Publication - Structural changes in banking after the crisis - January 2018
Executive summary
The decade since the onset of the global financial crisis has brought about significant structural changes in the banking sector. The crisis revealed substantial weaknesses in the banking system and the prudential framework, leading to excessive lending and risk-taking unsupported by adequate capital and liquidity buffers.
The effects of the crisis have weighed heavily on economic growth, financial stability and bank performance in many jurisdictions, although the headwinds have begun to subside. Technological change, increased non-bank competition and shifts in globalisation are still broader environmental challenges facing the banking system.
Regulators have responded to the crisis by reforming the global prudential framework and enhancing supervision. The key goals of these reforms have been to increase banks’ resilience through stronger capital and liquidity buffers, and reduce implicit public subsidies and the impact of bank failures on the economy and taxpayers through enhanced recovery and resolution regimes. At the same time, the dynamic adaptation of the system and the emergence of new risks warrant ongoing attention.
In adapting to their new operating landscape, banks have been re-assessing and adjusting their business strategies and models, including their balance sheet structure, cost base, scope of activities and geographic presence. Some changes have been substantial and are ongoing, while a number of advanced economy banking systems are also confronted with low profitability and legacy problems.
This report by the CGFS Working Group examines trends in bank business models, performance and market structure, and assesses their implications for the stability and efficiency of banking markets.
The main findings on the evolution of banking sectors are as follows:
Changes in banking market capacity and structure. The crisis ended a period of strong growth in banking sector assets in many advanced economies. Several capacity metrics point to a shrinking of banking sectors relative to economic activity in several countries directly impacted by the crisis. This adjustment has occurred mainly through a reduction in business volumes rather than the exit of firms from the market. Banking sectors have expanded in countries that were less affected by the crisis, particularly the large emerging market economies (EMEs). Concentration in banking systems has tended to increase, with some exceptions.
Shifts in bank business models. Advanced economy banks have tended to reorient their business away from trading and more complex activities, towards less capital-intensive activities, including commercial banking. This pattern is evident in the changes in banks’ asset portfolios, revenue mix and increased reliance on customer deposit funding. Large European and US banks have also become more selective and focused in their international banking activities, while banks from the large EMEs and countries less affected by the crisis have expanded internationally.
Trends in bank performance. Bank profitability (return on equity) has declined across countries and business model types from the historically high rates seen before the crisis. At least in part, this reflects lower leverage induced by the regulatory reforms. In addition, many advanced economy banks, in particular banks in some European countries, are facing sluggish revenues and an overall cost base that has been resistant to cuts, including, in some cases, legacy costs associated with past investment decisions and misconduct.
The main findings regarding the impact of post-crisis structural change for the stability of the banking sector are related to three areas:
Bank resilience and risk-taking. Banks globally have enhanced their resilience to future risks by substantially building up capital and liquidity buffers. The increased use of stress testing by banks and supervisors since the crisis also provides for greater resilience on a forward-looking basis, which should help support credit flows in good and bad times. In addition, advanced economy banks have shifted to more stable funding sources and invested in safer and less complex assets. Some of these adjustments may be driven partly by cyclical factors, such as accommodative monetary policy, and hence may diminish as conditions change. Qualitative evidence indicates that banks have considerably strengthened their risk management and internal control practices. Although these changes are hard to assess, supervisors point to significant scope for further improvements, in particular because of the inherent uncertainties about the future evolution of risks.
Copyright: Centralbahnplatz 2 4051 Basel
Switzerland BISBCHBB
Website:www.bis.org
page source https://www.bis.org/
