Global Risk 2013–2014: Breaching the Next Banking Barrier

By Gerold GrasshoffWalter BohmayrMatteo CoppolaJörg ErlebachDuncan MartinThomas PfuhlerPeter Lückoff, and Thomas Garside

Banks live globally but die locally.

—Mervyn King, former governor of the Bank of England

Mervyn King’s gimlet-eyed comment on the banking industry, made at the height of the financial crisis, became an instant mantra of the monetary world, quoted in financial circles as readily as Shakespeare in a sophomore literature class.

King neatly captured the existential dilemma facing banks and their regulators with a phrase that resonated on both sides of the widening gulf between them: banks must now compete globally to survive, creating systemic risks that cascade down to countries and economies. If bank oversight fails globally, regulators will ring-fence their interests locally.

In the wake of a crisis unimpeded by oversight, banks face a wave of continuous, and sometimes contradictory, rules and regulatory measures as regulators react both globally and locally.

This publication, the latest in the annual Global Risk report series by The Boston Consulting Group, offers a deep look at these balkanized rules and assesses the increased costs and operational complexity that they impose on banks. Our central conclusion is that the reforms collectively represent the next level of regulatory tightening—a barrier that banks must breach to remain competitive.

To determine the health and overall performance of the industry, we assessed the economic profit generated by a diverse set of 318 retail, commercial, and investment banks, representing 90 percent of all banking assets globally. The new data, as we forecast in last year’s Risk Report, reveal that the industry has reached a new inflection point—including a return to profitability for some, but not all, banks.

We found that while economic profit remained unchanged on a globally averaged basis, there was a sharp divergence in bank performance by region as well as between developed and developing economies. The industry has now diverged into a three-speed world where emerging markets are performing strongly and North American banks are leaving the crisis behind, while European banks continue to struggle, especially in southern Europe.

Worldwide, banks face a common requirement for future value creation. With their economic profit suppressed by regulatory change, banks will be compelled to optimize their risk functions and maximize the value of their “risk dollars.” This report provides a framework and a set of levers that banks can use to gain operational excellence, especially in risk functions.

To breach the regulatory barrier, banks must become proactive. Winning banks will be those that adopt a strategic approach allowing them to categorize, prioritize, and execute against old, new, and evolving regulations and an uncertain future.

To support banks in this approach, we have classified the global universe of current and anticipated reforms into three broad clusters based on regulators’ intent: financial stability, separation and resolution, and prudent operations.

We hope that this report’s findings and recommendations contribute to helping banks thrive both globally and locally.