State of the Financial Services Industry 2010
The intensive care provided by governments and central banks helped most financial institutions survive the crisis of late 2008. They are now in recovery, preparing for life in an uncertain economic and regulatory environment.
Following the failure of Lehman Brothers in late 2008, the interbank lending markets seized up. It seemed possible that the banking system would collapse. Governments intervened on an unprecedented scale, providing financial institutions with over US$1 trillion in debt and equity capital. Most survived. 2009 was then devoted to recovery, as will be 2010 and 2011. As with patients recovering from a medical trauma, the process can be broken into five stages:
1. Intensive care Intensive care had two goals: to stop the bleeding – that is, to prevent liquidity from draining out of the banking system – and to keep the heart beating: that is, to keep banks supplying each other and the real economy with credit. These goals were achieved by extending deposit guarantees, including even to interbank deposits, and supplying financial institutions with hundreds of billions of debt and equity capital.
2. Convalescence Governmental agencies are providing financial institutions with a congenial business environment in which they can rebuild their strength. The rigours of anticipated new regulatory regimes are being forestalled and near zero short-term interest rates are creating a steep yield from which banks are earning considerable “mis-match” earnings.
3. Preparation Redesigning the regulatory regime for the recovered industry is the most important task in preparing for independence. A great deal of uncertainty about future regulation persists. The second important task of preparation is deciding when to withdraw government support from financial institutions. Withdraw it too soon and they may relapse into ill-health, leading to losses on taxpayers’ investment to date. Support them too long, however, and the potential for the perverting the allocation of capital grows.
4. Rebuilding Financial institutions rebuilding their business models for the post-crisis environment are taking several common measures: “de-risking”, cutting costs, upgrading operations and IT and striving to make funding more secure, with a renewed focus on retail deposit gathering. However, we expect more dramatic adaptations will also occur. Changes in the sources of value to financial institutions, both geographically and across industry sectors, will lead to increased M&A. US banks are likely to consolidate from 7000 to 3500 by 2015, and we have already seen a 50 per cent increase in insurers buying banking operations.
5. New lifestyle The crisis has dealt a serious blow to the already poor reputation of the financial services industry. Upon recovery, financial firms will need to demonstrate their healthy new lifestyle not only to regulators but to consumers. Financial firms will need to take a more customer-centric approach to business, aiming to provide customers with the financial outcomes they seek rather than simply pushing products.
With all major economies now out of recession and equity markets recovering lost ground, many claim to see the “green shoots of recovery”. Yet these green shoots may be Astroturf – not signs of a real return to health but mere artefacts of governments’ massive monetary and fiscal stimulus programmes. As these are scaled back, there is a material chance of a W-shaped recovery or that the Japanese experience, of a long period of low growth, will become common in advanced economies. Indeed as there are even reasons to fear another financial crisis in the not-so-distant future.
