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Global Banking Profits Inch Higher Despite Risk and Regulation Hurdles

Nearly Ten Years Past Onset of Financial Crisis, Banking Industry Is Largely on Track Toward Recovery; Managing Risk and Optimizing Capital, Liquidity, and Funding Remain Key Challenges, Says Report by The Boston Consulting Group

BOSTON—Amid a continuously rising tide of regulation and high costs of compliance, banks must create more efficient and effective processes, and leverage technical innovation, if they hope to survive and thrive in the run-up to 2020 and beyond, according to a new report by The Boston Consulting Group (BCG). The report, Global Risk 2017:  Staying the Course in Banking, is being released today.

Drawing on an extensive benchmarking exercise to determine the overall health, risk profile, and performance of the banking industry—a study involving more than 300 retail, commercial, and investment banks that represented more than 80% of all banking assets worldwide—the report examines economic profit (EP) both globally and regionally, analyzes the ever-evolving regulatory climate, and proposes a senior-management agenda to help institutions stay the course in these turbulent times.   

“The seas of regulatory change have continued to surge worldwide, producing a strong impact on banks’ strategic and operational planning efforts,” said Gerold Grasshoff, the global leader of BCG’s risk management segment and a coauthor of the report.  “Coping with regulation must therefore remain a priority, and the increasing costs of doing so will place substantial pressure on all banks regardless of size or specialty.”

Economic Profitability

Tallied globally, banks created positive EP of €159 billion in 2015, or 18 basis points as a percentage of total assets. This was the highest value created since the crisis, as EP ranged from –24 to 17 basis points from 2009 through 2014.  Averaged globally and adjusted for risk costs, it was the fifth year in a row in which EP rose, and the third consecutive year of positive EP performance worldwide, as the industry continued its recovery from the upheaval of 2007–2008.

The global increase in EP in 2015 was driven by the positive regional performance in North America, the Middle East, and Africa, where banks continued to surge ahead. In Europe, banks have stalled in their struggle for recovery. Asia-Pacific banks’ EP shrank slightly compared with performance in 2014, while South American banks’ EP fell by nearly half.

The Regulatory Climate

The report says that the era of constantly evolving and increasing regulatory requirements persists and that the number of individual regulatory changes that banks must track on a global scale has more than tripled since 2011, to an average of 200 revisions per day. Identifying overarching themes, BCG makes several predictions:  that  regulation will stay at an extensive level (despite recent developments in the US that may augur critical challenges to regulatory implementation); that actions by individual jurisdictions, rather than by globally coordinated initiatives, will remain the source of most new and changing requirements that banks must comply with; and that the influence of regulation on strategic and operational planning will continue to be significant.

To assess the current status of regulation, the report also organizes the global spectrum into three clusters:

  • Financial stability is the most developed area of reform, although evolution continues. Capital remains the name of the game, as pressure by investors and peers pushes capital requirements higher.
  • Prudent operations will be required to avoid the errors of the past. Strict regulatory enforcement has brought cumulative financial penalties to banks of $321 billion (through 2016) since the financial crisis    
  • Resolution remains the least developed and most pressing area of reform. There is still no consensus on how to close down (or unwind) banks or on which preparatory, structural measures might be needed.

An Agenda for Staying the Course

According to the report, bank steering functions will need to become more involved and effective in overall cost management. Their tools for doing so are varied—from adjusting the organization and operating models to harnessing the strong potential of new technologies. Partnering with both fintech and regtech startups can provide access to innovative capabilities and solutions relevant to bank steering. At the same time, banks must not forget that their risk and steering functions are ultimately responsible for optimizing the scarce financial resources of capital, liquidity, and funding. Success will require closer collaboration of those functions and more integrated management of the banks’ P&L and balance sheets.

“Managing regulatory change will remain at the top of bank risk and steering agendas for the foreseeable future,” said Grasshoff. “Defining an efficient interaction mode between banks and regulators will be a critical task. In an era of rising regulatory seas, this focus on change management is mandatory, not optional.”

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

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

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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 85 offices in 48 countries.

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