Financial services will adapt to its new world with significant changes to its traditional models argues a new PricewaterhouseCoopers (PwC) paper
The global financial landscape has reshaped significantly, states a new PwC paper, “The Day after Tomorrow’’, released on 6 February. The paper analyses the emerging themes and new models as the fallout from the credit crisis continues and financial services (FS) providers grapple with a new environment.
According to the PwC paper, a distinguishing feature of the new landscape is an accelerated shift of economic power towards the East; a simpler more transparent form of banking based on a more classic banking model; Governments “inside the tent’’, raising significant conflicts of interest; a stricter governance structure based on national and international regulation and the need for sustainable business models that move financial institutions from survival to longer term strategies.
Commenting on the new financial services world order, Jeremy Scott, global financial services chairman, PricewaterhouseCoopers, said:
“Financial transformation of this kind is unprecedented and as the financial crisis has developed it has become clear that the only thing you can expect is the unexpected. Consequently, old ways of working may no longer apply in some instances and wholesale change across the sector can be predicted. The interdependency of the global markets combined with the vast array of stakeholders: Government, regulators, management and shareholders with interests in returning to less volatile times, make it ever more vital that action to deal with uncertainty is taken.”
Key findings include:
• Shift in global power towards the East
The shift of financial power from the West to the East has accelerated. The credit crunch has burst the asset bubble predicated on the investment flows generated by the macroeconomic imbalances in a US-centric global economy. The new patterns of world trade and investment that emerge from this fundamental rebalancing will look very different from the US-centred system.
Nigel Vooght, central cluster FS leader, PricewaterhouseCoopers, commented:
“We are moving to a multi-polar world where Western financial centres could be bypassed. Successful globalisation has always followed its customers and therefore banks will follow their customers’ natural trade routes. As the East invests to protect the natural resources it needs to fuel its economies, the banks will follow this investment.’’
• The rise of Nouveau Classic banking
A smaller, more tightly regulated banking system and the dominance of the universal banking model will be central features of a new banking landscape. The shadow banking system will largely be dismantled. Banks that relied heavily on capital markets for their liquidity and that were specialist rather than universal are having to restructure.
Richard Kibble, partner, PricewaterhouseCoopers LLP commented;
“In future, this “Nouveau Classic” banking model will be simpler, more risk averse and more transparent. Profits will be lower, but risk-adjusted returns will not drop by as much, because the risk profile of the business mix will also decline. Banks will retain a larger part of their own origination and will take more responsibility for the due diligence necessary to ensure credit quality.”
• Government “inside the tent”
Governments are expected to intervene more heavily in the way the financial system operates, in order to stimulate worldwide economies. This intervention is already evident in the US and UK, with pressure being applied to state-supported banks with respect to re-possessions and foreclosures and SME lending. More conflict should be expected as Governments reflect society’s wishes and exert influence on banks’ governance, tax, dividend policy and compensation. After such a massive bail out, society expects that the banks will adjust their behaviour to reflect the wider public interest and not necessarily shareholder interests.
David Newton, global FS tax leader, PricewaterhouseCoopers, added:
“Governments will be a major part of financial services for some time to come. It is the 21st century equivalent of the New Deal: Government is providing the capital infrastructure.”
• The pursuit of “zero-risk” regulation
The fundamental weaknesses in the regulatory regime have been exposed, and material, substantive changes to the regulatory environment will be made. There is recognition that regulatory shortcomings cannot be dealt with on a national basis alone. The G20 has already outlined an Action Plan for Regulatory Reform. However, while establishing one regulatory college would be fraught with conflicts of interest, it is an approach that must be strongly reviewed. The
on-shore sector will have more regulation in more areas. Overall, financial stability will be the primary concern and anything that affects it will be regulated in one form or another. This will be aligned with a greater influence from Government over state-supported banks’ strategies.
Jeremy Scott, global financial services chairman, PricewaterhouseCoopers, noted:
“The concept of regulatory colleges is not new, but giving more authority to the lead supervisor would strengthen the concept. At the very minimum, the idea of a college of supervisors must be pushed to the limit, with a strong lead supervisor with the mandate to direct local regulators.”
• Unprecedented fiscal pressure
Tax implications will be great for Western Governments that will face intense fiscal pressure as the recession and the decline in asset prices both reduce tax revenues. Banks will face a short-term reprieve but, in the longer-term, taxes will have to go up. Given the importance of financial services to the economies of the developed world, it is natural that Governments will seek to tax the sector more heavily.
David Newton, global FS tax leader, PricewaterhouseCoopers, said:
“The Government will tell the banks, we saved you from disaster, now we want you to pay your fair share.”
• From survival mode to sustainable strategy
Financial institutions must resist the temptation to become completely reactive at the expense of longer-term considerations. At the same time, they must adjust to the realities of doing business in a world where the interest of multiple stakeholders – Governments and society in general – have become more important.
Jeremy Scott, global financial services chairman, PricewaterhouseCoopers, said:
“To get financial institutions working, a sustainable business model is needed. Most institutions are stuck in survival mode, when their executives need to be taking decisions now on where the business will be in two or three years’ time. My concern is that a lot of organisations won’t address the problem now, which will put them at a competitive disadvantage in the future.”
The global financial landscape has reshaped significantly, states a new PwC paper, “The Day after Tomorrow’’, released on 6 February. The paper analyses the emerging themes and new models as the fallout from the credit crisis continues and financial services (FS) providers grapple with a new environment.
According to the PwC paper, a distinguishing feature of the new landscape is an accelerated shift of economic power towards the East; a simpler more transparent form of banking based on a more classic banking model; Governments “inside the tent’’, raising significant conflicts of interest; a stricter governance structure based on national and international regulation and the need for sustainable business models that move financial institutions from survival to longer term strategies.
Commenting on the new financial services world order, Jeremy Scott, global financial services chairman, PricewaterhouseCoopers, said:
“Financial transformation of this kind is unprecedented and as the financial crisis has developed it has become clear that the only thing you can expect is the unexpected. Consequently, old ways of working may no longer apply in some instances and wholesale change across the sector can be predicted. The interdependency of the global markets combined with the vast array of stakeholders: Government, regulators, management and shareholders with interests in returning to less volatile times, make it ever more vital that action to deal with uncertainty is taken.”
Key findings include:
• Shift in global power towards the East
The shift of financial power from the West to the East has accelerated. The credit crunch has burst the asset bubble predicated on the investment flows generated by the macroeconomic imbalances in a US-centric global economy. The new patterns of world trade and investment that emerge from this fundamental rebalancing will look very different from the US-centred system.
Nigel Vooght, central cluster FS leader, PricewaterhouseCoopers, commented:
“We are moving to a multi-polar world where Western financial centres could be bypassed. Successful globalisation has always followed its customers and therefore banks will follow their customers’ natural trade routes. As the East invests to protect the natural resources it needs to fuel its economies, the banks will follow this investment.’’
• The rise of Nouveau Classic banking
A smaller, more tightly regulated banking system and the dominance of the universal banking model will be central features of a new banking landscape. The shadow banking system will largely be dismantled. Banks that relied heavily on capital markets for their liquidity and that were specialist rather than universal are having to restructure.
Richard Kibble, partner, PricewaterhouseCoopers LLP commented;
“In future, this “Nouveau Classic” banking model will be simpler, more risk averse and more transparent. Profits will be lower, but risk-adjusted returns will not drop by as much, because the risk profile of the business mix will also decline. Banks will retain a larger part of their own origination and will take more responsibility for the due diligence necessary to ensure credit quality.”
• Government “inside the tent”
Governments are expected to intervene more heavily in the way the financial system operates, in order to stimulate worldwide economies. This intervention is already evident in the US and UK, with pressure being applied to state-supported banks with respect to re-possessions and foreclosures and SME lending. More conflict should be expected as Governments reflect society’s wishes and exert influence on banks’ governance, tax, dividend policy and compensation. After such a massive bail out, society expects that the banks will adjust their behaviour to reflect the wider public interest and not necessarily shareholder interests.
David Newton, global FS tax leader, PricewaterhouseCoopers, added:
“Governments will be a major part of financial services for some time to come. It is the 21st century equivalent of the New Deal: Government is providing the capital infrastructure.”
• The pursuit of “zero-risk” regulation
The fundamental weaknesses in the regulatory regime have been exposed, and material, substantive changes to the regulatory environment will be made. There is recognition that regulatory shortcomings cannot be dealt with on a national basis alone. The G20 has already outlined an Action Plan for Regulatory Reform. However, while establishing one regulatory college would be fraught with conflicts of interest, it is an approach that must be strongly reviewed. The
on-shore sector will have more regulation in more areas. Overall, financial stability will be the primary concern and anything that affects it will be regulated in one form or another. This will be aligned with a greater influence from Government over state-supported banks’ strategies.
Jeremy Scott, global financial services chairman, PricewaterhouseCoopers, noted:
“The concept of regulatory colleges is not new, but giving more authority to the lead supervisor would strengthen the concept. At the very minimum, the idea of a college of supervisors must be pushed to the limit, with a strong lead supervisor with the mandate to direct local regulators.”
• Unprecedented fiscal pressure
Tax implications will be great for Western Governments that will face intense fiscal pressure as the recession and the decline in asset prices both reduce tax revenues. Banks will face a short-term reprieve but, in the longer-term, taxes will have to go up. Given the importance of financial services to the economies of the developed world, it is natural that Governments will seek to tax the sector more heavily.
David Newton, global FS tax leader, PricewaterhouseCoopers, said:
“The Government will tell the banks, we saved you from disaster, now we want you to pay your fair share.”
• From survival mode to sustainable strategy
Financial institutions must resist the temptation to become completely reactive at the expense of longer-term considerations. At the same time, they must adjust to the realities of doing business in a world where the interest of multiple stakeholders – Governments and society in general – have become more important.
Jeremy Scott, global financial services chairman, PricewaterhouseCoopers, said:
“To get financial institutions working, a sustainable business model is needed. Most institutions are stuck in survival mode, when their executives need to be taking decisions now on where the business will be in two or three years’ time. My concern is that a lot of organisations won’t address the problem now, which will put them at a competitive disadvantage in the future.”
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