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Fifteen years after the global financial crisis, the world of banking is once again facing major challenges. Inflation is higher; bank failures are increasing; perceived risks are rising; geopolitical uncertainty is growing; interest rates are rising. It’s a perfect storm with the world’s banks in the eye.
Financial institutions – again – need to be at the forefront of managing their clients’ cash and their own balance sheets. And the remaining liquid is critical. Australia is not immune in this environment.
Following the Reserve Bank of Australia’s (RBA) ninth rate hike in the past 12 months, local banks will be looking to reassure their clients, investors, regulators and the market at large that they are prepared for such a challenging environment.
Here and there
Each crisis comes with its own set of challenges and in its own context. The world today is different from when the global financial crisis was precipitated by the collapse of the US subprime mortgage market. This event hit an unsuspecting world with a call for bank capital that destroyed bank equity and started a global recession. So what has changed?
The financial standards of banks’ balance sheets are much stronger
Banks must meet more demanding regulatory measures regarding capital adequacy, leverage and liquidity. But there is always room for improvement, as Silicon Valley Bank and Credit Suisse have shown.
Non-financial standards are also being tightened
Investing organizations in meeting net zero carbon goals; social diversity and stronger corporate risk controls – environmental, social and governance (ESG) promises – will not come for free and will continue to influence markets for several years to come. However, these commitments are not destabilizing – quite the opposite.
Improvements in corporate governance should, among other things, reduce operating losses stemming from improper operating practices, fiduciary violations, aggressive sales practices, privacy violations, account switching, and misuse of confidential information.
These practices have come to the fore in Australia following the recent Royal Commission into misconduct in the banking, superannuation and financial services industry. From an environmental perspective, ASIC’s first legal action against a financial services provider for greenwashing reflects the expectation that financial institutions will implement transparent and robust environmental practices.
The profile of bank assets has changed
This is partly due to Basel III capital, leverage and liquidity, as well as credit teams looking to avoid asset classes that are difficult to value.
Interest rates are higher
Interest rates are higher than they have been in a generation and are slowly eroding the value of medium- and long-term bank assets – even traditional, familiar and less complex asset classes. It’s a silent danger that isn’t easy to hear coming.
Communication channels
Communication channels are more accessible, more immediate and more acceptable. News, rumors, sound bytes, memes, data and information are shared faster than ever before. A whisper turns into a roar in no time, and a tweet can cause a run on the bank.
The rise of fintech
New financial technologies emerged that were both friendly and threatening. Some technologies have brought new positive capabilities to the banking community – saving costs, reducing operational risks, promoting good governance and improving the client experience.
Others undermined and disintermediated the banks. Digital banking and fintech innovation has been targeted by the Federal Government through initiatives such as the Enhanced Regulatory Sandbox (ERS) to help the Australian market meet new challenges such as those mentioned above.
Open banking
Regulatory-backed innovations in open banking and payments have radically changed the speed at which money can be accessed and moved. Great for the client, but it brings potential deposit and liquidity volatility. Rapid changes in the composition of the bank’s liabilities can give rise to a new set of risks that the bank must manage.
Powering a better bank
Of the seven shifts described above, three are technologically based. Systems, software and solutions are at the core of banking today, and it is these technologies that bankers must turn to for answers that will ensure the bank’s survival and prosperity.
As regulation and governance have tightened in the wake of the global financial crisis, banks have been forced to become more aware of the importance of managing their own balance sheets more closely while providing their clients with the best service for their cash and liquid balances.
Every dollar of corporate liquidity is a dollar of banking responsibility. An ecosystem of complementary and scalable enterprise treasury services is therefore essential to support banks in providing client-facing functions to automate the management and deployment of client cash. At the same time, banks must deploy tools within the ecosystem to help protect them and increase their return on capital.
We call this ecosystem the Corporate Treasury Exchange (CTX); a composable set of services designed as cloud-native, technologically homogenous. These services are able to satisfy even the most demanding requirements of the bank’s clients – whether they are business, commercial, corporate, state or institutional client segments.
The challenges for which the Corporate Treasury Exchange was developed are critical to the health of a financial institution – and its share price. It is obvious that a bank must be able to offer the best cash management services in order to attract and retain clients. This is where her income comes from.
In addition, helping the bank gain access to the highest quality liabilities is critical to improving bank returns. The better the bank’s liabilities (retail deposits, SME deposits, and corporate deposits that support the working capital cycle), the less capital the bank has to set aside to run its business. The less capital, the higher the returns.
So regulation helps compliant banks become more profitable. But this changing framework has brought challenges – how does a bank differentiate itself to attract the best deposits? And how do they measure their progress?
CTX helps banks address these challenges. Today, banks operate in a highly competitive, super-connected digital world. And technology is essential to solving the problems of differentiation and performance measurement. Software systems are key. Systems that connect, systems that enable interaction between the client and their bank, systems that automate workflows, systems that deliver easy-to-use information and systems that provide insight and intelligence.
Does it matter?
Do I care, you may ask? Well, probably yes; for a number of reasons.
1) If the bank can manage its book of liabilities, if it can collect quality deposits, it can use these deposits for more efficient and profitable lending to its clients.
Explain; quality deposits (although they have immediate access) can be relied on as stable liabilities of the bank. The regulations therefore allow these deposits to finance medium-term loans. If banks can manage and grow these liabilities, then they are able to increase the volume of mortgage loans they are able to support, at better interest rates.
The same applies to other loans that are essential to economic growth and supporting our way of life – for individuals, small businesses and large organisations.
2) As the world moves towards net zero, banks must be able to support their clients’ ESG goals. CTX has tools to help with this; enable clients to put excess cash into ESG-compliant investments; or rewarding clients who have higher ESG scores with better interest rates on their deposits. And all this automatically.
3) And of course bank protection means fewer bankruptcies. During and in the immediate aftermath of the global financial crisis, Australia – like the rest of the world – experienced the collapse of financial institutions. Some required bailouts from taxpayers or stronger players (such as the takeovers of St George and Bank West), often at a significant loss due to outstanding inter-institutional loans.
The impact of these failures has polarized the deposit and loan business at Australia’s big four banks, limiting choice to the most needy clients. Avoiding the impact of the global financial crisis would save taxpayers billions of dollars and keep the market more open for businesses and individuals with weaker financial circumstances.
4) In the meantime, looking at retirement investments, bank stocks will sit in the portfolio. If these banks perform well and return better value to shareholders, dividends will be healthy and share prices will remain strong.
So stronger banks are important for all of us. We need banks that can safely navigate the challenges of today and tomorrow to secure and scalable profitability. And part of the solution is better balance management made possible by modern technology.
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