecLion, Lhrouqh leqislaLion and
requlaLion, will chanqe Lhe way banks
inLeracL wiLh cusLomers, sell producLs,
reward sLall and deal wiLh complainLs. As
banks across mulLiple |urisdicLions locus
on resLorinq credibiliLy and reqaininq
LrusL, Lhey musL also Lurn Lheir aLLenLion
Lo implemenLinq Lhese new requlaLions
and ensurinq LhaL adopLion ol Lhe broader
requlaLory aqenda supporLs ellorLs Lo
resLore cusLomer relaLionships.
Which custcmers?
One ol Lhe broader dilemmas lacinq banks
will be which ol iLs cusLomers Lo keep
relaLionships wiLh once Lhe new sLraLeqy
has been implemenLed. Many banks LhaL
have Lried Lo be all Lhinqs Lo all cusLomers
will lnd LhaL promise dillculL Lo keep. More
are invesLinq in daLa analyLics Lo develop
a clearer picLure ol Lhe lull, riskad|usLed
value ol a cusLomer's overall relaLionship
wiLh Lhe bank.
AlLhouqh no business likes Lo Lurn away
cusLomers, we may see some insLiLuLions
Lake LhaL sLep and locus on a smaller
qroup ol core cusLomer seqmenLs where
Lhey have qenuine compeLiLive advanLaqe.
As an alLernaLive, we may also see much
qreaLer seqmenLaLion across channels,
wiLh lowervalue cusLomers more relianL
on a Lechnoloqyenabled sellservice
model wiLh limiLed inLeracLion wiLh a
relaLionship manaqer.
"For banks LhaL need Lo
consider Lhese alLernaLive
soluLions, perhaps Lhe
key dilemma will be
deLermininq which parLs
ol Lhe value chain Lhey
need Lo own, and which
elemenLs ol Lhe overall
cusLomer relaLionship
Lhey musL reLain, il Lhey
can no lonqer own Lhe
value chain endLoend."
ScIuticns, nct prcducts
1haL locus is likely Lo resulL in more
susLainable relaLionships, and Lhe messaqe iL
sends Lo sLall will also supporL Lhe board
sponsored aqenda LhaL many banks have
Lo realiqn culLure and behavior. 1here
is recoqniLion LhaL Loo many sales sLall
and relaLionship manaqers were incenLed
inappropriaLely in Lhe pasL. WiLh an increased
locus on arLiculaLinq and embeddinq a more
cusLomerlocused culLure, we will also see
banks ensure LhaL inLernal LarqeLseLLinq and
reward sLraLeqies are aliqned Lo resLorinq
LrusL and developinq lonqLerm relaLionships
wiLh cusLomers.
From a producL and service perspecLive,
Lhe prioriLy should be on enablinq more
personalizaLion and beinq much more
LransparenL wiLh raLes and lees. Bank
cusLomers are willinq Lo help banks provide
Lhem a more Lailored soluLion. ln LY's 2012
qlobal consumer bankinq survey, 707 ol
Lhose surveyed were prepared Lo share
more inlormaLion Lhan was necessary lor
compliance as lonq as iL resulLed in a beLLer
service (see charL 17). MosL would also
ensure Lhe inlormaLion was reviewed and
updaLed every year.
Crcwth frcm diitaI
Across dillerenL secLors such as media,
aviaLion and LelecommunicaLions,
cusLomers have much more lreedom Lo
creaLe a more personalized soluLion LhaL
besL suiLs Lheir needs. OrqanizaLions
in Lhese indusLries are leadinq wiLh a
"diqiLal lrsL" sLraLeqy, where soluLions are
developed wiLh mobile and online devices
in mind raLher Lhan beinq reLrolLLed Lo
supporL Lhose channels. 1hey have a beLLer
record Lhan mosL banks ol usinq cusLomer
daLa ellecLively. CusLomers are also
experiencinq beLLer complainLs handlinq
lrom oLher secLors; improvinq ellecLiveness
in Lhis area will boosL reLenLion.
As Lheir cusLomers become accusLomed Lo
Lhis lexibiliLy and service qualiLy, and sLarL
Lo experience iL lrom new, nonLradiLional
lnancial services providers, we anLicipaLe
LhaL more incumbenL banks will lollow
Lhese examples. 1hey cerLainly should.
Predelned bundlinq isn'L necessarily bad,
buL we expecL more banks Lo respond Lo
cusLomer expecLaLions ol qreaLer choice.
Revenue declined by 1.37 in 2012 lor
Lhe Lop 50 banks qlobally. CrowLh was
parLicularly elusive lor banks in Lurope and
Lhe Americas (see charL 6). As LhouqhLs
Lurn Lo reversinq LhaL Lrend, complainLs
resoluLion, lexibiliLy and Lransparency
will be crucial Lo reLaininq cusLomers and
increasinq share ol walleL wiLh Lhem. We
also expecL banks Lo learn lrom oLhers and
make beLLer use ol Lhe daLa Lhey have. Banks
have a unique view ol Lheir cusLomers and
yeL many lack Lhe daLa analyLics capabiliLies
Lo Lurn Lhis inLo a compeLiLive advanLaqe
and provide cusLomers wiLh more LarqeLed
ollerinqs and soluLions.
Banks will need Lo reassure cusLomers LhaL
online soluLions are sale and secure. As we
noLed earlier (charL 10), daLa privacy and
Lhe securiLy ol personal inlormaLion is a
key concern ol reLail cusLomers, so banks
musL develop, deliver and communicaLe
Yes
707
Chart 17. Percentae cf custcmers
wiIIin tc prcvide their bank with mcre
perscnaI infcrmaticn
Source: !"#$%" Q#)6:2/1 H%)3()4 +:17/-8 A9/ *:6,#2/1
,%3/6 *#),1#", LY, June 2012
an approach LhaL convinces Lhem. Where
banks are usinq daLa Lo oller new soluLions
Lo cusLomers, Lhe approach musL also
convince Lhem LhaL daLa is handled
sensiLively and LrusL is noL abused.
Restructurin fcr business
custcmers
All cusLomers expecL increasinqly seamless
service LhrouqhouL Lhe orqanizaLion, and
Lhe speedy and ellecLive resoluLion ol
problems. AL a Lime when cusLomers have
more choice Lhan ever belore, sLrucLural
relorm LhaL complemenLs Lhe new cusLomer
sLraLeqy is crucial Lo minimizinq aLLriLion.
AspecLs ol Lhe requlaLory aqenda, desiqned
Lo relorm bank sLrucLures, will have an
ineviLable impacL on business cusLomers,
parLicularly Lhose LhaL require producLs
and services lrom boLh sides ol a poLenLial
rinqlence. 1he decisions banks make on
bookinq models, leqal enLiLy sLraLeqy and
locaLion sLraLeqy in Lhe cominq monLhs and
years will also allecL cusLomers. As banks
consider wheLher Lo esLablish an operaLinq
enLiLy LhaL serves mulLiple divisions, use
shared service cenLers or use indusLrywide
uLiliLies, iL will be criLical Lo undersLand
whaL impacL Lhose decisions would have on
dillerenL cusLomer qroups.
We have already noLed LhaL surveyed
mulLinaLional corporaLions are concerned
abouL consisLency ol service across markeLs
(see charL 11), so our expecLaLion is LhaL
banks will redesiqn Lhe sLrucLure around
cusLomers raLher Lhan producLs and
disband poLenLially arLilcial silos. lL also
became clear durinq LhaL survey LhaL many
ol Lhese cusLomers don'L expecL a sinqle
insLiLuLion Lo meeL all Lheir needs. MosL are
mulLibanked anyway and would preler Lo
selecL besLinclass providers in each case,
which reinlorces our beliel LhaL banks will
become more LarqeLed in boLh Lheir producL
and cusLomer sLraLeqies.
Custcmers as ccIIabcratcrs
More businesses are expecLinq Lo relnance
loan or debL obliqaLions in Lhe nexL year,
as charL 18 lrom LY's OcLober CapiLal
Conldence BaromeLer shows. AL a Lime
when inLeresL raLes and bond yields are well
below hisLorical levels, we are seeinq more
examples ol asseL manaqers esLablishinq
loan lunds or, in Lhe case ol a Canadian
pension lund, lendinq direcLly Lo companies.
lndeed, lor lowrisk, lonqerLerm pro|ecLs, a
pension lund or insurance company may be
a beLLer lL Lhan a bank wiLh a consLrained
balance sheeL.
Banks have Lhe cusLomer base and Lhe
skills in loan oriqinaLion and crediL risk
manaqemenL. WhaL many lack is Lhe lunds
Lo lend or Lhe capaciLy on Lhe balance
sheeL Lo hold Lhose loans Lo maLuriLy. We
expecL Lo see more examples ol banks
workinq wiLh asseL manaqers Lo harness
dillerenL skill seLs and resources. Civen Lhe
overdependence on bank lendinq in Lurope
and mosL emerqinq markeLs, banks should
also be lookinq aL how Lo help smaller
companies secure lundinq lrom debL and
equiLy capiLal markeLs.
C. OrqanizaLions: resLrucLured
(and simpliled?)
WiLh siqnilcanL chanqes Lo business
models expecLed over Lhe nexL lew years,
exisLinq operaLinq models will also need
Chart 1. Dces ycur ccmpany pIan tc refinance Icans cr cther debt cbIiaticns in the next 12 mcnths?
Yes 27
Cctober 2012
Yes 297
April 2013
Yes 357
Cctober 2013
Source: LY CapiLal Conlidence BaromeLer, OcLober 2013.
resLrucLurinq. We anLicipaLe a noLiceable
shilL ol emphasis as banks LransiLion lrom
planninq and LacLical lxes Lo execuLion ol
broader, inLeqraLed, sLrucLural relorms.
RequlaLion is a siqnilcanL driver ol Lhese
relorms in Lwo ways. FirsL, banks will be
required Lo implemenL cerLain chanqes Lo
ensure resoluLion plans can be execuLed
ellecLively and Lo comply wiLh specilc rules
on rinqlencinq. For Lhose banks allecLed
by Lhe proposed rules on FBOs in Lhe US,
sLrucLural chanqes will be ineviLable Lo
comply and Lhe cosL implicaLions may
necessiLaLe sLraLeqic chanqes as well. Clobal
bookinq models are also under LhreaL.
Second, Lhe broader requlaLory aqenda,
as iL relaLes Lo capiLal, liquidiLy and O1C
derivaLives, makes sLrucLural relorm an
economic imperaLive. 1here has been a
permanenL sLepchanqe in Lhe cosL ol doinq
business. Combined, Lhere are mulLiple
incenLives Lo minimize duplicaLion, Lo
improve capiLal and liquidiLy ellciency, and
Lo sLreamline leqacy and olLen overly
bureaucraLic sLrucLures. UnlorLunaLely,
requlaLors are more concerned wiLh
sLabiliLy Lhan economic ellciency and some
duplicaLion will be ineviLable. ParLly as a
reacLion Lo Lhis, Lhe luLure operaLinq models
lor many banks are likely Lo be simpler,
relecLinq Lheir wiLhdrawal lrom dillerenL
markeLs and business lines.
StreamIinin structures
Key consideraLions relaLe Lo which enLiLies
should be deposiLLakinq, which should
be resLricLed Lo capiLal markeLs and
invesLmenL bankinq acLiviLies, wheLher
Lhe ulLimaLe parenL should be a bank or a
holdinq company and wheLher Lo creaLe
separaLe operaLinq enLiLies Lo manaqe
key operaLions and Lechnoloqy luncLions.
Banks musL also adapL Lo resLricLions on Lhe
acLiviLies possible wiLhin loreiqn branches,
as more requlaLors lavor locally capiLalized
subsidiaries.
We have seen a number ol banks embark
on a review ol Lheir leqal enLiLy sLrucLures
already. More are expecLed Lo lollow and
raLionalize Lheir porLlolios, disbandinq
unnecessary enLiLies Lo improve capiLal
ellciency. As banks embark on Lhis
exercise, Lhey should also incorporaLe
a review ol inLernal sLrucLures and
hierarchies. A simpler bank should be
able Lo remove duplicaLe manaqemenL
and delayer Lhe orqanizaLion.
Chart 19. PctentiaI IcbaI capitaI requirements*
Basel 3
minimum
5witzerland
(UB5 and
Credit 5uisse)
China CPD IV ICB Proposal
UK C5IB group
(non ring Ienced)
Australia Basel C5IB ICB Proposal
UK
(ring Ienced)
Japan
****
India U5
`US and oLher FSB member counLries are workinq on addiLional bail in requiremenLs which are likely Lo close Lhe qap beLween
SwiLzerland/UK and oLher counLries in Lerms ol qoinq concern loss absorbancy.
``1he maximum Basel lll CSlB buller ol 3.57 is noL currenLly applicable Lo any insLiLuLion.
```US CSlB requiremenLs are expecLed Lo be announced by Lhe end ol 2013.
```` DralL requlaLions lor rules coverinq capiLal conservaLion buller and counLercyclical buller expecLed in 201^/15.
2.5
3.5
10.5
4.5
2.5
3.5
5
15.5
4.5
2.5
3.5
10.5
4.5
3.5
13
2.5
2.5
**
4.5
3.5
4.5
3.5
13
2.5
2.5
5
2
10
2.5
5.5
2.5
4.5
19
3
2.5
4.5
3
20
3
3.5
2.5
4.5
3
3.5
20
3
3.5
2.5
4.5
2.5
4
Pesolution buIIer (including bail in bonds)
Nonequity capital (T1+T2)
Progressive buIIer (low triggering cocos)
Common equity capital conservation buIIer
Additional loss absorbing capital (including bail in bonds)
Additional common equity (systemic/ringIence buIIer)
High triggering cocos
Minimum common equity
2.5
***
9.5
Source: H%)3 5#1 R),/1)%,(#)%" +/,,"/2/),6< )%,(#)%" 1/4:"%,#16, LY analysis.
1hese reviews should also incorporaLe Lhe luLuresLaLe sLrucLure ol
Lhe business across |urisdicLions. 1he increasinq rise ol requlaLory
naLionalism, wiLh rules above and beyond qlobal sLandards,
will have a ma|or impacL on sLrucLural relorm. Local requlaLory
requiremenLs in individual |urisdicLions have become clearer,
parLicularly around capiLal levels (see charL 19) and Lhe shilL lrom
branch Lo subsidiary sLrucLures. As a resulL, Lhere will be a spoLliqhL
on Lhe orqanizaLion's qeoqraphic looLprinL Lo deLermine which
locaLions should serve as bookinq cenLers lor dillerenL producLs.
1rapped capiLal and liquidiLy are increasinq risks lor qlobal banks,
as are proposed Lax chanqes such as Lurope's F11, and we are
likely Lo see lurLher raLionalizaLion ol where cerLain acLiviLies are
underLaken Lo miLiqaLe Lhis issue.
Transfcrmin cuItures
Banks across |urisdicLions have been hiL by wave upon wave ol
compliance lailures and conducL issues. lmmediaLe responses
necessarily have been LacLical as banks Lry Lo undersLand Lhe scale
ol Lhe problem and implemenL a remediaLion proqram.
1here are broader issues ol culLure and behavior LhaL also need Lo
be addressed, and a number ol insLiLuLions have underLaken a more
sLraLeqic assessmenL ol how Lheir orqanizaLions need Lo chanqe.
Much ol Lhis locuses on risk culLure, buL iL also incorporaLes
broader behavioral issues LhrouqhouL Lhe business.
1here is a clear requiremenL lor Lhe bank's risk appeLiLe Lo be
relecLed in iLs culLure, buL orqanizaLions musL also sLrike a balance
beLween manaqinq risks and deliverinq (susLainable) qrowLh. Linked
Lo LhaL is Lhe quesLion ol wheLher Lhe orqanizaLion needs Lo have a
sinqle culLure across every parL ol Lhe business or wheLher, insLead,
Lhere are common core values buL culLural variaLions amonq
deparLmenLs LhaL reasonably relecL Lheir dillerenL acLiviLies.
1he ma|or challenqe lor banks LhaL have been Lhrouqh Lhis
process is ensurinq LhaL chanqes have been embedded LhrouqhouL
Lhe orqanizaLion and LhaL new sLandards are beinq adhered Lo.
UnlorLunaLely, many lack Lhe sysLems and processes required Lo help
moniLor conducL and behavior and Lo Lrack how well chanqes are
beinq embedded. 1he broader risk qovernance aqenda will conLinue
Lo be a key prioriLy lor banks, buL we expecL Lo see much more locus
on Lhis area Lo sLrenqLhen inLernal Lransparency and Lhereby reduce
operaLional risk, parLicularly as iL relaLes Lo conducL.
Ccnnectin tc shared services
Compliance wiLh rinqlencinq and resoluLion planninq will also require
allecLed insLiLuLions Lo consider which qroup luncLions and services
should be shared across dillerenL businesses and subsidiaries, and
wheLher some should be housed in separaLe operaLinq enLiLies.
RequlaLors are keen Lo ensure LhaL any "run Lhe bank" operaLions,
such as paymenL processinq and accounL sysLems, do noL suller lrom
Lhe collapse ol a sinqle enLiLy wiLhin Lhe qroup.
LsLablishinq Lhese enLiLies will be expensive and Limeconsuminq,
diverLinq lunds and Lime away lrom qrowLhlocused iniLiaLives. As
banks invesL in creaLinq Lhese sLrucLures, iL is possible LhaL some
will consider wheLher Lhey miqhL be shared by oLher banks. OLher
larqe compeLiLors may be relucLanL Lo use anoLher bank's operaLinq
company, buL iL may be a siqnilcanL advanLaqe lor smaller banks
due Lo cosL savinqs. (See secLion D, below, lor more on Lhis Lopic.)
We also expecL Lo see more banks inLroduce iniLiaLives Lo Lranslorm
core luncLions, such as lnance, LhaL may suller lrom duplicaLion
and inellciency as a resulL ol leqacy sLrucLures. SLreamlininq
processes and conLrols across Lhe bank and increasinq levels ol
auLomaLion will lorm parL ol Lhis and should resulL in siqnilcanL
reducLions in backollce headcounL.
1his LranslormaLion is also likely Lo include a revised locaLion
sLraLeqy, as banks will be explorinq ollshorinq and nearshorinq
opLions Lo benelL lrom lowercosL cenLers. However, iL is viLal Lo re
enqineer Lhe luncLion lrsL Lo avoid exporLinq inellcienL processes
Lo Lhe new locaLion. lL is also imporLanL Lo consider how skills will
be Lranslerred beLween Lhe head ollce and new cenLers, Lo ensure
head ollce sLall undersLand core processes and luncLions.
Emerin markets nct exempt
Banks across a number ol emerqinq markeLs have embarked
upon siqnilcanL expansion proqrams in recenL years, wiLh lurLher
plans lor ma|or qrowLh in Lhe luLure. Branch neLworks have been
exLended, producL ranqes enhanced and sLall numbers increased.
Many ol Lhese insLiLuLions are recoqnizinq Lhe need Lo relorm
sLrucLures and key luncLions Lo manaqe a business LhaL is now
several orders ol maqniLude biqqer.
Risk manaqemenL will require parLicular locus as branch neLworks
LesL operaLional risk capabiliLies, rapid qrowLh in sLall numbers
allecLs Lhe orqanizaLion's culLure and increased demand lor
crediL producLs sLreLches Lhe capaciLy ol Lhe crediL risk luncLion.
SLrenqLheninq sysLems, processes and oversiqhL will be a crucial
area ol locus Lo minimize Lhe risk ol lailure and provide comlorL
Lo manaqemenL and invesLors. "RunLhebank" Lechnoloqy will
be a crucial invesLmenL area in Lhe shorL Lo medium Lerm Lo
deliver Lhese upqrades, as well as Lo ensure LhaL Lhe bank has
Lhe manaqemenL inlormaLion available Lo comply wiLh local and
inLernaLional requlaLory sLandards.
OLher corporaLe luncLions and operaLinq procedures will also need
aLLenLion, ranqinq lrom paymenL processinq Lo human resources,
as Lhese banks adapL Lo operaLinq on a dillerenL scale. As more ol
Lhese banks look Lo parLnership or collaboraLion opporLuniLies wiLh
loreiqn lrms, demonsLraLion ol robusL qovernance processes will be
a prerequisiLe lor any deal.
D. lnlrasLrucLure: redesiqned, shared
1he pressure on bank inlrasLrucLure is immense. AnLiquaLed
plaLlorm and mulLiple leqacy sysLems were sLruqqlinq Lo cope
belore Lhe onslauqhL ol new demands. 1he spend required Lo
deliver new sysLems will be siqnilcanL, and wiLh Lhe vasL ma|oriLy ol
bank l1 budqeLs already commiLLed Lo mainLenance and requlaLory
iniLiaLives, Lhere is limiLed scope lor invesLmenL, especially in
Lurope (see charL 20).
PreCFC prolLabiliLy levels had also masked Lhe inellciencies
inherenL in many bank orqanizaLions, includinq duplicaLe acLiviLies
across divisions and poorly desiqned processes. 1akinq Lhese
lacLors LoqeLher, banks will need Lo redesiqn Lheir inlrasLrucLures
Lo reduce complexiLy and meeL new requiremenLs more ellcienLly.
And Lo manaqe cosLs, more orqanizaLions will explore opLions Lo
ouLsource, Lo relocaLe and Lo share sysLems and processes wiLh
oLher orqanizaLions.
SiIcs dismantIed
DillerenL divisions wiLhin banks have hisLorically been quilLy ol
recreaLinq raLher Lhan sharinq sysLems, parLicularly il exisLinq
ones didn'L quiLe meeL Lhe requiremenLs ol a parLicular division or
business line. OrqanizaLional silos and sysLems inheriLed Lhrouqh
merqers and acquisiLions have exacerbaLed Lhe siLuaLion, leavinq
banks wiLh complex and cosLly sysLems archiLecLures and an army
ol sLall Lo manaqe Lhem.
We are already seeinq a lew banks develop shared sysLems
across core luncLions such as lnance and risk Lo save money.
SLandardizaLion ol Lools, plaLlorms and processes will need Lo
become much more common il cosLs are Lo be brouqhL under
"OrqanizaLional silos and sysLems inheriLed
Lhrouqh merqers and acquisiLions have
exacerbaLed Lhe siLuaLion, leavinq
banks wiLh complex and cosLly sysLems
archiLecLures and an army ol sLall Lo
manaqe Lhem."
conLrol (see charL 6). We should also see lurLher consolidaLion ol
processinq cenLers, daLa cenLers and server laciliLies, wiLh banks
explorinq ouLsourcinq opLions and qreaLer use ol cloud Lechnoloqy.
1he redesiqned inlrasLrucLure should exLend Lo a much LiqhLer
sLraLeqy lor Lhe developmenL and supporL ol sysLems and
applicaLions. LliminaLinq unused or underused applicaLions will
provide some cosL savinqs, buL banks should also review Lheir
broader approach Lo new developmenL. Coinq lorward, more
banks are likely Lo conlqure LhirdparLy soluLions insLead ol
bespoke developmenL inhouse. We should also see consolidaLion
ol suppliers around a core qroup ol vendors LhaL provide boLh
developmenL and mainLenance supporL.
DismanLlinq silos and harmonizinq sysLems will provide banks wiLh
more reliable, consisLenL daLa across Lhe business and enable Lhem
Lo harness "qolden sources" ol daLa LhaL are easier Lo proLecL
lrom cyberaLLacks. 1his will supporL compliance wiLh requlaLory
requiremenLs, ranqinq lrom risk daLa aqqreqaLion Lo counLerparLy
exposure. lL will enable banks Lo benelL lrom orqanizaLion
wide capiLal and liquidiLy manaqemenL. lL should also allow Lhe
orqanizaLion Lo have a sinqle view ol cusLomer daLa across channels
and use more sophisLicaLed daLa analyLics Lo sLrenqLhen cusLomer
relaLionships and aid business developmenL.
ln oLher indusLries, parLicularly wiLhin Lhe manulacLurinq secLors,
much smaller prolL marqins lorced Lhe adopLion ol "lean
manulacLurinq" several years aqo. Banks musL consider how Lhey
can reenqineer Lhe business Lo indusLrialize more processes and
make lurLher use ol sLraiqhLLhrouqh processinq, boLh Lo cuL cosLs
and Lo reduce Lhe opporLuniLy lor errors.
As banks review Lheir opLions, Lhe quesLion is wheLher Lhey develop
soluLions in splendid isolaLion or consider indusLrywide opLions
lor sharinq inlrasLrucLure. 1o LhaL end, we expecL more banks will
overcome Lhe aversion Lo sharinq, boLh inLernally and exLernally,
Lypiled by Lhe "noL invenLed here" syndrome.
Sharin is ccd
AlLhouqh some l1 sysLems are a source ol compeLiLive advanLaqe
lor banks, many LhaL sLore daLa lor requlaLory moniLorinq and
compliance are noL. Some indusLrywide soluLions in areas such
as paymenLs processinq are well esLablished, buL we are sLarLinq
Lo see examples ol banks lookinq Lo share more backollce cosLs,
parLicularly wiLhin corporaLe and invesLmenL bankinq.
One qroup is lookinq aL poLenLially ouLsourcinq cusLomer
compliance checks (e.q., know your cusLomer, anLimoney
launderinq) Lo a new, LhirdparLy, indusLry uLiliLy. AnoLher is
explorinq opLions Lo creaLe a cenLralized library LhaL provides a
common source ol clienL relerence daLa, includinq leqal enLiLy
idenLilers and backqround checks.
Chart 20. Breakdcwn cf bank !T spend
2011
2011
2011
2012
2012
2012
2013
2013
2013
2014
2014
2014
2015
2015
2015
E
u
r
o
p
e
A
s
i
a
A
m
e
r
i
c
a
s
51.3 7.7
39.5 1.5
12. 40.7
51. 7.7
43.7 19.2
42. 14.1
51.5 7.7
17. 41.5
41.5 13.2
51.9 7.7
19. 4.9
15.5 43.9
52.2 7.7
20.5 49.7
1. 45.1
Source: CelenL, 2013
Maintainance Investments
We also expecL Lo see lurLher proqress beinq made wiLhin reLail
bankinq, such as poLenLially sLorinq all cusLomer accounL deLails in
a cenLral uLiliLy. NoL only would Lhis reduce cosLs, iL would saLisly
requlaLory requiremenLs lor increased porLabiliLy ol accounLs. ln
addiLion Lo indusLrywide soluLions, we expecL more banks Lo Lake
advanLaqe ol Lhird parLies LhaL oller oLher services. 1here is likely Lo
be more whiLelabellinq and ouLsourcinq ol lnancial inlrasLrucLure
such as paymenLs, cusLody and seLLlemenLs. OpLions Lo creaLe
indusLry uLiliLies should also be explored by banks in emerqinq
markeLs LhaL are lookinq Lo develop new sysLems. ln Lhe medium
Lerm, we expecL Lo see much less duplicaLion ol A1Ms and poinLol
sale machines in emerqinq markeLs.
We have seen examples ol banks in Cermany and lLaly leveraqinq
new Lechnoloqy, such as cloud compuLinq and sLoraqe, Lo
obviaLe Lhe need lor invesLmenL in physical servers and sLoraqe
capabiliLies. DaLa securiLy concerns are prevenLinq some lrom
adopLinq Lhis innovaLion, buL more are likely Lo lollow as lears are
allayed, possibly usinq a combinaLion ol public and privaLe clouds,
dependinq on Lhe sensiLiviLy ol Lhe daLa.
1hese decisions will noL be Laken liqhLly. LliminaLinq duplicaLion, boLh
wiLhin banks and across Lhe indusLry, may make sense economically
buL Lhe reacLion ol requlaLors Lo Lhese opLions will be crucial. Concerns
around conLinuiLy ol service will need Lo be saLisled, as well as Lhose
relaLed Lo daLa. BuL cosL pressures should drive lurLher proqress in Lhis
direcLion. ConcenLraLion risks musL also be addressed.
Some ol Lhese opLions would incur siqnilcanL uplronL developmenL
cosLs, buL Lhey would be cheaper Lhan Lhe cumulaLive cosL ol
mulLiple insLiLuLions runninq similar sysLems. lndeed, LhirdparLy
providers and indusLry uLiliLies may also be more secure Lhan
sLandalone sysLems aL individual banks, as Lhese services will be
Lheir primary luncLion. 1he iniLial locus is likely Lo be on assessinq
which sysLems don'L conler any proprieLary advanLaqe and which
processes could be exLracLed and Lranslerred Lo a Lhird parLy.
DiitaI hrst
Civen Lhe chanqes in cusLomer behavior, and Lhe emerqence ol
new Lechnoloqy, we believe banks will lollow oLher secLors, such
as media, down Lhe paLh ol "diqiLal lrsL" soluLion developmenL
sLraLeqies. SmarLphone ownership conLinues Lo qrow rapidly (see
charL 21), and boLh reLail and business cusLomers are increasinqly
expressinq a prelerence Lo manaqe cerLain LransacLions diqiLally
insLead ol inperson or via a branch.
lnsLead ol reLrolLLinq exisLinq soluLions onLo a diqiLal plaLlorm, we
expecL more banks Lo lead wiLh Lheir diqiLal soluLions and make
Lhem available in branches. As cusLomer channel prelerences
conLinue Lo evolve, and more cusLomers choose Lo visiL branches
lor advice on complex soluLions raLher Lhan Lo manaqe simple
LransacLions, Lhere is also opporLuniLy lor a new branch sLraLeqy.
Banks have siqnilcanL resources Lied up in Lheir physical branches
and could apply lessons lrom Lhe reLail secLor where mulLiple brands
have "concessions" wiLhin a sinqle deparLmenL sLore. Sharinq
physical branches may noL work in busy urban cenLers where Lhe
cusLomer numbers |usLily sLandalone branches, buL iL could be
an opLion in less populous locaLions. 1his is likely Lo lorm parL ol
a broader review ol, and likely consolidaLion ol, banks' real esLaLe
looLprinLs, parLicularly where Lhey sLill have mulLiple ollces in
sinqle ciLies.
Chart 21. Smartphcne penetraticn by reicn (as percentae cf pcpuIaticn)
Europe Asia PaciIic North America Latin America Middle East and AIrica
2011 2012 2013F 2014F 2015F 2017F 201F
Source: Ovum, !"#$%&' )*#+' ,+- ./,01)*#+' 2#0'3,41 56789567:;< May 2013.
0
207
407
07
807
1007
1207
FinaI
thcuhts:
an industry
rehabilitated?
1here are mulLiple, unavoidable lorces drivinq chanqe,
requlaLion beinq Lhe sLronqesL. New requlaLion is desiqned
Lo make Lhe indusLry more sLable, make iL less likely Lo
require luLure Laxpayer bailouLs and ensure consumers are
adequaLely proLecLed.
Many ol Lhe relorms, il noL all, are needed
and yeL expensive Lo implemenL. 1he impacL
on Lhe cosL ol doinq business is even more
severe and requlaLory consLrainLs have
rendered many currenL business models
unprolLable. Banks need Lo chanqe.
1here is recoqniLion LhaL chanqe is required,
buL banks are servinq mulLiple masLers. For
requlaLors, sLabiliLy is Lhe primary concern.
lnvesLors may accepL a lower riskad|usLed
reLurn lrom saler banks, buL LhaL reLurn
sLill needs Lo exceed Lhe cosL ol equiLy.
CusLomers expecL Lo be LreaLed lairly buL
also expecL Lo benelL lrom new Lechnoloqy,
and Lhey are beinq LempLed away lrom
LradiLional banks by alLernaLive, more Lech
savvy providers. Banks need Lo innovaLe.
New enLranLs are usinq disrupLive
Lechnoloqies Lo shake up Lhe sLaLus quo.
Many are |usL sLarLups and Lheir currenL
share ol Lhe markeL may be small, buL Lhey
are brinqinq Lo bankinq Lhe sorL ol chanqe
we have seen in oLher indusLries. Some
ol Lhese new ideas will work, some won'L.
Banks don'L necessarily need Lo imiLaLe in
an aLLempL Lo compensaLe lor noL beinq a
lrsL mover.
1hey can benelL lrom "second mover"
advanLaqe by developinq an undersLandinq
ol how cusLomers reacL Lo new
proposiLions, adapLinq as needed Lo suiL
Lheir own base. We have already seen a lew
banks parLner wiLh innovaLors, such as P2P
lenders. Acquirinq innovaLive sLarLups is
also an opLion, buL banks musL be carelul
noL Lo quash Lhe creaLiviLy Lhey're buyinq
by "corporaLizinq" iL.
Responses necessarily cuL across business
lines and exLend LhrouqhouL Lhe indusLry.
1hey need Lo resLore credibiliLy and LrusL.
1hey musL lx broken processes and replace
anLiquaLed sysLems. 1here is also a need
Lo redesiqn compensaLion models as banks
adapL Lo a lower reLurn environmenL.
CollecLively, Lhey should resulL in an
indusLry LhaL can qeneraLe susLainable
qrowLh and supporL Lhe nexL phase ol
economic recovery in boLh developed and
emerqinq markeLs.
Once plans are implemenLed, we expecL
banks Lo develop mechanisms and Lools Lo
moniLor proqress, parLicularly on Lhe less
Lanqible aspecLs ol relorm such as culLure
and behavior. lnsLiLuLions will be keen Lo
sLrenqLhen Lheir repuLaLions and recover
prolLabiliLy.
1he business ol bankinq will conLinue, buL
Lhese responses should chanqe Lhe way iL
is conducLed. lrrespecLive ol which model
banks adopL, we will see more alliances
and collaboraLions across business lines,
markeLs and luncLions as universal bankinq
is redelned.
MethcdcIcy
EY maintains a database oI banking key perIormance indicators. The database covers the top 50 banks by assets,
as listed by The Banker Database at July 2013. Data is drawn Irom company reports. Data Ior revenues, costs, loan
loss provisions, net interest margins, earnings per share and core tier one capital are as reported. Cther Iigures are
calculated to ensure a consistent methodology. Where no data is recorded, the reporting bank is excluded Ior that
metric. Ma|or outliers are also excluded to avoid distortion. Where necessary, balance sheet and income statement
data have been converted to U5 dollars using exchange rates Irom CANDA (oanda.com).
The Iollowing banks were included in the analysis oI investment banking revenues: Barclays, BNP Paribas, Bank oI
America, Citigroup, Credit 5uisse, Deutsche Bank, Coldman 5achs, H5BC, JPMorgan Chase, Morgan 5tanley, Nomura,
Poyal Bank oI 5cotland, 5ocit Cnrale and UB5.
EY | Assurance | 1ax | 1ransacLions | Advisory
About EY
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About EY's Clobal Banking & Capital Markets Center
ln Loday's qlobally compeLiLive and hiqhly requlaLed
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array ol diverqenL sLakeholders is a key qoal ol banks and
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noL inLended Lo be relied upon as accounLinq, Lax, or oLher prolessional advice.
Please reler Lo your advisors lor specilic advice.
ey.com
Bill 5chlich
Clobal Bankinq &
CapiLal MarkeLs Leader
New York
william.schlichey.com
+1 212 773 3233
Ian Baggs
DepuLy Bankinq &
London
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Jan Bellens
Clobal Bankinq &
CapiLal MarkeLs Lmerqinq
MarkeLs Leader
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Clobal Bankinq &
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Lead AnalysL
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Americas Bankinq &
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5teve Ferguson
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