research proposal banking sector

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• Published: 18 June 2021

Financial technology and the future of banking

• Daniel Broby   ORCID: orcid.org/0000-0001-5482-0766 1  

Financial Innovation volume  7 , Article number:  47 ( 2021 ) Cite this article

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This paper presents an analytical framework that describes the business model of banks. It draws on the classical theory of banking and the literature on digital transformation. It provides an explanation for existing trends and, by extending the theory of the banking firm, it illustrates how financial intermediation will be impacted by innovative financial technology applications. It further reviews the options that established banks will have to consider in order to mitigate the threat to their profitability. Deposit taking and lending are considered in the context of the challenge made from shadow banking and the all-digital banks. The paper contributes to an understanding of the future of banking, providing a framework for scholarly empirical investigation. In the discussion, four possible strategies are proposed for market participants, (1) customer retention, (2) customer acquisition, (3) banking as a service and (4) social media payment platforms. It is concluded that, in an increasingly digital world, trust will remain at the core of banking. That said, liquidity transformation will still have an important role to play. The nature of banking and financial services, however, will change dramatically.

Introduction

The bank of the future will have several different manifestations. This paper extends theory to explain the impact of financial technology and the Internet on the nature of banking. It provides an analytical framework for academic investigation, highlighting the trends that are shaping scholarly research into these dynamics. To do this, it re-examines the nature of financial intermediation and transactions. It explains how digital banking will be structurally, as well as physically, different from the banks described in the literature to date. It does this by extending the contribution of Klein ( 1971 ), on the theory of the banking firm. It presents suggested strategies for incumbent, and challenger banks, and how banking as a service and social media payment will reshape the competitive landscape.

The banking industry has been evolving since Banca Monte dei Paschi di Siena opened its doors in 1472. Its leveraged business model has proved very scalable over time, but it is now facing new challenges. Firstly, its book to capital ratios, as documented by Berger et al ( 1995 ), have been consistently falling since 1840. This trend continues as competition has increased. In the past decade, the industry has experienced declines in profitability as measured by return on tangible equity. This is partly the result of falling leverage and fee income and partly due to the net interest margin (connected to traditional lending activity). These trends accelerated following the 2008 financial crisis. At the same time, technology has made banks more competitive. Advances in digital technology are changing the very nature of banking. Banks are now distributing services via mobile technology. A prolonged period of very low interest rates is also having an impact. To sustain their profitability, Brei et al. ( 2020 ) note that many banks have increased their emphasis on fee-generating services.

As Fama ( 1980 ) explains, a bank is an intermediary. The Internet is, however, changing the way financial service providers conduct their role. It is fundamentally changing the nature of the banking. This in turn is changing the nature of banking services, and the way those services are delivered. As a consequence, in order to compete in the changing digital landscape, banks have to adapt. The banks of the future, both incumbents and challengers, need to address liquidity transformation, data, trust, competition, and the digitalization of financial services. Against this backdrop, incumbent banks are focused on reinventing themselves. The challenger banks are, however, starting with a blank canvas. The research questions that these dynamics pose need to be investigated within the context of the theory of banking, hence the need to revise the existing analytical framework.

Banks perform payment and transfer functions for an economy. The Internet can now facilitate and even perform these functions. It is changing the way that transactions are recorded on ledgers and is facilitating both public and private digital currencies. In the past, banks operated in a world of information asymmetry between themselves and their borrowers (clients), but this is changing. This differential gave one bank an advantage over another due to its knowledge about its clients. The digital transformation that financial technology brings reduces this advantage, as this information can be digitally analyzed.

Even the nature of deposits is being transformed. Banks in the future will have to accept deposits and process transactions made in digital form, either Central Bank Digital Currencies (CBDC) or cryptocurrencies. This presents a number of issues: (1) it changes the way financial services will be delivered, (2) it requires a discussion on resilience, security and competition in payments, (3) it provides a building block for better cross border money transfers and (4) it raises the question of private and public issuance of money. Braggion et al ( 2018 ) consider whether these represent a threat to financial stability.

The academic study of banking began with Edgeworth ( 1888 ). He postulated that it is based on probability. In this respect, the nature of the business model depends on the probability that a bank will not be called upon to meet all its liabilities at the same time. This allows banks to lend more than they have in deposits. Because of the resultant mismatch between long term assets and short-term liabilities, a bank’s capital structure is very sensitive to liquidity trade-offs. This is explained by Diamond and Rajan ( 2000 ). They explain that this makes a bank a’relationship lender’. In effect, they suggest a bank is an intermediary that has borrowed from other investors.

Diamond and Rajan ( 2000 ) argue a lender can negotiate repayment obligations and that a bank benefits from its knowledge of the customer. As shall be shown, the new generation of digital challenger banks do not have the same tradeoffs or knowledge of the customer. They operate more like a broker providing a platform for banking services. This suggests that there will be more than one type of bank in the future and several different payment protocols. It also suggests that banks will have to data mine customer information to improve their understanding of a client’s financial needs.

The key focus of Diamond and Rajan ( 2000 ), however, was to position a traditional bank is an intermediary. Gurley and Shaw ( 1956 ) describe how the customer relationship means a bank can borrow funds by way of deposits (liabilities) and subsequently use them to lend or invest (assets). In facilitating this mediation, they provide a service whereby they store money and provide a mechanism to transmit money. With improvements in financial technology, however, money can be stored digitally, lenders and investors can source funds directly over the internet, and money transfer can be done digitally.

A review of financial technology and banking literature is provided by Thakor ( 2020 ). He highlights that financial service companies are now being provided by non-deposit taking contenders. This paper addresses one of the four research questions raised by his review, namely how theories of financial intermediation can be modified to accommodate banks, shadow banks, and non-intermediated solutions.

To be a bank, an entity must be authorized to accept retail deposits. A challenger bank is, therefore, still a bank in the traditional sense. It does not, however, have the costs of a branch network. A peer-to-peer lender, meanwhile, does not have a deposit base and therefore acts more like a broker. This leads to the issue that this paper addresses, namely how the banks of the future will conduct their intermediation.

In order to understand what the bank of the future will look like, it is necessary to understand the nature of the aforementioned intermediation, and the way it is changing. In this respect, there are two key types of intermediation. These are (1) quantitative asset transformation and, (2) brokerage. The latter is a common model adopted by challenger banks. Figure  1 depicts how these two types of financial intermediation match savers with borrowers. To avoid nuanced distinction between these two types of intermediation, it is common to classify banks by the services they perform. These can be grouped as either private, investment, or commercial banking. The service sub-groupings include payments, settlements, fund management, trading, treasury management, brokerage, and other agency services.

How banks act as intermediaries between lenders and borrowers. This function call also be conducted by intermediaries as brokers, for example by shadow banks. Disintermediation occurs over the internet where peer-to-peer lenders match savers to lenders

Financial technology has the ability to disintermediate the banking sector. The competitive pressures this results in will shape the banks of the future. The channels that will facilitate this are shown in Fig.  2 , namely the Internet and/or mobile devices. Challengers can participate in this by, (1) directly matching borrows with savers over the Internet and, (2) distributing white labels products. The later enables banking as a service and avoids the aforementioned liquidity mismatch.

The strategic options banks have to match lenders with borrowers. The traditional and challenger banks are in the same space, competing for business. The distributed banks use the traditional and challenger banks to white label banking services. These banks compete with payment platforms on social media. The Internet heralds an era of banking as a service

There are also physical changes that are being made in the delivery of services. Bricks and mortar branches are in decline. Mobile banking, or m-banking as Liu et al ( 2020 ) describe it, is an increasingly important distribution channel. Robotics are increasingly being used to automate customer interaction. As explained by Vishnu et al ( 2017 ), these improve efficiency and the quality of execution. They allow for increased oversight and can be built on legacy systems as well as from a blank canvas. Application programming interfaces (APIs) are bringing the same type of functionality to m-banking. They can be used to authorize third party use of banking data. How banks evolve over time is important because, according to the OECD, the activity in the financial sector represents between 20 and 30 percent of developed countries Gross Domestic Product.

In summary, financial technology has evolved to a level where online banks and banking as a service are challenging incumbents and the nature of banking mediation. Banking is rapidly transforming because of changes in such technology. At the same time, the solving of the double spending problem, whereby digital money can be cryptographically protected, has led to the possibility that paper money will become redundant at some point in the future. A theoretical framework is required to understand this evolving landscape. This is discussed next.

The theory of the banking firm: a revision

In financial theory, as eloquently explained by Fama ( 1980 ), banking provides an accounting system for transactions and a portfolio system for the storage of assets. That will not change for the banks of the future. Fama ( 1980 ) explains that their activities, in an unregulated state, fulfil the Modigliani–Miller ( 1959 ) theorem of the irrelevance of the financing decision. In practice, traditional banks compete for deposits through the interest rate they offer. This makes the transactional element dependent on the resulting debits and credits that they process, essentially making banks into bookkeeping entities fulfilling the intermediation function. Since this is done in response to competitive forces, the general equilibrium is a passive one. As such, the banking business model is vulnerable to disruption, particularly by innovation in financial technology.

A bank is an idiosyncratic corporate entity due to its ability to generate credit by leveraging its balance sheet. That balance sheet has assets on one side and liabilities on the other, like any corporate entity. The assets consist of cash, lending, financial and fixed assets. On the other side of the balance sheet are its liabilities, deposits, and debt. In this respect, a bank’s equity and its liabilities are its source of funds, and its assets are its use of funds. This is explained by Klein ( 1971 ), who notes that a bank’s equity W , borrowed funds and its deposits B is equal to its total funds F . This is the same for incumbents and challengers. This can be depicted algebraically if we let incumbents be represented by Φ and challengers represented by Γ:

Klein ( 1971 ) further explains that a bank’s equity is therefore made up of its share capital and unimpaired reserves. The latter are held by a bank to protect the bank’s deposit clients. This part is also mandated by regulation, so as to protect customers and indeed the entire banking system from systemic failure. These protective measures include other prudential requirements to hold cash reserves or other liquid assets. As shall be shown, banking services can be performed over the Internet without these protections. Banking as a service, as this phenomenon known, is expected to increase in the future. This will change the nature of the protection available to clients. It will change the way banks transform assets, explained next.

A bank’s deposits are said to be a function of the proportion of total funds obtained through the issuance of the ith deposit type and its total funds F , represented by α i . Where deposits, represented by Bs , are made in the form of Bs (i  =  1 *s n) , they generate a rate of interest. It follows that Si Bs  =  B . As such,

Therefor it can be said that,

The importance of Eq. 3 is that the balance sheet can be leveraged by the issuance of loans. It should be noted, however, that not all loans are returned to the bank in whole or part. Non-performing loans reduce the asset side of a bank’s balance sheet and act as a constraint on capital, and therefore new lending. Clearly, this is not the case with banking as a service. In that model, loans are brokered. That said, with the traditional model, an advantage of financial technology is that it facilitates the data mining of clients’ accounts. Lending can therefore be more targeted to borrowers that are more likely to repay, thereby reducing non-performing loans. Pari passu, the incumbent bank of the future will therefore have a higher risk-adjusted return on capital. In practice, however, banking as a service will bring greater competition from challengers and possible further erosion of margins. Alternatively, some banks will proactively engage in partnerships and acquisitions to maintain their customer base and address the competition.

A bank must have reserves to meet the demand of customers demanding their deposits back. The amount of these reserves is a key function of banking regulation. The Basel Committee on Banking Supervision mandates a requirement to hold various tiers of capital, so that banks have sufficient reserves to protect depositors. The Committee also imposes a framework for mitigating excessive liquidity risk and maturity transformation, through a set Liquidity Coverage Ratio and Net Stable Funding Ratio.

Recent revisions of theory, because of financial technology advances, have altered our understanding of banking intermediation. This will impact the competitive landscape and therefor shape the nature of the bank of the future. In this respect, the threat to incumbent banks comes from peer-to-peer Internet lending platforms. These perform the brokerage function of financial intermediation without the use of the aforementioned banking balance sheet. Unlike regulated deposit takers, such lending platforms do not create assets and do not perform risk and asset transformation. That said, they are reliant on investors who do not always behave in a counter cyclical way.

Financial technology in banking is not new. It has been used to facilitate electronic markets since the 1980’s. Thakor ( 2020 ) refers to three waves of application of financial innovation in banking. The advent of institutional futures markets and the changing nature of financial contracts fundamentally changed the role of banks. In response to this, academics extended the concept of a bank into an entity that either fulfills the aforementioned functions of a broker or a qualitative asset transformer. In this respect, they connect the providers and users of capital without changing the nature of the transformation of the various claims to that capital. This transformation can be in the form risk transfer or the application of leverage. The nature of trading of financial assets, however, is changing. Price discovery can now be done over the Internet and that is moving liquidity from central marketplaces (like the stock exchange) to decentralized ones.

Alongside these trends, in considering what the bank of the future will look like, it is necessary to understand the unregulated lending market that competes with traditional banks. In this part of the lending market, there has been a rise in shadow banks. The literature on these entities is covered by Adrian and Ashcraft ( 2016 ). Shadow banks have taken substantial market share from the traditional banks. They fulfil the brokerage function of banks, but regulators have only partial oversight of their risk transformation or leverage. The rise of shadow banks has been facilitated by financial technology and the originate to distribute model documented by Bord and Santos ( 2012 ). They use alternative trading systems that function as electronic communication networks. These facilitate dark pools of liquidity whereby buyers and sellers of bonds and securities trade off-exchange. Since the credit crisis of 2008, total broker dealer assets have diverged from banking assets. This illustrates the changed lending environment.

In the disintermediated market, banking as a service providers must rely on their equity and what access to funding they can attract from their online network. Without this they are unable to drive lending growth. To explain this, let I represent the online network. Extending Klein ( 1971 ), further let Ψ represent banking as a service and their total funds by F . This state is depicted as,

Theoretically, it can be shown that,

Shadow banks, and those disintermediators who bypass the banking system, have an advantage in a world where technology is ubiquitous. This becomes more apparent when costs are considered. Buchak et al. ( 2018 ) point out that shadow banks finance their originations almost entirely through securitization and what they term the originate to distribute business model. Diversifying risk in this way is good for individual banks, as banking risks can be transferred away from traditional banking balance sheets to institutional balance sheets. That said, the rise of securitization has introduced systemic risk into the banking sector.

Thus, we can see that the nature of banking capital is changing and at the same time technology is replacing labor. Let A denote the number of transactions per account at a period in time, and C denote the total cost per account per time period of providing the services of the payment mechanism. Klein ( 1971 ) points out that, if capital and labor are assumed to be part of the traditional banking model, it can be observed that,

It can therefore be observed that the total service charge per account at a period in time, represented by S, has a linear and proportional relationship to bank account activity. This is another variable that financial technology can impact. According to Klein ( 1971 ) this can be summed up in the following way,

where d is the basic bank decision variable, the service charge per transaction. Once again, in an automated and digital environment, financial technology greatly reduces d for the challenger banks. Swankie and Broby ( 2019 ) examine the impact of Artificial Intelligence on the evaluation of banking risk and conclude that it improves such variables.

Meanwhile, the traditional banking model can be expressed as a product of the number of accounts, M , and the average size of an account, N . This suggests a banks implicit yield is it rate of interest on deposits adjusted by its operating loss in each time period. This yield is generated by payment and loan services. Let R 1 depict this. These can be expressed as a fraction of total demand deposits. This is depicted by Klein ( 1971 ), if one assumes activity per account is constant, as,

As a result, whether a bank is structured with traditional labor overheads or built digitally, is extremely relevant to its profitability. The capital and labor of tradition banks, depicted as Φ i , is greater than online networks, depicted as I i . As such, the later have an advantage. This can be shown as,

What Klein (1972) failed to highlight is that the banking inherently involves leverage. Diamond and Dybving (1983) show that leverage makes bank susceptible to run on their liquidity. The literature divides these between adverse shock events, as explained by Bernanke et al ( 1996 ) or moral hazard events as explained by Demirgu¨¸c-Kunt and Detragiache ( 2002 ). This leverage builds on the balance sheet mismatch of short-term assets with long term liabilities. As such, capital and liquidity are intrinsically linked to viability and solvency.

The way capital and liquidity are managed is through credit and default management. This is done at a bank level and a supervisory level. The Basel Committee on Banking Supervision applies capital and leverage ratios, and central banks manage interest rates and other counter-cyclical measures. The various iterations of the prudential regulation of banks have moved the microeconomic theory of banking from the modeling of risk to the modeling of imperfect information. As mentioned, shadow and disintermediated services do not fall under this form or prudential regulation.

The relationship between leverage and insolvency risk crucially depends on the degree of banks total funds F and their liability structure L . In this respect, the liability structure of traditional banks is also greater than online networks which do not have the same level of available funds, depicted as,

Diamond and Dybvig ( 1983 ) observe that this liability structure is intimately tied to a traditional bank’s assets. In this respect, a bank’s ability to finance its lending at low cost and its ability to achieve repayment are key to its avoidance of insolvency. Online networks and/or brokers do not have to finance their lending, simply source it. Similarly, as brokers they do not face capital loss in the event of a default. This disintermediates the bank through the use of a peer-to-peer environment. These lenders and borrowers are introduced in digital way over the internet. Regulators have taken notice and the digital broker advantage might not last forever. As a result, the future may well see greater cooperation between these competing parties. This also because banks have valuable operational experience compared to new entrants.

It should also be observed that bank lending is either secured or unsecured. Interest on an unsecured loan is typically higher than the interest on a secured loan. In this respect, incumbent banks have an advantage as their closeness to the customer allows them to better understand the security of the assets. Berger et al ( 2005 ) further differentiate lending into transaction lending, relationship lending and credit scoring.

The evolution of the business model in a digital world

As has been demonstrated, the bank of the future in its various manifestations will be a consequence of the evolution of the current banking business model. There has been considerable scholarly investigation into the uniqueness of this business model, but less so on its changing nature. Song and Thakor ( 2010 ) are helpful in this respect and suggest that there are three aspects to this evolution, namely competition, complementary and co-evolution. Although liquidity transformation is evolving, it remains central to a bank’s role.

All the dynamics mentioned are relevant to the economy. There is considerable evidence, as outlined by Levine ( 2001 ), that market liberalization has a causal impact on economic growth. The impact of technology on productivity should prove positive and enhance the functioning of the domestic financial system. Indeed, market liberalization has already reshaped banking by increasing competition. New fee based ancillary financial services have become widespread, as has the proprietorial use of balance sheets. Risk has been securitized and even packaged into trade-able products.

Challenger banks are developing in a complementary way with the incumbents. The latter have an advantage over new entrants because they have information on their customers. The liquidity insurance model, proposed by Diamond and Dybvig ( 1983 ), explains how such banks have informational advantages over exchange markets. That said, financial technology changes these dynamics. It if facilitating the processing of financial data by third parties, explained in greater detail in the section on Open Banking.

At the same time, financial technology is facilitating banking as a service. This is where financial services are delivered by a broker over the Internet without resort to the balance sheet. This includes roboadvisory asset management, peer to peer lending, and crowd funding. Its growth will be facilitated by Open Banking as it becomes more geographically adopted. Figure  3 illustrates how these business models are disintermediating the traditional banking role and matching burrowers and savers.

The traditional view of banks ecosystem between savers and borrowers, atop the Internet which is matching savers and borrowers directly in a peer-to-peer way. The Klein ( 1971 ) theory of the banking firm does not incorporate the mirrored dynamics, and as such needs to be extended to reflect the digital innovation that impacts both borrowers and severs in a peer-to-peer environment

Meanwhile, the banking sector is co-evolving alongside a shadow banking phenomenon. Lenders and borrowers are interacting, but outside of the banking sector. This is a concern for central banks and banking regulators, as the lending is taking place in an unregulated environment. Shadow banking has grown because of financial technology, market liberalization and excess liquidity in the asset management ecosystem. Pozsar and Singh ( 2011 ) detail the non-bank/bank intersection of shadow banking. They point out that shadow banking results in reverse maturity transformation. Incumbent banks have blurred the distinction between their use of traditional (M2) liabilities and market-based shadow banking (non-M2) liabilities. This impacts the inter-generational transfers that enable a bank to achieve interest rate smoothing.

Securitization has transformed the risk in the banking sector, transferring it to asset management institutions. These include structured investment vehicles, securities lenders, asset backed commercial paper investors, credit focused hedge and money market funds. This in turn has led to greater systemic risk, the result of the nature of the non-traded liabilities of securitized pooling arrangements. This increased risk manifested itself in the 2008 credit crisis.

Commercial pressures are also shaping the banking industry. The drive for cost efficiency has made incumbent banks address their personally costs. Bank branches have been closed as technology has evolved. Branches make it easier to withdraw or transfer deposits and challenger banks are not as easily able to attract new deposits. The banking sector is therefore looking for new point of customer contact, such as supermarkets, post offices and social media platforms. These structural issues are occurring at the same time as the retail high street is also evolving. Banks have had an aggressive roll out of automated telling machines and a reduction in branches and headcount. Online digital transactions have now become the norm in most developed countries.

The financing of banks is also evolving. Traditional banks have tended to fund illiquid assets with short term and unstable liquid liabilities. This is one of the key contributors to the rise to the credit crisis of 2008. The provision of liquidity as a last resort is central to the asset transformation process. In this respect, the banking sector experienced a shock in 2008 in what is termed the credit crisis. The aforementioned liquidity mismatch resulted in the system not being able to absorb all the risks associated with subprime lending. Central banks had to resort to quantitative easing as a result of the failure of overnight funding mechanisms. The image of the entire banking sector was tarnished, and the banks of the future will have to address this.

The future must learn from the mistakes of the past. The structural weakness of the banking business model cannot be solved. That said, the latest Basel rules introduce further risk mitigation, improved leverage ratios and increased levels of capital reserve. Another lesson of the credit crisis was that there should be greater emphasis on risk culture, governance, and oversight. The independence and performance of the board, the experience and the skill set of senior management are now a greater focus of regulators. Internal controls and data analysis are increasingly more robust and efficient, with a greater focus on a banks stable funding ratio.

Meanwhile, the very nature of money is changing. A digital wallet for crypto-currencies fulfills much the same storage and transmission functions of a bank; and crypto-currencies are increasing being used for payment. Meanwhile, in Sweden, stores have the right to refuse cash and the majority of transactions are card based. This move to credit and debit cards, and the solving of the double spending problem, whereby digital money can be crypto-graphically protected, has led to the possibility that paper money could be replaced at some point in the future. Whether this might be by replacement by a CBDC, or decentralized digital offering, is of secondary importance to the requirement of banks to adapt. Whether accommodating crytpo-currencies or CBDC’s, Kou et al. ( 2021 ) recommend that banks keep focused on alternative payment and money transferring technologies.

Central banks also have to adapt. To limit disintermediation, they have to ensure that the economic design of their sponsored digital currencies focus on access for banks, interest payment relative to bank policy rate, banking holding limits and convertibility with bank deposits. All these developments have implications for banks, particularly in respect of funding, the secure storage of deposits and how digital currency interacts with traditional fiat money.

Open banking

Against the backdrop of all these trends and changes, a new dynamic is shaping the future of the banking sector. This is termed Open Banking, already briefly mentioned. This new way of handling banking data protocols introduces a secure way to give financial service companies consensual access to a bank’s customer financial information. Figure  4 illustrates how this works. Although a fairly simple concept, the implications are important for the banking industry. Essentially, a bank customer gives a regulated API permission to securely access his/her banking website. That is then used by a banking as a service entity to make direct payments and/or download financial data in order to provide a solution. It heralds an era of customer centric banking.

How Open Banking operates. The customer generates data by using his bank account. A third party provider is authorized to access that data through an API request. The bank confirms digitally that the customer has authorized the exchange of data and then fulfills the request

Open Banking was a response to the documented inertia around individual’s willingness to change bank accounts. Following the Retail Banking Review in the UK, this was addressed by lawmakers through the European Union’s Payment Services Directive II. The legislation was designed to make it easier to change banks by allowing customers to delegate authority to transfer their financial data to other parties. As a result of this, a whole host of data centric applications were conceived. Open banking adds further momentum to reshaping the future of banking.

Open Banking has a number of quite revolutionary implications. It was started so customers could change banks easily, but it resulted in some secondary considerations which are going to change the future of banking itself. It gives a clear view of bank financing. It allows aggregation of finances in one place. It also allows can give access to attractive offerings by allowing price comparisons. Open Banking API’s build a secure online financial marketplace based on data. They also allow access to a larger market in a faster way but the third-party providers for the new entrants. Open Banking allows developers to build single solutions on an API addressing very specific problems, like for example, a cash flow based credit rating.

Romānova et al. ( 2018 ) undertook a questionnaire on the Payment Services Directive II. The results suggest that Open Banking will promote competitiveness, innovation, and new product development. The initiative is associated with low costs and customer satisfaction, but that some concerns about security, privacy and risk are present. These can be mitigated, to some extent, by secure protocols and layered permission access.

Discussion: strategic options

Faced with these disruptive trends, there are four strategic options for market participants to con- sider. There are (1) a defensive customer retention strategy for incumbents, (2) an aggressive customer acquisition strategy for challenger banks (3) a banking as a service strategy for new entrants, and (4) a payments strategy for social media platforms.

Each of these strategies has to be conducted in a competitive marketplace for money demand by potential customers. Figure  5 illustrates where the first three strategies lie on the tradeoff between money demand and interest rates. The payment strategy can’t be modeled based on the supply of money. In the figure, the market settles at a rate L 2 . The incumbent banks have the capacity to meet the largest supply of these loans. The challenger banks have a constrained function but due to a lower cost base can gain excess rent through higher rates of interest. The peer-to-peer bank as a service brokers must settle for the market rate and a constrained supply offering.

The money demand M by lenders on the y axis. Interest rates on the y axis are labeled as r I and r II . The challenger banks are represented by the line labeled Γ. They have a price and technology advantage and so can lend at higher interest rates. The brokers are represented by the line labeled Ω. They are price takers, accepting the interest rate determined by the market. The same is true for the incumbents, represented by the line labeled Φ but they have a greater market share due to their customer relationships. Note that payments strategy for social media platforms is not shown on this figure as it is not affected by interest rates

Figure  5 illustrates that having a niche strategy is not counterproductive. Liu et al ( 2020 ) found that banks performing niche activities exhibit higher profitability and have lower risk. The syndication market now means that a bank making a loan does not have to be the entity that services it. This means banks in the future can better shape their risk profile and manage their lending books accordingly.

An interesting question for central banks is what the future Deposit Supply function will look like. If all three forms: open banking, traditional banking and challenger banks develop together, will the bank of the future have the same Deposit Supply function? The Klein ( 1971 ) general formulation assumes that deposits are increasing functions of implicit and explicit yields. As such, the very nature of central bank directed monetary policy may have to be revisited, as alluded to in the earlier discussion on digital money.

The client retention strategy (incumbents)

The competitive pressures suggest that incumbent banks need to focus on customer retention. Reichheld and Kenny ( 1990 ) found that the best way to do this was to focus on the retention of branch deposit customers. Obviously, another way is to provide a unique digital experience that matches the challengers.

Incumbent banks have a competitive advantage based on the information they have about their customers. Allen ( 1990 ) argues that where risk aversion is observable, information markets are viable. In other words, both bank and customer benefit from this. The strategic issue for them, therefore, becomes the retention of these customers when faced with greater competition.

Open Banking changes the dynamics of the banking information advantage. Borgogno and Colangelo ( 2020 ) suggest that the access to account (XS2A) rule that it introduced will increase competition and reduce information asymmetry. XS2A requires banks to grant access to bank account data to authorized third payment service providers.

The incumbent banks have a high-cost base and legacy IT systems. This makes it harder for them to migrate to a digital world. There are, however, also benefits from financial technology for the incumbents. These include reduced cost and greater efficiency. Financial technology can also now support platforms that allow incumbent banks to sell NPL’s. These platforms do not require the ownership of assets, they act as consolidators. The use of technology to monitor the transactions make the processing cost efficient. The unique selling point of such platforms is their centralized point of contact which results in a reduction in information asymmetry.

Incumbent banks must adapt a number of areas they got to adapt in terms of their liquidity transformation. They have to adapt the way they handle data. They must get customers to trust them in a digital world and the way that they trust them in a bricks and mortar world. It is no coincidence. When you go into a bank branch that is a great big solid building great big facade and so forth that is done deliberately so that you trust that bank with your deposit.

The risk of having rising non-performing loans needs to be managed, so customer retention should be selective. One of the puzzles in banking is why customers are regularly denied credit, rather than simply being charged a higher price for it. This credit rationing is often alleviated by collateral, but finance theory suggests value is based on the discounted sum of future cash flows. As such, it is conceivable that the bank of the future will use financial technology to provide innovative credit allocation solutions. That said, the dual risks of moral hazard and information asymmetries from the adoption of such solutions must be addressed.

Customer retention is especially important as bank competition is intensifying, as is the digitalization of financial services. Customer retention requires innovation, and that innovation has been moving at a very fast rate. Until now, banks have traditionally been hesitant about technology. More recently, mergers and acquisitions have increased quite substantially, initiated by a need to address actual or perceived weaknesses in financial technology.

The client acquisition strategy (challengers)

As intermediaries, the challenger banks are the same as incumbent banks, but designed from the outset to be digital. This gives them a cost and efficiency advantage. Anagnostopoulos ( 2018 ) suggests that the difference between challenger and traditional banks is that the former address its customers problems more directly. The challenge for such banks is customer acquisition.

Open Banking is a major advantage to challenger banks as it facilitates the changing of accounts. There is widespread dissatisfaction with many incumbent banks. Open Banking makes it easier to change accounts and also easier to get a transaction history on the client.

Customer acquisition can be improved by building trust in a brand. Historically, a bank was physically built in a very robust manner, hence the heavy architecture and grand banking halls. This was done deliberately to engender a sense of confidence in the deposit taking institution. Pure internet banks are not able to do this. As such, they must employ different strategies to convey stability. To do this, some communicate their sustainability credentials, whilst others use generational values-based advertising. Customer acquisition in a banking context is traditionally done by offering more attractive rates of interest. This is illustrated in Fig.  5 by the intersect of traditional banks with the market rate of interest, depicted where the line Γ crosses L 2 . As a result of the relationship with banking yield, teaser rates and introductory rates are common. A customer acquisition strategy has risks, as consumers with good credit can game different challenger banks by frequently changing accounts.

Most customer acquisition, however, is done based on superior service offering. The functionality of challenger banking accounts is often superior to incumbents, largely because the latter are built on legacy databases that have inter-operability issues. Having an open platform of services is a popular customer acquisition technique. The unrestricted provision of third-party products is viewed more favorably than a restricted range of products.

The banking as a service strategy (new entrants)

Banking from a customer’s perspective is the provision of a service. Customers don’t care about the maturity transformation of banking balance sheets. Banking as a service can be performed without recourse to these balance sheets. Banking products are brokered, mostly by new entrants, to individuals as services that can be subscribed to or paid on a fee basis.

There are a number banking as a service solutions including pre-paid and credit cards, lending and leasing. The banking as a service brokers are effectively those that are aggregating services from others using open banking to enable banking as a service.

The rise of banking as a service needs to be understood as these compete directly with traditional banks. As explained, some of these do this through peer-to-peer lending over the internet, others by matching borrows and sellers, conducting mediation as a loan broker. Such entities do not transform assets and do not have banking licenses. They do not have a branch network and often don not have access to deposits. This means that they have no insurance protection and can be subject to interest rate controls.

The new genre of financial technology, banking as a service provider, conduct financial services transformation without access to central bank liquidity. In a distributed digital asset world, the assets are stored on a distributed ledger rather than a traditional banking ledger. Financial technology has automated credit evaluation, savings, investments, insurance, trading, banking payments and risk management. These banking as a service offering are only as secure as the technology on which they are built.

The social media payment strategy (disintermediators and disruptors)

An intermediation bank is a conceptual idea, one created solely on a social networking site. Social media has developed a market for online goods and services. Williams ( 2018 ) estimates that there are 2.46 billion social media users. These all make and receive payments of some kind. They demand security and functionality. Importantly, they have often more clients than most banks. As such, a strategy to monetize the payments infrastructure makes sense.

All social media platforms are rich repositories of data. Such platforms are used to buy and sell things and that requires payments. Some platforms are considering evolving their own digital payment, cutting out the banks as middlemen. These include Facebook’s Diem (formerly Libra), a digital currency, and similar developments at some of the biggest technology companies. The risk with social media payment platform is that there is systemic counter-party protection. Regulators need to address this. One way to do this would be to extend payment service insurance to such platforms.

Social media as a platform moves the payment relationship from a transaction to a customer experience. The ability to use consumer desires in combination with financial data has the potential to deliver a number of new revenue opportunities. These will compete directly with the banks of the future. This will have implications for (1) the money supply, (2) the market share of traditional banks and, (3) the services that payment providers offer.

Further research

Several recommendations for research derive from both the impact of disintermediation and the four proposed strategies that will shape banking in the future. The recommendations and suggestions are based on the mentioned papers and the conclusions drawn from them.

As discussed, the nature of intermediation is changing, and this has implications for the pricing of risk. The role of interest rates in banking will have to be further reviewed. In a decentralized world based on crypto currencies the central banks do not have the same control over the money supply, This suggest the quantity theory of money and the liquidity preference theory need to be revisited. As explained, the Internet reduces much of the friction costs of intermediation. Researchers should ask how this will impact maturity transformation. It is also fair to ask whether at some point in the future there will just be one big bank. This question has already been addressed in the literature but the Internet facilities the possibility. Diamond ( 1984 ) and Ramakrishnan and Thakor ( 1984 ) suggested the answer was due to diversification and its impact on reducing monitoring costs.

Attention should be given by academics to the changing nature of banking risk. How should regulators, for example, address the moral hazard posed by challenger banks with weak balance sheets? What about deposit insurance? Should it be priced to include unregulated entities? Also, what criteria do borrowers use to choose non-banking intermediaries? The changing risk environment also poses two interesting practical questions. What will an online bank run look like, and how can it be averted? How can you establish trust in digital services?

There are also research questions related to the nature of competition. What, for example, will be the nature of cross border competition in a decentralized world? Is the credit rationing that generates competition a static or dynamic phenomena online? What is the value of combining consumer utility with banking services?

Financial intermediaries, like banks, thrive in a world of deficits and surpluses supported by information asymmetries and disconnectedness. The connectivity of the internet changes this dynamic. In this respect, the view of Schumpeter ( 1911 ) on the role of financial intermediaries needs revisiting. Lenders and borrows can be connected peer to peer via the internet.

All the dynamics mentioned change the nature of moral hazard. This needs further investigation. There has been much scholarly research on the intrinsic riskiness of the mismatch between banking assets and liabilities. This mismatch not only results in potential insolvency for a single bank but potentially for the whole system. There has, for example, been much debate on the whether a bank can be too big to fail. As a result of the riskiness of the banking model, the banks of the future will be just a liable to fail as the banks of the past.

This paper presented a revision of the theory of banking in a digital world. In this respect, it built on the work of Klein ( 1971 ). It provided an overview of the changing nature of banking intermediation, a result of the Internet and new digital business models. It presented the traditional academic view of banking and how it is evolving. It showed how this is adapted to explain digital driven disintermediation.

It was shown that the banking industry is facing several documented challenges. Risk is being taken of balance sheet, securitized, and brokered. Financial technology is digitalizing service delivery. At the same time, the very nature of intermediation is being changed due to digital currency. It is argued that the bank of the future not only has to face these competitive issues, but that technology will enhance the delivery of banking services and reduce the cost of their delivery.

The paper further presented the importance of the Open Banking revolution and how that facilitates banking as a service. Open Banking is increasing client churn and driving banking as a service. That in turn is changing the way products are delivered.

Four strategies were proposed to navigate the evolving competitive landscape. These are for incumbents to address customer retention; for challengers to peruse a low-cost digital experience; for niche players to provide banking as a service; and for social media platforms to develop payment platforms. In all these scenarios, the banks of the future will have to have digital strategies for both payments and service delivery.

It was shown that both incumbents and challengers are dependent on capital availability and borrowers credit concerns. Nothing has changed in that respect. The risks remain credit and default risk. What is clear, however, is the bank has become intrinsically linked with technology. The Internet is changing the nature of mediation. It is allowing peer to peer matching of borrowers and savers. It is facilitating new payment protocols and digital currencies. Banks need to evolve and adapt to accommodate these. Most of these questions are empirical in nature. The aim of this paper, however, was to demonstrate that an understanding of the banking model is a prerequisite to understanding how to address these and how to develop hypotheses connected with them.

In conclusion, financial technology is changing the future of banking and the way banks intermediate. It is facilitating digital money and the online transmission of financial assets. It is making banks more customer enteric and more competitive. Scholarly investigation into banking has to adapt. That said, whatever the future, trust will remain at the core of banking. Similarly, deposits and lending will continue to attract regulatory oversight.

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Global Banking Annual Review 2023: The Great Banking Transition

The Global Banking Annual Review 2023: The Great Banking Transition

Banking has had to chart a challenging course over the past few years, during which institutions faced increased oversight, digital innovation, and new competitors, and all at a time when interest rates were at historic lows. The past few months have also brought their share of upsets, including liquidity woes and some bank failures. But, broadly speaking, a favorable wind seems to have returned to the industry’s sails. The past 18 months have been the best period for global banking overall since at least 2007, as rising interest rates have boosted profits in a more benign credit environment.

About the authors

This report is a collaborative effort by Debopriyo Bhattacharyya, Miklós Dietz , Alexander Edlich , Reinhard Höll , Asheet Mehta , Brian Weintraub , and Eckart Windhagen , representing views from McKinsey’s Global Banking Practice.

Below the surface, too, much has changed: balance sheet and transactions have increasingly moved out of traditional banks to nontraditional institutions and to parts of the market that are capital-light and often differently regulated—for example, to digital payments specialists and private markets, including alternative asset management firms. While the growth of assets under management outside of banks’ balance sheets is not new, our analysis suggests that the traditional core of the banking sector—the balance sheet—now finds itself at a tipping point. Given the size of this movement, we have broadened the scope of this year’s Global Banking Annual Review to define banks as including all financial institutions except insurance companies.

In this year’s review, we focus on this “Great Banking Transition,” analyzing causes and effects and considering whether the improved performance in 2022–23 and the recent rise in interest rates in many economies could change its dynamics. To conclude, we suggest five priorities for financial institutions as they look to reinvent and future-proof themselves. The five are: exploiting leading technologies (including AI), flexing and potentially even unbundling the balance sheet, scaling or exiting transaction business, leveling up distribution, and adapting to the evolving risk landscape .

All financial institutions will need to examine each of their businesses to assess where their competitive advantages lie across and within the three core banking activities of balance sheet, transactions, and distribution. And they will need to do so in a world in which technology and AI will play a more prominent role, and against the backdrop of a shifting macroeconomic environment and heightened geopolitical risks.

The past 18 months brought banks their highest highs and lowest lows

The recent upturn arises from the sharp increase in interest rates in many advanced economies, including a 500-basis-point rise in the United States. The higher interest rates enabled a long-awaited improvement in net interest margins, which boosted the sector’s profits by about $280 billion in 2022 and lifted return on equity (ROE) to 12 percent in 2022 and an expected 13 percent in 2023, compared with an average of just 9 percent since 2010 (Exhibit 1).

Over the past year, the banking sector has continued its journey of continuous cost improvement: the cost-income ratio dropped by seven percentage points from 59 percent in 2012 to about 52 percent in 2022 (partially driven by margin changes), and the trend is also visible in the cost-per-asset ratio (which declined from 1.6 to 1.5).

See past reports:

• 2022: Banking on a sustainable path
• 2021: The great divergence
• 2020: A test of resilience
• 2019: The last pit stop? Time for bold late-cycle moves
• 2018: Banks in the changing world of financial intermediation
• 2017: Remaking the bank for an ecosystem world
• 2016: A brave new world for global banking
• 2015: The fight for the customer
• 2014: The road back

The ROE growth was accompanied by volatility over the past 18 months. This contributed to the collapse or rescue of high-profile banks in the United States and the government-brokered takeover of one of Switzerland’s oldest and biggest banks. Star performers of past years, including fintechs and cryptocurrency players, have struggled against this backdrop.

Performance varied widely within categories. While some financial institutions across markets have generated a premium ROE, strong growth in earnings, and above-average price-to-earnings and price-to-book multiples, others have lagged (Exhibit 2). While more than 40 percent of payments providers have an ROE above 14 percent, almost 35 percent have an ROE below 8 percent. Among wealth and asset managers, who typically have margins of about 30 percent, more than one-third have an ROE above 14 percent, while more than 40 percent have an ROE below 8 percent. Bank performance varies significantly, too. These variations indicate the extent to which operational excellence and decisions relating to cost, efficiency, customer retention, and other issues affecting performance are more important than ever for banking. Strongest performers tend to use the balance sheet effectively, are customer centric, and often lead on technology usage.

Between 2017 and 2022, payment providers, capital market infrastructure providers, and asset managers, as well as investment banks and brokers-dealers increased their price to earnings, whereas other financial institutions including GSIB (global systematically important banks), universal banks, and nonbank lenders saw a decline in their price to earnings.

Payment providers, investment banks and broker dealers also increased their earnings per share more than the other types of institutions. Consequently, these two types of institutions come out best in terms of value creation and total return to shareholders among financial institutions during this five-year period.

The geographic divergence we have noted in previous years also continues to widen. Banks grouped along the crescent formed by the Indian Ocean, stretching from Singapore to India, Dubai, and parts of eastern Africa, are home to half of the best-performing banks in the world (Exhibit 3). In other geographies, many banks buoyed by recent performance are able to invest again. But in Europe and the United States, as well as in China and Russia, banks overall have struggled to generate their cost of capital.

One aspect of banking hasn’t changed, however: the price-to-book ratio, which was at 0.9 in 2022. This measure has remained flat since the 2008 financial crisis and stands at a historic gap to the rest of the economy—a reflection that capital markets expect the duration-weighted return on equity to remain below the cost of equity. While the price-to-book ratio reflects some of the long-term systematic challenges the sector is facing, it also suggests the possible upside: every 0.1-times improvement in the price-to-book ratio would cause the sector’s value added to increase by more than $1 trillion.

Looking to the future, the outlook for financial institutions is likely to be especially shaped by four global trends. First, the macroeconomic environment has shifted substantially, with higher interest rates and inflation figures in many parts of the world, as well as a possible deceleration of Chinese economic growth. An unusually broad range of outcomes is suddenly possible, suggesting we may be on the cusp of a new macroeconomic era. Second, technological progress continues to accelerate, and customers are increasingly comfortable with and demanding about technology-driven experiences. In particular, the emergence of generative AI could be a game changer, lifting productivity by 3 to 5 percent and enabling a reduction in operating expenditures of between $200 billion and $300 billion, according to our estimates. Third, governments are broadening and deepening regulatory scrutiny of nontraditional financial institutions and intermediaries as the macroeconomic system comes under stress and new technologies, players, and risks emerge. For example, recently published proposals for a final Basel III “endgame” would result in higher capital requirements for large and medium-size banks, with differences across banks. And fourth, systemic risk is shifting in nature as rising geopolitical tensions increase volatility and spur restrictions on trade and investment in the real economy.

The Great Transition for the balance sheet, transactions, and payments has gained momentum

In this context, the future dynamics of the Great Transition are critical for the banking sector overall. Evidence of the transition’s profound effect on the sector to date abounds. For example, between 2015 and 2022, more than 70 percent of the net increase of financial funds ended up off banking balance sheets, held by insurance and pension funds, sovereign wealth funds and public pension funds, private capital, and other alternative investments, as well as retail and institutional investors (Exhibit 4).

The shift off the balance sheet is a global phenomenon (Exhibit 5). In the United States, 75 percent of the net increase in financial funds ended up off banking balance sheets, while the figure in Europe is about 55 percent.

The growth of private debt is another manifestation of the transition away from traditional financial institutions. Private debt saw its highest inflows in 2022, with growth of 29 percent, driven by direct lending.

Beyond the balance sheet, transactions and payments also are shifting. For example, consumer digital payment processing conducted by payments specialists grew by more than 50 percent between 2015 and 2022 (Exhibit 6).

The oscillating interest rate environment will affect the Great Transition, but exactly how remains to be seen. We may be going through a phase in which a long-term macroeconomic turning point—including a higher-for-longer interest rate scenario and an end to the asset price super cycle—changes the attractiveness of some models that were specifically geared to the old environment, while other structural trends, especially in technology, continue. Fundamentally, the question for banks is to what extent they can offer the products in high demand at a time when risk capacity is broadening and many clients and customers are searching for the highest deposit yields.

Focusing on five priorities can help banks capture the moment

Regardless of the macroeconomic developments, financial institutions will have to adapt to the changing environment of the Great Transition, especially the trends of technology, regulation, risk, and scale. Mergers and acquisitions may gain importance.

As financial institutions consider how they want to change, we outline five priorities which, though not an exhaustive list, can serve as thought starters (Exhibit 7).

• Exploit technology and AI to improve productivity, talent management, and the delivery of products and services. This includes applying AI and advanced analytics to deploy process automation, platforms, and ecosystems. Other principles associated with success include operating more like a tech company to scale the delivery of products and services; cultivating a cloud-based, platform-oriented architecture; and improving capabilities to address technology risks. Distinctive technology development and deployment will increasingly become a critical differentiator for banks.
• Flex and even unbundle the balance sheet. Flexing implies active use of syndication, originate-to-distribute models, third-party balance sheets (for example, as part of banking-as-a-service applications), and a renewed focus on deposits. Unbundling, which can be done to varying degrees and in stages, pushes this concept further and can mean separating out customer-facing businesses from banking as a service and using technology to radically restructure costs.
• Scale or exit transaction business. Scale in a market or product is a key to success, but it can be multifaceted. Institutions can find a niche in which to go deep, or they can look to cover an entire market. Banks can aggressively pursue economies of scale in their transactions business, including through M&A (which has been a major differentiator between traditional banks and specialists) or by leveraging partners to help with exits.
• Level up distribution to sell to customers and advise them directly and indirectly, including through embedded finance and marketplaces and by offering digital and AI-based advisory. An integrated omnichannel approach could make the most of automation and human interaction, for example. Deciding on a strategy for third-party distribution—which could be via partnerships to create embedded finance opportunities or platform-based models—can create opportunities to serve customer needs including with products outside the institution’s existing business models.
• Adapt to changing risks. Financial institutions everywhere will need to stay on top of the ever-evolving risk environment. In the macroeconomic context, this includes inflation, an unclear growth outlook, and potential credit challenges in specific sectors such as commercial real estate exposure. Other risks are associated with changing regulatory requirements, cyber and fraud risk, and the integration of advanced analytics and AI into the banking system. To manage these risks, banks could consider elevating the risk function to make it a true differentiator. For example, in client discussions, product design, and communications they could highlight the bank’s resilience based on its track record of managing systemic risk and liquidity. They could also further strengthen the first line and embed risk in day-to-day activities, including investing in new risk activities driven by the growth of generative AI. Underlying changes in the real economy will likely continue in unexpected ways, requiring banks to remain ever more vigilant.

All these priorities have significant implications for financial institutions’ capital plans, including the more active raising and return of capital. As financial institutions reexamine their businesses and identify their relative competitive advantages in each of the balance sheet, transactions, and distribution components, they will need to ensure that they are positioned to generate adequate returns. And they will need to do so in a very different macroeconomic and geopolitical environment and at a time when AI and other technologies are potentially changing the environment and with a broader set of competitors. Scale and specialization will be determinant, as will value-creating diversification. Minimum economies of scale are also likely to shift, especially where technology and data are the drivers of scale. The years ahead will likely be more dynamic than the immediate past, with the gap between winners and losers increasing even more. Now is the time to begin charting the path forward.

Debopriyo Bhattacharyya is a director of solution delivery in McKinsey’s Gurugram office;  Miklós Dietz is a senior partner in the Vancouver office; Alexander Edlich and Asheet Mehta are senior partners in the New York office, where Brian Weintraub is a partner; Reinhard Höll is a partner in the Berlin office, and Eckart Windhagen is a senior partner in the Frankfurt office.

The authors would like to thank the following colleagues for their contributions to this report: Mayank Aggarwal, Krishna Bhattacharya, Alessio Botta, Andrea Cappo, Miguel Leiria Carvalho, Cristina Catania, Matt Cooke, Alison Corsi, Julie Crothers, Anubhav Das, Chris Depin, Thorsten Ehinger, Nnenna Elumogo, Xiyuan Fang, Fuad Faridi, Max Flötotto, Suhrid Gajendragadkar, Jeff Galvin, Amit Garg, Jonathan Godsall, Peter Gumbel, Nils Jean-Mairet, Rushabh Kapashi, Attila Kincses, Ida Kristensen, Matthieu Lemerle, Kate McCarthy, Jared Moon, Jesus Moreno, Marie-Claude Nadeau, Jatin Pant, Thomas Poppensieker, Angela Samper, Gokhan Sari, Manu Saxena, Kai Schindelhauer, Simone Schöberl, Joydeep Sengupta, Vishnu Sharma, Mark Staples, Vik Sohoni, Gregor Theisen, Marco Vettori, and Nicole Zhou.

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Lehigh Valley Campus in Pennsylvania is proposing to incorporate renewable sources of energy (Hybrid Photovoltaic Cells and Thermal Collector) into the campus and a cybercafé/bookstore business venture in honor of the recently deceased alumnus of PSU, Wayne K. Newton. It is our firm belief that this project will fulfill the Late Wayne Newton’s visionary dream and fulfill the family’s wishes to donate the funds. The campus aims to use these funds to procure hybrid solar module and design a cybercafé/bookstore business premise

The total cost of the project will be $87120.

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Persistent downturns in the global economy have created renewed interest in the systematic risk, a concept that describes unpredictable breakdowns in financial systems. Systemic risks can arise because of correlated defaults among industry players such as banks, insurance companies, shadow banking institutions and other financial service providers(Allen & Gale, 2000). Recent studies have revealed a strong correlation between shadow banking and systematic risks. This research proposal outlines a methodology for understanding the relationship between shadow banking and systemic risks.

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Introduction Many hospitals go against the practice of sustainable of development and environmental conservation. They contribute to pollution and environmental destruction through emission of carbon into the atmosphere, water wastage, unhealthy food and misuse of energy. These actions not only destroy the environmental but also contribute to high disease prevalence (HealthIT 2012). The concept of green hospitals has evolved over time to offer answers to some of the challenges.

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There has been an increase in incidents involving digital cyber attacks worldwide. Most of the databases of corporations are targeted by criminals since they contain sensitive company information, which obtained can be used against the company. Hackers normally attack the databases to acquire sensitive information such as credit card numbers and other personal information of unsuspecting customers and use it to commit internet fraud.

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Abstract: 2

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ASSESSMENT OF OPPORTUNITIES AND CHALLENGES OF ETHIOPIAN BANKING IN ADOPTING E-SERVE

Researchers investigated the challenges and opportunities of adopting E-services in Commercial Bank of Ethiopia. The study conducted based on the data gathered from four branches of CBE, one district office and head office. Statistically analyzed data was obtained from a self administered questionnaire that was distributed to the targeted respondents on 80 customers and 50 employee were sampled using non-probability sampling techniques. The study employed both qualitative and quantitative approach. The study found the opportunities that are environmental factors to adopt E-banking services in CBE includes government support, competitive pressure, legal framework, the national Information Communication Technology(ICT) infrastructure, and government programs on raising ICT awareness. Further, this paper considered technological factors as opportunity to adopt E-banking in CBE. The study also identified environmental factors that are considered as challenges faced by CBE in adopting the new technology and these are high rate of illiteracy, low level of internet penetration, poorly developed ICT infrastructure, high cost of internet, and lack of financial networks that link different banks, 2 | P a g e frequent power interruption technical problems on E-banking products, and no immediate solution to technical problems. At the end, researchers' suggested some measures, which could be taken by the bank and government. The suggestions include: the bank should try to utilize all opportunities that are identified in this research, should focus on informing customers the benefit of using E-banking by using medias and the government should support the bank by developing ICT infrastructure and establish strong legal framework on use of E-banking services.

Related Papers

Demis H Gebreal

The main objective of this study is to identify Perceived benefits and challenges of e-banking adoption on Ethiopian private commercial banks. Mixed research design was employed and primary data was collected through questionnaires from employees and analyzed using quantitative (statistical) and qualitative methods. The study reveals that e-banking service provides benefit for both customers and banks in improving their public image and retain customers for long. Despite the benefit of e-banking service and investment on adopting; the system is not well strengthen in providing services due to several challenges. From these, low level of infrastructure, lack of legal frame works, security risk which lessen confidence of customer to use those technologies, lack of trust on the use of technological innovation and limited top management support are the major challenges of Ethiopian private commercial banks in respect to technology adoption. This study suggested that the government should issue laws that govern e-banking operation, security technologies should be strengthened. Awareness about e-banking should be created using different approaches. Moreover e-banking technologies should be given in a simple and easy to use way.

Euro Asia International Journals

Abstract The study is conducted on the electronic banking practices, opportunities, and challenges of commercial banks. The case of commercial bank of Ethiopia, Nekemte branch the main objectives of the study will be to electronic banking practices, opportunities, and challenges of commercial banks OF Ethiopia Nekemte branch. The respondents of the study are from electronic banking system of Nekekmte town administration office. All necessary data for the accomplishment of the study have been collected from the Banking practice through questionnaires and interview. The result of the data are organized and analyzed by using descriptive through cross tabulation and percentage to analyze the possible solution. The study uses census survey and sampling technique. Keywords:- Banking : modern technology : customer ; satisfaction.

Ayana Gemechu

i Acknowledgement ii Table of contents iii List of tables vii List of Figures viii List of abbreviation ix Chapter one: Introduction 1 1.1. Back ground of the study 1 1.2.Statement of the problem 3 1.3. Research questions 5 1.4. Objective of the study 5 1.5. Methods adopted 6 1.6. Scope and limitation of the study. 7 1.7. Significance of the study 7 1.8. Structure of the paper 7 Chapter Two: Literature Review 9 2.1. Definition of E-banking 9 2.2. The evolution of Ebanking 11 2.3. Electronic banking system in Ethiopian banking industry 12 2.4. Factors influencing banks to adopt E-banking system 15 2.4.1. TechnologyorganizationEnvironment (TOE) framework 16 2.4.1.1. Technological Factor 17 2.4.1.2. Organizational Factor 18

TIJ's Research Journal of Social Science & Management - RJSSM

derbew dagnew

This study aimed at identifying factors that affect E-banking adoption in Ethiopia, in case of the commercial banks in Gondar city. The study used both quantitative and qualitative (mixed) research approach with a Survey design to collect and analyze the data. Target populations of this study are customers and branch managers of the commercial banks in Gondar city. Seven commercial banks (commercial Commercial bank of Ethiopia, Dashen bank, Wegagen bank, Bank of Abbyssinia, United bank, Awash international bank and Nib international bank) where selected purposively for the purpose of the study. Primary data was collected through questionnaire and interview and Secondary data from different source such as documents and reports related with the issues of E-banking system were used in this study. 471 samples of customers were selected randomly from these selected banks and managers of the main branches of these selected banks were also interviewed to strengthen the results of the study...

Patrick Cerna

ICT has brought unprecedented changes and transformation to banks such as online banking, mobile banking, branch networking, automated teller machine (ATM)and Point of sale services. In Ethiopia, in particular to the government-owned Commercial Bank the lack of assistance of employee to its customers on ICT enabled-services and resistance within them hamper its slow adoption. Thus, the purpose of the study is to identify factor affecting customers and employees usage of ICT services in selected branches of commercial banks in Hossana town branches. The study employs descriptive research design and both qualitative and quantitative methods were used. Using structured questionnaires, observations and personal interview, the data were collected from 192samples which were selected by employing availability, convenient and purposive sampling techniques. In order to achieve the research objective descriptive and econometrics (ANOVA, pears correlation and multiple regression models) were employed for data Case Study Tirkaso and Cerna; ACRI, 5(2): 1-8, 2016; Article no. ACRI.27924 2 analysis. The result of multiple regression model revealed that gender and marital status had no influence on the use of ICT services; there was a positive relationship between the age, education level, occupation, security concern, system quality and experiences of the respondents with the use of ICT services. The study confirmed that lack of computer literate professionals, high cost of internet, power interruption, security risk, system quality risk, poor internet connectivity, lack of ICT skilled employees and customers are a major factors that affect Information and Communication Technology services in the banks. Thus, it has been recommended that Commercial Bank of Ethiopia should give additional emphasis to reliability, responsive and transaction efficiency to increase the awareness of customers and employees to use ICT services.

IJSRP Journal

Traditionally banks are in the forefront in harnessing and using technology to improve their products and services. Over a period of time they have been using electronic and telecommunication networks extensively to provide products and services to the customers. This study attempts to understand and identify bankers perception of benefits and risks associated with electronic banking facilities in Ethiopia. Bank employees were the primary source of data and the data so collected was analyzed using mean score analysis. As per the findings of this study it is observed that bankers perceive „ a means to save time‟ and „minimize inconveniences‟ as the most and the least advantage of electronic banking whereas „Need for expertise and training‟ and „ charge a high cost for services‟ are considered as the most and the least risk associated with electronic banking

subramanian shanmugam

Electronic banking helped in modernizing the financial systems, creating economic transparency and contributing to greater predictability, liquidity and stability. The most important advantage and the main reason for migration to electronic banking(e-banking) from traditional paper based banking is to improve operational efficiency by means of reducing transaction time and costs which has helped companies, governments and other end users of e-banking products. Technology provides more opportunity to the customers as well as the banker for their convenience with or without awareness of e- banking products and its services. The banks need to provide necessary information regarding their products and services to maximize customer satisfaction. Product awareness and customer satisfaction is very important tool for successful marketing and business growth. This main objectives of this research study makes an attempt to understand and test whether the customers are aware of the product or...

IJSTE - International Journal of Science Technology and Engineering

This research paper tries to find out the reasons why costumers' are not using e banking facility , study the awareness level of various secure transaction methods and study the difference between proportion of respondents to whom bank educates and proportion of respondents to who bank does not educate about the e-banking services being offered. The administrative management of the bank has a lot of scope of action from the findings of the research.

The Journal of Internet Banking and Commerce

Gardachew Worku

The paper examines the practices, opportunities and challenges of E-banking services in Ethiopia. Ethiopian banking system is one of the most underdeveloped compared to the rest of the world. In Ethiopia cash is still the most dominant medium of exchange and electronic-banking is not well known, let alone used for transacting banking business. All banks in Ethiopia except Dashen Bank are too late to move with technological advancement and they should clearly chart out the time schedule for their integration and technological advancement.

Journal of Business & Financial Affairs

Milion Tafa

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Türkiye Banking Sector Outlook. First Quarter 2024

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Published on Wednesday, May 29, 2024 | Updated on Thursday, May 30, 2024

Profitability of the sector is under pressure of high funding costs which continues to be partially offset by fees & commission income. Credit growth will be subdued due to regulationary caps in the very short term.

• Key points:
• The limited acceleration ahead of the election in March was followed by a moderation in TL credit growth caused by the macro-prudential regulations introduced for consumer credits and TL commercial credits and also by the CBRT’s rate hike in March by 500bps.
• FC lending most recently accelerated, mainly led by the SME lending of public banks. Having in mind the improved short FX positon of the real sector, we do not see any risk yet for the banking sector. Additionally, the CBRT recently (May 23rd) introduced a monthly growth limit of 2% to limit FC credits.
• Increasing de-dollarization of residents support the TL deposit growth rates. Yet, much tighter liquidity policies of the CRBT will make cost of funding even more costly for the sector.
• Asset quality is solid with adequate provisioning. Although being low, NPL ratios of commercial segment is concentrated in certain sectors. On retail side, pick-up in NPL ratios continues, mostly for general purpose loans and consumer credit cards.
• The credit risk indicator, the share of Stage 2 and NPLs in gross loans, declined further to 9.8% in 1Q24 1 for peer deposit banks, according to our calculations.

Documents to download

Report (pdf).

• Deniz Ergun BBVA Research - Senior Economist

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• Banking and Financial Systems

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What are bank research jobs – and what do research analysts do?

• If you work in research in an investment bank, you will make predictions about traded securities. These could be either equity or debt (fixed income).
• You’ll need to understand businesses and economic issues in detail.
• People who succeed in research jobs tend to be good communicators and creative thinkers.
• Top performers in research often go into other roles in fund management or investment banking, although there are plenty of highly-paid and senior jobs in research itself.
• As a researcher, you are effectively a resource for the rest of the bank to consult; there are always opportunities to impress senior bankers.

What do research jobs in banking involve?

The research department of an investment bank is not the most glamorous division, because the people who work there don’t directly generate revenue. Furthermore, it’s a bit of an unhappy coincidence that the name of the most junior career title in investment banking (“analyst”) is also the generic name given to the employees who research and analyze companies, entire sectors, and their creditworthiness. In research, you get “analysts” who are actually Managing Directors . 

However, banks employ lots of research analysts, and they do it for a reason. A research analyst’s job is to understand the reason for the valuation of financial instruments, and a large part of the business of investment banking is to understand what the fair price for something is. This is important if you’re buying and selling bonds and equities in the hope of making money from price changes, but research analysts also help capital markets and advisory bankers to understand their clients’ business and make better pitches. 

In general, research analysts are attached to the sales and trading business line, where they comment on price movements and issue buy and sell (or overweight/ underweight) recommendations to investor clients. Because of this, research analysts will usually specialize either in equities or in debt. Some banks have specialist cross asset research teams working across both, and sometimes there will be a separate economics research team serving both sides of sales and trading, but it is just as common to see both debt and equity divisions employing their own economic researchers focused on the economic implications for their specific markets. Researchers of this breed are often referred to as strategists.

What do fixed income analysis jobs involve?

Fixed income analysis is a job that deals with all areas of interest rate markets and issuers that connect the central bank to sovereign and corporate borrowers. Moyeen Islam of Barclays describes the fixed income strategist’s role as “to translate the economists’ view on the likely policy path of the central bank into a market view.” 

Fixed income analysts tend to have a much greater number of companies to cover than equity research analysts, but unlike equity researchers they don’t generally publish earnings forecasts and make fewer trading recommendations. Consequently, their notes tend to be shorter and they publish fewer updates. Fixed income researchers also need to be aware of the credit ratings of bonds under their coverage, and to anticipate ratings changes. 

Like equity analysts, fixed income (also known as bond research) teams tend to be split by sector and by geography, although fixed income research departments tend to have larger teams covering financials than any other sector, reflecting the fact that the financial sector itself is the largest issuer. Darren Sharma, founder and CEO of Frontline Analysts, says that “you’re basically running a small, very specialized news service with a particular beat to cover, and a readership of a few dozen – maybe a few hundred – extremely well-informed people. Within that little area, you’ve got to be the Wall Street Journal, the Economist and the BBC World Service”. 

What do equity research analysis jobs involve?

Equity research analysts are divided into teams. These will generally be sector-based and follow the same sectoral classifications as the stock market indices – consumer goods, technology, financials, oil & gas and so on. Geographically, the teams will be divided according to the investor base, so there are usually EMEA, Americas, APAC, and emerging markets analyst teams in every sector, who communicate with one another to establish a reasonably consistent global view.

Equity analysts typically cover around ten stocks each and will be expected to write notes on every set of quarterly results for each of the companies they cover, along with regular thematic notes on the industry as a whole and updates when they change their view on valuation or their recommendation. They also maintain spreadsheet models of each of their companies, and publish earnings forecasts. 

The job of an equity analyst is a bit different in a hedge fund . Shawn Cain covers 50 different restaurant, retail, and leisure stocks at hedge fund Citadel . When I was an analyst at an investment bank, I used to write long research reports,” Cain told us. At Citadel, Cain said his job as an analyst is to present the portfolio manager with "actionable investment ideas," and to synthesize other research so that the PM can understand a path to meeting money. He also meets with the management of the companies he covers to help better understand their strategies. 

What do deal research jobs involve?

As well as supporting the sales and trading business by making recommendations to clients and warning the trading desk of upcoming events, research analysts have to write “deal research”. This happens when the bank is involved in an issue of new securities, arranging by the capital markets team (Equity Capital Markets or Debt Capital Markets). Deal research does not contain any investment recommendations: it’s meant to give a summary to investors of the key facts relating to the issuer, a set of earnings forecasts and a range of valuations. 

Deal research is also known as primary research, supporting primary deals. By comparison, everyday trading recommendations are known as secondary research because they refer to securities which have already been issued. Writing primary research is a relatively rare event for equity analysts, as it is associated with IPOs and rights issues. For bond analysts, however, it is the main part of the job, as fixed income securities tend to trade less but require constant new issuance as bonds mature. 

Which skills are required for equity and fixed income research jobs?

Research analysts are often looked on as the nerds of the sales and trading department. To do well in equity or debt research, you need to be comfortable with doing a lot of reading of company accounts and economic data and absorbing much more detailed information than in some other investment banking specialties. Your job is to be the expert that others consult. 

However, research is also a job in which there’s surprising scope for creativity. The currency analysts work in is ideas. The best analysts can take a sideways view and see something that others have missed is what really makes an analyst stand out. Huw van Steenis, vice chairman and partner at management consultant Oliver Wyman, says that analysts need to “read voraciously, analyze the what-ifs and tails and build a mosaic. There is no one way to develop your edge, but being curious, try to be early on a big theme and insisting on catalysts all help”. 

Analysts aren’t confined to the back rooms of the research department. They are expected to make phone calls and presentations to investors and market their ideas and research, and to build relationships with companies in order to understand them and make forecasts. So, although the ability to build an accurate spreadsheet model is important, the ability to communicate and relate to other people is absolutely vital. At the highest levels of the research department, superstar analysts and strategists might find themselves spending nearly all of their time out meeting clients and companies, with a team of juniors back in the office to do the background work and come up with the numbers and facts to support their views. 

These attributes are general across the research department. However, there are also a few differences between the skills needed of equity and fixed income (debt researchers). 

In general, because of the way that the underlying securities work and the risk to the downside, debt analysis has a greater need of skills like precision and attention to detail. By comparison, equity analysts are expected to publish earnings forecasts and price targets, and an equity analyst can sometimes get away with a few minor errors if their big picture understanding of broad trends is really good. 

In both equity and debt research, there is often room for analysts to move on to other areas of the banking industry; because you build up a visible track record of successful and unsuccessful recommendations, analysts are often recruited by hedge funds and the buy side. 

Alternatively, analysts who have strong relationships and understanding of the companies they cover will sometimes find themselves gravitating toward roles in corporate finance/ capital markets or M&A advisory . We’ve also noticed a marked trend for equity analysts to end up in investor relations for the firms they’ve previously covered, too.

Education and qualifications for research jobs

It helps to study the right subjects. SocGen’s recent research recruits have studied finance, economics and mathematics. 

Because researchers often specialize in particular sectors, there can be more variety in the qualifications in research. Medical doctors will sometimes cover biotech firms, for example. After a few years in a particular industry, like healthcare, an MBA can provide an opportunity to pivot into a research job at associate level.

The CFA Charter and the three related CFA exams were designed for researchers, so this is the critical qualification here. If you want to work in research, it probably helps to start studying the CFA Level 1, even at university.

Salaries and bonuses in research

Research jobs are well paid. Below is an excerpt from our 2024 salary and bonus report . Figures are in US dollars, and are an aggregate of all global respondents working in equity research – pay varies by jurisdiction, with the US paying its staff best, generally speaking, with European and Asian bank staff paid comparatively worst. Although bonuses are low for juniors in comparison to other investment bankers, they can increase rapidly once a researcher distinguishes themselves from their peers.

With additional material from Zeno Toulon.

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Special Report

Major GCC Banking Sectors’ Risk Profiles

Thu 30 May, 2024 - 6:11 AM ET

Importance of Risk Profile KRD for VRs Risk profile is one of two qualitative key rating drivers (KRDs) considered for banks’ Viability Ratings (VRs) under Fitch Ratings’ Bank Rating Criteria, and has a typical weight of 10%. However, the risk profile factor is one of the reasons we may assign a VR higher or lower than the VR implied by the weightings of the implied scores. Like the business profile score, the other qualitative factor, risk profile, may have a stronger impact on the assigned VR, both in a negative and a positive sense, than the weighting would suggest. This applies if we believe that, over the long term, it will have a positive or negative impact on a bank’s financial metrics beyond that currently captured in the financial KRD scores. The risk profile factor could also be used as an adjustment for the asset quality assessment and for capital and leverage, both of which can act as a weakest link in the overall assessment of the VR.

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Swiss Federal Council Plans To Strengthen The Country's Too-Big-To-Fail Banking Framework

Banking Industry Country Risk Assessment Update: May 2024

Sustainability Insights: Shareholders Are Calling On Multilateral Lending Institutions To Increase Private-Sector Capital Mobilization For Climate And Development

Currency Exchange Fund N.V. (The)

Your Three Minutes In China Bank Mortgages: Risks To Rise In Lower-Tier Cities

• 29 May, 2024 | 16:55
• Sector Financial Institutions Banks
• Tags Europe Switzerland
• Topic Capital Flows

UBS Could Be Hit By Move To Limit Double Leverage

Supervisors could gain better tools, increased capacity to absorb losses as a going concern, closer alignment on accounting standards and prudent valuation, increased accountability for individual managers, multilayered defenses against deposit run risk, repercussions and rating implications, how would swiss regulators address future resolution cases, getting through the parliamentary process will take time, related research, key takeaways.

• Adopting the Swiss Federal Council's proposed revisions to the country's too-big-to-fail framework would increase regulatory requirements for systemically important banks (SIBs) while strengthening the regulator's supervisory powers and giving it more crisis management options.
• Although some Swiss banks will be more affected than others, we view most of the proposed changes as ratings neutral. The changes also support our view that if a Swiss SIB were to fail, the regulator is most likely to pursue a formal resolution.
• We do not expect these changes to come into effect before 2025, given Switzerland's protracted parliamentary process. They are also likely to be subject to phase-in periods.
• The Federal Council is also exploring options to strengthen banks' capital frameworks but has yet to make specific proposals.

The Swiss government's management of the failure of Credit Suisse in 2023 drew criticism from investors and banks alike. Just over a year later, on April 10, 2024, the Federal Council presented several proposals to strengthen the country's too-big-to-fail banking framework. Its report covers the main pain points highlighted by the Credit Suisse case.

The revised regulations aim to reduce the likelihood that a Swiss SIB will experience another crisis. The proposals would strengthen corporate governance, bank supervision, capital, and liquidity requirements. In addition, the introduction of crisis management tools should improve resolution planning and crisis cooperation among authorities.

In S&P Global Ratings' view, the main effect of the proposals would be to align Swiss bank regulations more closely with those in comparable jurisdictions, such as the EU and the U.K. That said, some of the revisions would mean tighter rules than those in other banking systems. Although the Swiss authorities recognize the need for global coordination and plan to advocate for changes at the Basel table, the Federal Council has signaled that it is determined to implement its proposals. Swiss rule-makers have more freedom than their EU neighbors to implement proposals at a national level, without coordinating policy initiatives across borders. They also benefit from the political momentum generated by the failure of Credit Suisse and its merger with UBS.

Most Swiss SIBs operate only in the domestic market. UBS is the only Swiss globally systemically important bank. Being subject to stricter rules than its global competitors could put UBS at a disadvantage in its foreign banking operations.

For international banking groups, the use of debt at the parent company level to finance equity participations in foreign subsidiaries (that is, double leverage) is a well-documented issue. The parent company, as a stand-alone entity, is itself subject to minimum capital requirements. If risk materializes at the subsidiary level, parent companies with excessive double leverage can quickly find their own capital position constrained. UBS is the only Swiss bank that has foreign subsidiaries.

Swiss regulations currently address double leverage via a scheduled increase in risk-weighting for such participations. However, the Federal Council has now floated the idea of simply deducting equity participations in foreign subsidiaries from the parent bank's capital. This implies full capitalization of the risks stemming from foreign subsidiaries, in compliance with the Basel III standards. However, it would not only mark a departure from the Swiss authorities' previous, gradual approach but also put Swiss rules at odds with those in the EU. The EU's "Danish compromise" allows for a preferential capital treatment of financial subsidiaries.

The design of the new measure is still being debated; the authorities may opt for a full deduction or increase the risk-weighting. Any increase in capital requirements for banks that have foreign subsidiaries would have implications for UBS' business model.

The Swiss authorities plan to introduce forward-looking capital requirements for SIBs, similar to the Pillar 2 requirements that have long been set by supervisors in the EU and U.K. The authorities may also decide to make stress test results public.

In our view, changes such as the ability to set more-tailored capital requirements would give supervisors more options to address any shortcomings that are identified through stress testing. Broadly speaking, the powers available to Swiss supervisors would be on par with those available to their peers in comparable jurisdictions, such as the EU or U.K.

The proposals imply that the Swiss authorities are hesitant to reduce the use of external audit firms for supervisory work or to introduce fines. We note that supervision in other EU jurisdictions also makes increasing use of external audit firms.

The recognition of additional Tier 1 (AT1) instruments as regulatory Tier 1 capital offers a source of risk-bearing capacity that can be tapped relatively early on, while a bank is still a going concern. The Federal Council is exploring options that could strengthen the ability of these hybrid capital instruments to absorb losses at an early stage. Other lawmakers are having similar discussions about how to enhance the ability of AT1 instruments to help stabilize a bank at an earlier point of distress.

One possible option is to introduce clearer rules governing the suspension of interest payments and restrictions on buybacks, should a bank report sustained losses. Alternatively, AT1 instruments typically set the trigger for equity conversion or write down at a common equity Tier 1 ratio of 7%; this could be increased to at least 10%.

The Federal Council has explored options such as allowing only convertible instruments, which would remove the possibility of a write-down feature. It has even reviewed the option of potentially removing AT1 instruments from regulatory Tier 1 capital. However, we understand that these alternatives were not included among the proposals that were put forward for consideration.

The Federal Council has suggested tightening the standards on the prudent valuation and the recoverability of certain balance sheet items to align Swiss rules more closely with EU rules. This would affect the treatment of participations, goodwill, intangibles, and deferred tax assets. When Credit Suisse merged with UBS, certain of its assets had to be sharply devalued, by an amount that far exceeded the prudent valuation adjustment. This had a negative effect on its level of capital.

One lesson learnt from the Credit Suisse case was that incentive structures could increase moral hazard. The authorities therefore propose revising the senior manager regime to enhance the accountability of individual decision-makers. For example, the Swiss Financial Market Supervisory Authority (FINMA) could be given the ability to associate one or more specific managers with misconduct, similar to the U.K. system.

In addition, the Federal Council has proposed tying variable compensation more closely to sustainable, measurable success; for example, by introducing vesting periods and claw-back mechanisms. The council explicitly stated that such measures could target staff at a wider range of Swiss banks, not just SIBs. The proposal would not introduce limits on the level of variable compensation allowed, in line with existing regulation.

The Swiss authorities had decided in 2022 to tighten liquidity requirements--those changes came into effect in January 2024. However, the failure of Credit Suisse taught Swiss policymakers the importance of a multifaceted regulatory response to the issues presented by rapid, massive deposit runs. Metric adjustments cannot be the only means of addressing deposit run risk. It would not be feasible to require banks to hold sufficient liquidity to meet an outflow similar in size to the runs on Credit Suisse or U.S. regional banks.

Liquidity coverage ratio requirements for Swiss banks are higher than those in most other jurisdictions, including the EU. Therefore, we still expect the Swiss authorities to advocate at an international level for equivalent adjustments to the main liquidity requirements, particularly those related to the calibration of deposit outflows. Although this should provide additional protection, such a response can only go so far. Other lines of defense are needed.

As a second line of defense against liquidity stress, the Federal Council proposals emphasize the role of the central bank as a lender of last resort. The Swiss National Bank, like many other comparable central banks, has its function as a lender of last resort enshrined in its toolkit. The Swiss authorities would like to both increase the pool of available collateral and lower the stigma associated with accessing "last resort" facilities.

A third line of defense is also needed. The Swiss authorities envisage that this should take the form of a public liquidity backstop. The backstop would allow the central bank to lend to SIBs, in exceptional circumstances, without requiring collateral. Loans would be backed only by the security provided by preferential creditor rights in case of bankruptcy. Crucially, the proposal states that the backstop should be enshrined into law, rather than relying on being approved on an ad hoc basis using emergency powers. This measure has already been submitted to the Swiss parliament, in September 2023; we explored its consequences in " Swiss Public Liquidity Backstop Has Limited Implications For Hybrid Ratings ," published on Sept. 18, 2023, on RatingsDirect.

UBS already faces higher capital requirements when the Basel III rules are adopted in full on Jan. 1, 2025. These will require it to have a total loss-absorbing capacity of 27.6%. Adding the Federal Council's proposed measures to its other going-concern requirements would make these higher than those for many other globally systemically important banks in Europe. Switzerland's minister of finance estimates that UBS' revised capital requirements could have an additional impact of US$15 billion-US$25 billion, forcing the bank to build up further capital or reduce its risk-weighted assets.

Nevertheless, we consider most of the authorities' proposals on banks' corporate governance and supervision to be ratings neutral. Most of them simply align the Swiss regulatory framework with that seen in comparable global jurisdictions.

In general, we view having tighter banking rules compared with other regulatory regimes as positive, under our banking industry and country risk assessment (BICRA). However, the failure of Credit Suisse indicated that industry risk in the Swiss banking sector was higher than we had previously thought (see " Select Swiss Banks Affirmed After Review Of Banking Sector; BICRA Group Remains '2' ," published on July 24, 2023). A strengthening of the BICRA would depend not only on stricter rules on paper, but also on a track record of timely and appropriate intervention by FINMA. In our view, applying the proposed rules would require a cultural change on regulation and we have yet to see how FINMA would apply its new powers, in practice.

At this stage, Swiss policymakers have yet to provide a final decision; instead, they have laid out multiple options. Some of the suggested changes--such as those affecting the capital framework or increasing the prescribed liquidity holdings--could have profound implications for Swiss SIBs' capital and balance sheet structure. If adopted, the higher capital requirements could bolster some of our ratings on Swiss banks and their hybrid instruments, in the medium- to long-term, by strengthening our risk-adjusted capital metrics. For now, we will wait and see which options make the cut.

Switzerland's multi-tiered banking system

FINMA uses a methodology similar to that of the Financial Stability Board to categorize domestic banks into different categories based on their total assets, assets under management, privileged deposits, and required capital. Supervision then depending on the categorization. Less-significant institutions can benefit from reduced calculation and disclosure obligations under Switzerland's small banks regime. Midsize banks, such as cantonal banks, are subject to more-continuous and intensive supervision. Extremely large, important, and complex market participants are subject to higher capital, liquidity requirements and may also be required to prepare resolution strategies.

Except for the governance measures, we anticipate that the recent proposals will affect only SIBs, and that there will be some differentiation between global SIBs (banks that have an extensive international reach) and domestic SIBs (those that have a domestic focus).

UBS is the only global SIB in Switzerland. The domestic SIBs are:

• PostFinance, the banking arm of the Swiss postal service;
• Raiffeisen Group, the head organization of the Swiss cooperative sector; and
• Zuercher Kantonalbank, which is owned by the canton of Zurich.

The Swiss authorities, and Credit Suisse itself, had spent several years making preparations for a potential resolution. Nevertheless, in the event, decision-makers made a pragmatic decision to merge Credit Suisse with UBS instead of implementing a formal resolution process.

Some were concerned that this decision signaled a change in the Swiss authorities' approach to crisis management for too-big-to-fail institutions. However, we did not subscribe to this view at the time, and the authorities later confirmed that they had no plans to make substantive changes to the regulatory framework. This supports our analytical approach; our base-case scenario still assumes that distressed systemic banks in Switzerland would be subject to a formal resolution.

The proposed changes represent a strengthening of the crisis management framework and pointedly demonstrate the Swiss authorities' future intentions:

• Strengthening the early intervention powers granted to supervisors would ensure that regulators could make more-proactive decisions if a bank's financial situation were to deteriorate.
• Expanding the resolution options grants the authorities even more flexibility at the point of failure (for example, giving them the option of mandating an orderly wind-down).

In our view, these measures incrementally improve the Swiss resolution framework because they provide a wider range of tools to be used in distress.

Before taking effect, the Federal Council's measures could pass through various legal stages. Initially, they would be simple FINMA expectations. Thereafter, we could see changes to the ordinances and, finally, following parliamentary approval, the measures could be enshrined in law through an act of parliament. The proposals relating to supervision could go through this process largely intact. For those aspects related to liquidity and capital requirements, the proposals are less specific and there is greater uncertainty regarding the exact scope of the changes. Implementation of some of the proposals could be delayed if they are put to a public referendum before being enshrined into law; this could occur if there is increased public interest in the proposals. We do not expect most of these measures to come into effect before 2025. Even then, we consider the changes likely to be subject to a phase-in period, similar to that applied during the implementation of Basel III.

• Your Three Minutes In Banking: Higher Minimum Reserve Requirements Will Dent Swiss Banks' Profits , April 26, 2024
• Top European Bank Rating Trends In 2024: The Future Is Now , Jan. 24, 2024
• Swiss Public Liquidity Backstop Has Limited Implications For Hybrid Ratings , Sept. 18, 2023
• Select Swiss Banks Affirmed After Review Of Banking Sector; BICRA Group Remains '2' , July 24, 2023
• Swiss Public Liquidity Backstop For Banks Comes With Strings Attached , July 17, 2023

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