Over the past five years the Basel III capital adequacy
regime has been driving banks to set aside more regulatory capital and pushing
their balance sheets to contract. With higher tier-one capital requirements,
the cost of capital is up, and so a fundamental re-assessment of business line
profitability has taken place in many banks. This has affected the way
financial institutions (FIs) develop and sell their products across asset
classes like foreign exchange (FX), money market (MM) and fixed income.
Corporations and high-net-worth individuals (HNWIs) are demanding
alternative sources of yield, providing an opportunity for treasurers who can
offer enhanced customer service. This includes offering a broader set of asset
classes, derivatives and structured products combined with functional-rich web
portals through which customers can readily carry out transactions and see
summaries of their engagements with the bank.
Many banks and
brokers have offered this to their larger clients and have already invested in
technology. Now it is coming to a much wider audience.
consequence of dealing with more advanced products, institutions need to adopt
enhanced modeling and risk management capabilities. Both FIs and their clients
face similar challenges, although the degree of sophistication may differ.
These challenges are highlighted by a continued and further focus on
the core of all treasuries – the day-to-day management, risk assessment and
implementation of policies related to cash and liquidity management.
Capital markets participants that already have a strong franchise in
particular asset classes, or offer special regional access, may be
well-positioned to maintain a competitive edge. There will always be clients
who need to carry out large-value trades in single names that need to be
brought together with liquidity.
FIs that can add value to their
clients’ needs by providing better service, proactive response and advice
regarding changes in market conditions can garner their support and trust.
The Next Five Years
Will this trend
continue for the next five years? Looking into the crystal ball is always
difficult, but there are a few trends that have the potential to shape the
global banking business over the next five years.
It is obvious
that the prevailing financial conditions are poised to change in the coming
five years. The quantitative easing (QE) ‘tap’ flooding the global economy
with cheap money will be switched off. Low interest rates may also need to
rise. These two factors alone will likely create a bumpy ride in the economies
of corporations and their FI partners.
While regulatory activity
has been a key response to the crash in 2008, we are starting to see the
emergence of a less harsh global regulatory atmosphere. FIs are needed to oil
the economy, and financial markets for equities and bonds fund necessary
capital to drive the activities of our everyday lives. In some instances,
politicians are realising that locking down banking activity in their own
regulatory regime may be to the detriment of their country’s growth.
If banks are too harshly regulated, they will see their business going abroad
or, worse, other industries’ business losing competitiveness and going abroad.
We have seen certain concessions, such as the threshold for margining
over-the-counter (OTC) derivatives being raised for non-FIs. Over the next five
years, we may see others.
Finally, those producing the technology
for trading institutions and providing global access to financial markets will
increase the sophistication of tools available to all. Applications to trade
almost anything already exist. Today’s capital markets participant can benefit
from exposure to improving and pioneering technology – the next five years will
continue to see much innovation in the technology space.
continued desire of FIs to extend services to all types of customers on single
platforms is evident. The needs of corporates to take advantage of
‘self-service’ trading on electronic venues, and automated risk/limit
management of those trades will continue to drive progress. Automation has
become fundamental to staying competitive in the global business of servicing
corporations. The emergence of platforms that allow corporations to build
their own structured products is a firm pointer in this direction.
All of these market forces have driven a harsh consideration of the costs of
IT, for both FIs and the customers they serve. Much more has been automated –
and wherever possible, IT infrastructures have been simplified. Automation and
consolidation have become the name of the game.
For the global capital
markets, the next five years will see these various trends cement themselves
into the ‘new normal’ for our industry.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?