The failures of traditional banking that led to the ‘credit crunch’ ten years ago may have been the making of the digital challengers that banks are so wary of today.
August 9, 2017, marks a decade since the credit crunch and future for the banks that caused it is still up for debate.
Ten years ago, BNP Paribas was the first major bank to acknowledge the risk of exposure to the sub-prime mortgage market.
“Looking back we can attribute the financial crisis in part to model complexity and systemic obfuscation in the usually valuable derivatives and credit markets,” comments Steve Wilcockson, financial services industry lead at MathWorks, a mathematical computing software firm.
The banking industry has since seen an overhaul of regulation in an attempt to prevent the financial crisis from recurring, but it now faces threats from digital challengers and open banking regulation.
Christian Edelmann, Oliver Wyman’s global head of corporate and institutional banking and wealth and asset management, says: “The capital markets industry has radically reshaped itself since the crisis began 10 years ago. Banks have enhanced their risk management, met new regulatory requirements and cut costs to restore profitability. The next 10 years will see similar radical changes.”
Despite these positive steps, banking revenues have fallen by roughly 25% from pre-crisis levels, according to Oliver Wyman data.
Returns on equity have halved and the spread between the winners and losers has widened, the global management consulting firm found.
Edelmann argues that in ten years’ time, “the winning banks will be those that embrace technological change and proactively transform their workforce”.
That is just as well as, if banks do not embrace technical innovation, they may face extinction.
“The credit crunch shattered consumers’ unflinching trust in traditional banks forever,” Sophie Guibaud, vice president of European Expansion at Fidor Bank says.
The banking industry may have tackled its old demons, but times have moved on – and so have said demons.
The raft of challenges facing banks today includes artificial intelligence, even bigger data, cryptocurrencies and robo-advisors. There is also “a proliferating patchwork of confusing, unsourced and often poorly-supported computer languages, putting the international population at risk of experiencing new global financial and economic crises,” says Wilcockson.
A fintech phoenix from the flames
Digital challenger banks are the phoenix rising from the financial crisis’s ashes, according to Guibaud.
“As consumers have become increasingly sceptical of traditional banks, one positive to emerge from the financial crisis has been the rise in prominence of challenger banks and innovative financial service providers,” she says.
“Consumers now have a much more level playing field when it comes to banking, but most importantly too, they know it. This means that financial organisations can’t take their customers for granted again,” says Guibaud.
If traditional banks want to maintain their position as wealth creators, liquidity providers and sound money managers, financial services should look to how “high integrity” medical and automotive industries address model governance, argues Wilcockson.
“While model and data governance have been elevated in regulations such as Solvency II and the PRA Stress Test guidance, regulators and all industry participants on sell- and buy-sides must work harder to drive thorough model governance standards. Financial risk management can and should lead the industry in this regard,” he concludes.
Image sources: Oliver Wyman
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