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Global Banking Recovery Stalls, as Risk and Regulatory Costs Bite

Bank Value Creation Weakens Worldwide, Eroded by Rising Risk, Regulation, and Compliance Costs, and Heavy Penalties; Four Initiatives Are Critical for Risk Management Agenda, Says Report by The Boston Consulting Group

NEW YORK— A decade after the financial crisis, the global banking industry has stumbled on the road to recovery, according to a new report by The Boston Consulting Group (BCG). The report, titled Global Risk 2018: Future-Proofing the Bank Risk Agenda, is being released today.

The report proposes a four-part agenda to help chief risk officers (CROs) get their banks back on track: taking a strategic approach to regulatory compliance; elevating the risk-management function’s knowledge and data capabilities; digitizing all risk operations; and adopting disruptive technologies such as artificial intelligence and machine learning in collaboration with regtechs and other fintech startups.

Banks’ economic profit (EP)—profit adjusted for risk and capital costs—weakened on a globally averaged basis in 2016 after five consecutive years of improvement, according to this eighth annual study by BCG of the banking industry’s health, performance, and risks. Worldwide EP fell from 15 basis points in 2015 to 11 basis points in 2016 and remained strongly divergent by region.

The report says that banking performance has eroded largely because of tougher competition, digital disruption, and rising costs and complexity linked in particular to ongoing waves of regulatory scrutiny and change, both global and local.

Banks Face 200 Regulatory Changes Daily, as Penalties Rise to $345 Billion

The global volume of regulatory revisions that banking CROs must monitor and implement has escalated to an average of 200 per day, a level that has remained stable over the past two years but represents a threefold increase from the 2011 level. Cumulative financial penalties for noncompliance imposed since 2009 reached $345 billion at the end of 2017, an increase of $22 billion over the total at the end of 2016.

“Successful chief risk officers will master the evolving regulation and compliance requirements as part of a broader agenda to overhaul the role and capabilities of the bank’s risk management function for the future,” said Gerold Grasshoff, the global leader of BCG’s risk management segment and a coauthor of the report.

Bank Performance Weakens in Almost Every Region

BCG’s assessment of financial results by region found that performance in 2016, while notably divergent, weakened everywhere but in Latin America.

North American banks suffered their first annual decline since the 2007–2008 global financial crisis, interrupting what had been a continuous recovery. European banks continued their struggle to recover, burdened by high volumes of nonperforming loans (NPLs) on their balance sheets.

“Standardizing the legal treatment of NPLs in Europe across individual national jurisdictions would be a crucial step in solving the NPL problem,” Grasshoff said.

The recovery of banks in the Middle East and Africa faltered, while Asia-Pacific banks registered a significant two-year drop. Only Latin American banks registered strong EP growth, following a sharp decline in 2015.

BCG research assessed the EP generated from 2012 to 2016 by retail, commercial, and investment banks, covering more than 80% of the global banking market. EP—which weighs refinancing, operating, capital and risk costs against income—provides a comprehensive measure of bank financial health.

A copy of the report can be downloaded at http://on.bcg.com/2EWeDB4.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About Boston Consulting Group

Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact.

To succeed, organizations must blend digital and human capabilities. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change. BCG delivers solutions through leading-edge management consulting along with technology and design, corporate and digital ventures—and business purpose. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, generating results that allow our clients to thrive.

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