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The Reinvention of Global Banking: Withstanding Challenges,Seizing Opportunities

May 29, 19:32 UTC+3
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Over the next several years, there is major turbulence in the offing for the global banking system, experts warn. The economic slowdown and low interest rate environment can wipe out up to a quarter of banks’ earnings. Additional risks are coming from tougher regulation, rapid rise of technologies, and geopolitical uncertainties. To weather those, banks will need transformations previously unheard of.

  • According to McKinsey, banks worldwide will be faced with a threat of major erosions in their profits through 2020. In mature markets, the fall can reach as much as 25% due to the decelerating economy and low rates. For Russian banks, future losses are estimated at USD 25 billion, with an additional blow coming from the high pace of new technologies and stricter regulation.

Greater transparency of the financial system and overall stronger oversight have been the key trends lately.

  • September 2017 is expected to see the first reports by countries and jurisdictions that have committed to the Automatic Exchange of Financial Account Information (AEoI), an initiative aimed at eradicating tax evasion practices. To date, 50 jurisdictions have signed the AEoI agreement. Russia will be joining the programme in 2018, bringing the total number of committing jurisdictions to 100.

This is part of a major action plan initiated by the OECD back in 2014 as a way to fight tax base erosion and profit shifting. Information exchange and the deoffshorisation drive are already reshaping the structure and geography of financial flows.

  • In Russia, the deoffshorisation law signed off in 2014 requires taxpayers to report their shares in foreign companies. According to the Moscow-based International Financial Centre, Russian businesses are moving out of offshore companies – and going back to Russia is one of the scenarios that they use. In 2015, the flow of capital from the Bahamas and Bermuda went up by 43% and 9%, respectively.

Thomson Reuters experts say that 2017 will mark the beginning of a new era in financial regulation. Donald Trump’s presidency and Brexit will also be among factors at play. In revising financial oversight, authorities will be focusing on government interests, withdrawing from the areas that are not aligned with those.

  • The US and Europe already see a trend for the diminishing influence of the Basel Committee on Banking Supervision, Bank for International Settlements, and the Financial Stability Board, established in response to the financial crisis. The stringent Basel III capital requirements damage the competitive ability of financial institutions, bankers in Western countries say.
  • This is happening as the roles of global players are shifting. As one example, in 2016, China’s banking system outperformed that of the eurozone to become the world’s largest by assets.

The latest technologies are also a challenge for global banking, with some of the players not ready for this swift transition, especially when it comes to emerging markets.

  • New technologies require banks to do more as risks for consumers and cyber attack threats are on the rise.
  • KPMG projects that by 2030, responding to technology breakthroughs, banks could go completely online, with clerks replaced by virtual assistants.
  • According to a survey by PwC, 81% of banking and capital markets CEOs are facing threats from the pace of technology change. Almost 75% say they see risks in the lack of key competencies in the area. As a result, part of their business might be taken away by FinTech companies.

Despite the new technologies and regulatory efforts, shadow banking still accounts for a sizeable share of the total market.

  • China has seen a rise in shadow lending in the aftermath of the government campaign to deleverage the national financial system. Moody's Investor Service estimates shadow lending volumes in China at USD 8.5 trillion.

To effectively fight those threats, banks worldwide will have to initiate transformations on an unprecedented scale, experts warn. National regulators are also facing the new reality.

  • In Russia, a major tool to make the banking system more reliable is cleaning up the financial market to eradicate dishonest players. Over the past two years alone, the Bank of Russia has stripped some 200 financial institutions of their licences.
  • Starting January 2018, a three-layered model of banking oversight is planned for introduction to simplify rules for banks with smaller risks and toughen control over those whose risks are higher.
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