A decade on from the Global Financial Crisis (GFC), the financial sector is finally moving out of the shadows and is coming to terms with the period of digital transformation that lies ahead. But this is not the time to breathe a sigh of relief. The financial sector, as a conduit for global capital movements, will continue to find itself at the apex of major political, economic and technological shifts in the coming year.
Politically, we have seen how the forces of globalisation, which have underpinned the development of capital markets and global banking corporations, now appear to be in retreat. The rise of populist politics means that anything moving across borders – migrant workers, digital services or capital – is increasingly treated with suspicion. Maintaining a licence to operate global banking businesses is becoming more difficult in markets where politics is still preoccupied with concerns over ‘too big to fail’ banking corporations.
In response, the political class has created a new agenda post-GFC, in which regulation has given rise to a very different business landscape. Many banks in the West have spent the past ten years restructuring and shrinking their balance sheets to adapt to that landscape. In contrast, banks in Asia have continued to expand. The four largest banks in the world today, when measured by assets, are all Chinese: ICBC being the world’s largest with a balance sheet of over $3.6 trillion in size.
Beyond yielding economic power to the East, banks in Europe are having to deal with an unprecedented range of political risks, not least driven by Brexit and the future of the European project. In addition, in 2018 the world’s three largest economic powers – the US, the EU, and China – fired the opening salvo in a new trade skirmish, casting concerns over a full-blown trade war in the year ahead. Creating a future-proof business strategy will become increasingly difficult when global markets and trade networks are being redrawn.
Alongside political uncertainty, banks in Europe also face great economic risks: they are naturally highly exposed to domestic markets, where the prospects of economic and real wage growth remain poor. Businesses and households are struggling to drive the kind of growth necessary to overcome increasing regulatory costs or to address the slump witnessed in shareholder returns since 2008. With the return on equity in the banking sector anticipated to remain in single digits, banks’ business models must adapt in order to unlock new potential.
Many will be turning to technology for help: there is little doubt that it is already re-setting banking economics. The business case for embracing technologies such as the Cloud, artificial intelligence (AI) and blockchain are clear: on-demand scalability at speed, enhanced decision-making, and safer and cheaper financial intermediation frameworks.
But digital transformation is not a panacea. Such transformations will involve massive investments, and by their nature bring with them huge risks and uncertainty as banks carve out a new contour. The business transformation being played out must be matched by a significant maturing in the understanding and management of new and emerging risks, both at an institutional level and a systemic level.
Non-financial risks will increasingly come to the fore, and banks need to fully understand how the confluence of shifting politics, economics and technology will shape future legislation and regulation, as well as impact their digital transformation strategies, operating models and risk management frameworks.