News Feed Item

Banks, Under Regulatory Pressure, Need to Transform Business, BCG Study Finds

Amid Structural Market Changes Driven by Shifting Investor Perspectives and Regulatory Reforms, Banks Face an Inflection Point Leading to a 'New New Normal'; Reworking of Business and Operating Models Will Be Required

BOSTON, MA -- (Marketwire) -- 12/05/12 -- Five years after the onset of the financial crisis, banks are still struggling to create sustainable value and must revise their business and operating models, taking a centralized, comprehensive approach at all organizational levels to make transformation happen, according to a new report by The Boston Consulting Group (BCG). The report, titled "An Inflection Point in Global Banking: Risk Report 2012," is being released today.

At EUR -89 billion in 2011, the economic profit of the global banking industry remained negative for the fourth consecutive year. The primary causes of the poor performance were risk costs -- still 75 percent above precrisis levels despite a slight decline due to lower capital charges. Banks' ability to create value has also been hampered by falling income levels, refinancing costs that are again increasing, and still-rising operating costs.

The pressure on economic profit will not ease in the foreseeable future, according to the report, which covers 145 banks that account for nearly 75 percent of banking assets in Europe, the U.S., and Asia-Pacific. In addressing the implications that structural industry changes have for bank income and costs, the report concludes that banks must take action now on multiple fronts in order to put value creation on a more positive trajectory.

The Equity Investor Perspective: Higher and More Diverse Cost-of-Equity Levels

During the crisis, the cost of equity rose from its stable precrisis level of 9 percent for all banks to 12 percent for commercial banks and 16 percent for investment banks. Investor expectations in the future will continue to differentiate between investment banks on the high end and commercial banks on the low end.

"These shifts in the cost of equity (COE) have sparked a debate on what constitutes an adequate level for banks going forward," said Gerold Grasshoff, a senior BCG partner and coauthor of the report. "In today's environment, with risk-free rates hovering around 0 percent, the real question seems to be whether COE and return-on-equity levels above 10 percent are realistic."

Banks will need to adopt a segment-specific approach to setting target returns in order to create incentives aligned with equity investors' interests. This is common for companies in many other industries, the report says.

The Debt Investor Perspective: Limited Market Access and Higher Funding Costs

The perspective of debt investors is also undergoing a structural change, reflected in particular by limited market access and higher credit-risk premiums for banks. As a consequence, banks have reverted to other sources of funding -- primarily central-bank liquidity but also deposits and secured funding. Many of the trends appear to be long-term, so capital market funding will be more selective and more costly on a sustained basis. "In the future, banks will need to give strong consideration to the availability, sources, and cost of funding in their business models and steering mechanisms," said Peter Neu, a BCG partner and coauthor of the report.

The Regulator Perspective: An Overhaul by the End of 2012

G-20 reforms such as the new Basel III framework -- despite discussions in the U.S. and EU on postponing implementation -- as well as central clearing and margining for over-the-counter derivatives, will form the new global regulatory foundation. While some regulations have already been introduced, virtually all remaining major reforms will be phased in by the end of 2012 or in early 2013.

In addition to the G-20 reforms, banks must contend with a number of domestic reforms -- for example, bank levies and the Liikanen proposal in the EU, the Volcker Rule in the U.S., and the Vickers report in the U.K. Market pressures are speeding the implementation of reforms, ultimately requiring banks to comply with the major elements by the end of 2012 or at least to present a credible plan for fulfilling the requirements.

Implications of the "New New Normal" Will Affect Economic Profit at the Group, Business, and Product Levels

Although the banking industry has reacted to changing market perspectives, major hurdles remain. For example, 50 percent of the banks in our survey are still short of the funds required to reach minimum capital ratios.

"As an inflection point is foreseeable for the industry, banks must ensure that they account sufficiently for all aspects of the new new normal when they adapt their businesses," said Grasshoff. "Each operating model will need to be reviewed separately according to business line and region."

A copy of this report can be downloaded at www.bcgperspectives.com

To arrange an interview with one of the authors, please contact Eric Gregoire at [email protected] or +1 617 850 3783.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 77 offices in 42 countries. For more information, please visit bcg.com.

About bcgperspectives.com

Bcgperspectives.com is a new website -- available on PC, mobile phone, and iPad -- that features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management's agenda. It also provides unprecedented access to BCG's extensive archive of thought leadership stretching back almost 50 years to the days of Bruce Henderson, the firm's founder and one of the architects of modern management consulting. All of our content -- including videos, podcasts, commentaries, and reports -- can be accessed via PC, mobile, iPad, Facebook, Twitter and LinkedIn.

More Stories By Marketwired .

Copyright © 2009 Marketwired. All rights reserved. All the news releases provided by Marketwired are copyrighted. Any forms of copying other than an individual user's personal reference without express written permission is prohibited. Further distribution of these materials is strictly forbidden, including but not limited to, posting, emailing, faxing, archiving in a public database, redistributing via a computer network or in a printed form.

Latest Stories
DevOps is being widely accepted (if not fully adopted) as essential in enterprise IT. But as Enterprise DevOps gains maturity, expands scope, and increases velocity, the need for data-driven decisions across teams becomes more acute. DevOps teams in any modern business must wrangle the ‘digital exhaust’ from the delivery toolchain, "pervasive" and "cognitive" computing, APIs and services, mobile devices and applications, the Internet of Things, and now even blockchain. In this power panel at @...
Without lifecycle traceability and visibility across the tool chain, stakeholders from Planning-to-Ops have limited insight and answers to who, what, when, why and how across the DevOps lifecycle. This impacts the ability to deliver high quality software at the needed velocity to drive positive business outcomes. In his general session at @DevOpsSummit at 19th Cloud Expo, Eric Robertson, General Manager at CollabNet, will discuss how customers are able to achieve a level of transparency that e...
SYS-CON Events announced today that SoftNet Solutions will exhibit at the 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. SoftNet Solutions specializes in Enterprise Solutions for Hadoop and Big Data. It offers customers the most open, robust, and value-conscious portfolio of solutions, services, and tools for the shortest route to success with Big Data. The unique differentiator is the ability to architect and ...
"Matrix is an ambitious open standard and implementation that's set up to break down the fragmentation problems that exist in IP messaging and VoIP communication," explained John Woolf, Technical Evangelist at Matrix, in this SYS-CON.tv interview at @ThingsExpo, held Nov 4–6, 2014, at the Santa Clara Convention Center in Santa Clara, CA.
In past @ThingsExpo presentations, Joseph di Paolantonio has explored how various Internet of Things (IoT) and data management and analytics (DMA) solution spaces will come together as sensor analytics ecosystems. This year, in his session at @ThingsExpo, Joseph di Paolantonio from DataArchon, will be adding the numerous Transportation areas, from autonomous vehicles to “Uber for containers.” While IoT data in any one area of Transportation will have a huge impact in that area, combining sensor...
Established in 1998, Calsoft is a leading software product engineering Services Company specializing in Storage, Networking, Virtualization and Cloud business verticals. Calsoft provides End-to-End Product Development, Quality Assurance Sustenance, Solution Engineering and Professional Services expertise to assist customers in achieving their product development and business goals. The company's deep domain knowledge of Storage, Virtualization, Networking and Cloud verticals helps in delivering ...
SYS-CON Events announced today that 910Telecom will exhibit at the 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. Housed in the classic Denver Gas & Electric Building, 910 15th St., 910Telecom is a carrier-neutral telecom hotel located in the heart of Denver. Adjacent to CenturyLink, AT&T, and Denver Main, 910Telecom offers connectivity to all major carriers, Internet service providers, Internet backbones and ...
Extreme Computing is the ability to leverage highly performant infrastructure and software to accelerate Big Data, machine learning, HPC, and Enterprise applications. High IOPS Storage, low-latency networks, in-memory databases, GPUs and other parallel accelerators are being used to achieve faster results and help businesses make better decisions. In his session at 18th Cloud Expo, Michael O'Neill, Strategic Business Development at NVIDIA, focused on some of the unique ways extreme computing is...
In his general session at 18th Cloud Expo, Lee Atchison, Principal Cloud Architect and Advocate at New Relic, discussed cloud as a ‘better data center’ and how it adds new capacity (faster) and improves application availability (redundancy). The cloud is a ‘Dynamic Tool for Dynamic Apps’ and resource allocation is an integral part of your application architecture, so use only the resources you need and allocate /de-allocate resources on the fly.
In the next five to ten years, millions, if not billions of things will become smarter. This smartness goes beyond connected things in our homes like the fridge, thermostat and fancy lighting, and into heavily regulated industries including aerospace, pharmaceutical/medical devices and energy. “Smartness” will embed itself within individual products that are part of our daily lives. We will engage with smart products - learning from them, informing them, and communicating with them. Smart produc...
More and more brands have jumped on the IoT bandwagon. We have an excess of wearables – activity trackers, smartwatches, smart glasses and sneakers, and more that track seemingly endless datapoints. However, most consumers have no idea what “IoT” means. Creating more wearables that track data shouldn't be the aim of brands; delivering meaningful, tangible relevance to their users should be. We're in a period in which the IoT pendulum is still swinging. Initially, it swung toward "smart for smar...
In his keynote at 19th Cloud Expo, Sheng Liang, co-founder and CEO of Rancher Labs, will discuss the technological advances and new business opportunities created by the rapid adoption of containers. With the success of Amazon Web Services (AWS) and various open source technologies used to build private clouds, cloud computing has become an essential component of IT strategy. However, users continue to face challenges in implementing clouds, as older technologies evolve and newer ones like Docke...
WebRTC sits at the intersection between VoIP and the Web. As such, it poses some interesting challenges for those developing services on top of it, but also for those who need to test and monitor these services. In his session at WebRTC Summit, Tsahi Levent-Levi, co-founder of testRTC, reviewed the various challenges posed by WebRTC when it comes to testing and monitoring and on ways to overcome them.
In his session at 19th Cloud Expo, Claude Remillard, Principal Program Manager in Developer Division at Microsoft, will contrast how his team used config as code and immutable patterns for continuous delivery of microservices and apps to the cloud. He will show the immutable patterns helps developers do away with most of the complexity of config as code-enabling scenarios such as rollback, zero downtime upgrades with far greater simplicity. He will also have live demos of building immutable pipe...
Rapid innovation, changing business landscapes, and new IT demands force businesses to make changes quickly. In the eyes of many, containers are at the brink of becoming a pervasive technology in enterprise IT to accelerate application delivery. In this presentation, you'll learn about the: The transformation of IT to a DevOps, microservices, and container-based architecture What are containers and how DevOps practices can operate in a container-based environment A demonstration of how Docke...