Welcome!

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
Historically, some banking activities such as trading have been relying heavily on analytics and cutting edge algorithmic tools. The coming of age of powerful data analytics solutions combined with the development of intelligent algorithms have created new opportunities for financial institutions. In his session at 20th Cloud Expo, Sebastien Meunier, Head of Digital for North America at Chappuis Halder & Co., discussed how these tools can be leveraged to develop a lasting competitive advantage ...
In his session at 20th Cloud Expo, Mike Johnston, an infrastructure engineer at Supergiant.io, discussed how to use Kubernetes to set up a SaaS infrastructure for your business. Mike Johnston is an infrastructure engineer at Supergiant.io with over 12 years of experience designing, deploying, and maintaining server and workstation infrastructure at all scales. He has experience with brick and mortar data centers as well as cloud providers like Digital Ocean, Amazon Web Services, and Rackspace. H...
The question before companies today is not whether to become intelligent, it’s a question of how and how fast. The key is to adopt and deploy an intelligent application strategy while simultaneously preparing to scale that intelligence. In her session at 21st Cloud Expo, Sangeeta Chakraborty, Chief Customer Officer at Ayasdi, will provide a tactical framework to become a truly intelligent enterprise, including how to identify the right applications for AI, how to build a Center of Excellence to ...
You know you need the cloud, but you’re hesitant to simply dump everything at Amazon since you know that not all workloads are suitable for cloud. You know that you want the kind of ease of use and scalability that you get with public cloud, but your applications are architected in a way that makes the public cloud a non-starter. You’re looking at private cloud solutions based on hyperconverged infrastructure, but you’re concerned with the limits inherent in those technologies.
SYS-CON Events announced today that Massive Networks will exhibit at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Massive Networks mission is simple. To help your business operate seamlessly with fast, reliable, and secure internet and network solutions. Improve your customer's experience with outstanding connections to your cloud.
DevOps is under attack because developers don’t want to mess with infrastructure. They will happily own their code into production, but want to use platforms instead of raw automation. That’s changing the landscape that we understand as DevOps with both architecture concepts (CloudNative) and process redefinition (SRE). Rob Hirschfeld’s recent work in Kubernetes operations has led to the conclusion that containers and related platforms have changed the way we should be thinking about DevOps and...
As businesses adopt functionalities in cloud computing, it’s imperative that IT operations consistently ensure cloud systems work correctly – all of the time, and to their best capabilities. In his session at @BigDataExpo, Bernd Harzog, CEO and founder of OpsDataStore, presented an industry answer to the common question, “Are you running IT operations as efficiently and as cost effectively as you need to?” He then expounded on the industry issues he frequently came up against as an analyst, and ...
All organizations that did not originate this moment have a pre-existing culture as well as legacy technology and processes that can be more or less amenable to DevOps implementation. That organizational culture is influenced by the personalities and management styles of Executive Management, the wider culture in which the organization is situated, and the personalities of key team members at all levels of the organization. This culture and entrenched interests usually throw a wrench in the work...
SYS-CON Events announced today that Datera, that offers a radically new data management architecture, has been named "Exhibitor" of SYS-CON's 21st International Cloud Expo ®, which will take place on Oct 31 - Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Datera is transforming the traditional datacenter model through modern cloud simplicity. The technology industry is at another major inflection point. The rise of mobile, the Internet of Things, data storage and Big...
Given the popularity of the containers, further investment in the telco/cable industry is needed to transition existing VM-based solutions to containerized cloud native deployments. The networking architecture of the solution isolates the network traffic into different network planes (e.g., management, control, and media). This naturally makes support for multiple interfaces in container orchestration engines an indispensable requirement.
Everything run by electricity will eventually be connected to the Internet. Get ahead of the Internet of Things revolution and join Akvelon expert and IoT industry leader, Sergey Grebnov, in his session at @ThingsExpo, for an educational dive into the world of managing your home, workplace and all the devices they contain with the power of machine-based AI and intelligent Bot services for a completely streamlined experience.
Because IoT devices are deployed in mission-critical environments more than ever before, it’s increasingly imperative they be truly smart. IoT sensors simply stockpiling data isn’t useful. IoT must be artificially and naturally intelligent in order to provide more value In his session at @ThingsExpo, John Crupi, Vice President and Engineering System Architect at Greenwave Systems, will discuss how IoT artificial intelligence (AI) can be carried out via edge analytics and machine learning techn...
FinTechs use the cloud to operate at the speed and scale of digital financial activity, but are often hindered by the complexity of managing security and compliance in the cloud. In his session at 20th Cloud Expo, Sesh Murthy, co-founder and CTO of Cloud Raxak, showed how proactive and automated cloud security enables FinTechs to leverage the cloud to achieve their business goals. Through business-driven cloud security, FinTechs can speed time-to-market, diminish risk and costs, maintain continu...
In his session at @ThingsExpo, Arvind Radhakrishnen discussed how IoT offers new business models in banking and financial services organizations with the capability to revolutionize products, payments, channels, business processes and asset management built on strong architectural foundation. The following topics were covered: How IoT stands to impact various business parameters including customer experience, cost and risk management within BFS organizations.
Existing Big Data solutions are mainly focused on the discovery and analysis of data. The solutions are scalable and highly available but tedious when swapping in and swapping out occurs in disarray and thrashing takes place. The resolution for thrashing through machine learning algorithms and support nomenclature is through simple techniques. Organizations that have been collecting large customer data are increasingly seeing the need to use the data for swapping in and out and thrashing occurs ...