the future of banking

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I served as developmental and line editor on this white paper from Booz & Company's financial services team.

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  • 1. Perspective Vanessa Wallace Andrew Herrick The Future of Banking Reappraising Core Capabilities after the Crisis

2. Contact InformationAmsterdamMilanSydney David WyattVincenzo Bafunno Vanessa Wallace PrincipalSenior Executive Advisor Partner +31-20-504-1940+39-02-72509-278 +61-2-9321-1906 david.wyatt@booz.com vincenzo.bafunno@booz.comvanessa.wallace@booz.comBangkokMumbai Andrew Herrick Arthur CalipoJai SinhaSenior Associate PrincipalPartner+61-2-9321-1947 +61-2-9321-2804+91-22-2287-2001 andrew.herrick@booz.com arthur.calipo@booz.com jai.sinha@booz.com Tokyo Beirut Munich Takeshi Fukushima Peter VayanosJohannes BussmannPrincipal PartnerPartner+81-3-3436-8642 +961-1-336433+49-89-54525-535 takeshi.fukushima@booz.com peter.vayanos@booz.com johannes.bussmann@booz.com Zurich ClevelandNew York Carlos Ammann Steffen LausterPaul HydePartner PartnerPartner+41-43-268-2144 +1-216-902-4222+1-212-551-6069carlos.ammann@booz.com steffen.lauster@booz.com paul.hyde@booz.comCopenhagen So Paulo Torsten MoeIvan De Souza PartnerSenior Partner +45-3318-70-02 +55-11-5501-6368 torsten.moe@booz.com ivan.desouza@booz.comLondon Shanghai Alan Gemes Andrew Cainey PartnerPartner +44-20-7393-3290 +86-21-2327-9800 alan.gemes@booz.comandrew.cainey@booz.comBooz & Company 3. EXECUTIVEFor all the chaos in the global banking sector since mid-2007,some things have not changed. The purpose of banking, the SUMMARYneeds of customers, and the core capabilities that drive thestrategies of the most successful banks have endured. What has changed is the environment in which banks operateand compete. The level of government regulation and owner-ship in the sector has risen dramatically. The banking valuechain has been fractured, particularly the links between banksand their customers, in pursuit of returns that proved unsus-tainable and must now be reforged. Finally, the outlook hasshifted to what will almost certainly be a prolonged period oflow growth in the broader economy and the banking sectoritself, with important implications for how banks competeand capture value. If banks hope to survive and prosper, their leaders can neitherconduct business as usual nor adopt temporary fixes andhalf-measures. They must respond at a more fundamentallevel, bolsteringand, to the extent that they are not alreadyin place, creatingthe essential organizational capabilities forthe post-crisis era. This Perspective is designed to guide bankleaders as they ready their institutions for the challenges andopportunities ahead. Booz & Company1 4. The global financial crisis has triggered by increased regulation and even THE FUTURE dramatic alterations to the global econ-outright ownership of the sector. OF BANKING omy and the financial services land-scape. The banking industry has been There is now an urgent need foraccused of bringing the world to itsbanks to reintegrate the value chainknees by taking breathtaking risks, and regain their traditional close-spurred by astronomical compensation, ness to the customer in order towith little regard for the consequences.better manage risk and create value.Much energy has been expended in de-bating the responsibility for this uphea- The outlook has shifted to whatval; however, banking leaders cannotwill almost certainly be a pro-afford to engage in the blame game. longed period of low growth, withThey must realize that despite the chaosimportant implications for howand restructuring experienced by thebanks compete and capture value.banking sector, the fundamentals ofbanking are unchanged. They mustAlthough the fundamentals ofcontinue to fulfill the societal purposebanking are unchanged, bankingof their institutions while steeringleaders cannot respond to thesethem to safe harbor and future success. challenges with the kinds of short-term solutions and temporary fixesTo achieve this, senior leaders must re-that are used to weather minorcognize three developments that havecyclical dips. Instead, they mustbeen set in motion by the financial crisis: analyze and adjust their companiescore capabilities in their continuing The role of government is grow- quest to outperform the market anding around the world, as witnessedtheir competitors. 2 Booz & Company 5. MAPPING THE Morgans takeover of Washington Mutual in the U.S., the merger of the entire sectorrating agencies, credit bureaus, and regulatorshave NEW BANKING Lloyds TSB and HBOS PLC in thebeen compromised. Sovereign risk LANDSCAPE U.K., and Westpacs purchase of St. George Bank in Australia. The has become a component of bank risk registers, since many counterparties ranks of the truly global retail banksare now functioning only with the are thinning, as yesterdays titans support of their home governments. retreat to the security of their home And perhaps most critical, the public markets and capital bases, whiletrust on which banks and bankers The changes to the global banking domestic banks are merging, disap-depend has erodeda trend that has sector are well documented. The pearing, and narrowing the focus of been exacerbated recently as some of worlds largest retail bank is now thetheir businesses. the banks that received U.S. and U.K. China Construction Bank, a Chinesepublic bailout money have gone on to state-owned enterprise. Six of theIt is not just the footprint of the indus-reap record profits, and in some cases largest 20 banks are new to the top try that has changed; its businesshave even returned to the practice order, and four of them are from themodels and supporting structure are of paying massive bonuses to staff. much smaller nations of Canada andbeing altered too. The value proposi- Besides the visible populist reaction in Australia (see Exhibit 1). The stand- tions of seemingly timeless models in many countries, there is also a quieter, alone investment bank, which formerly securitization, mortgage brokerage andbut perhaps more serious erosion in dominated much of the sector, has insurance, private banking, and eventhe credibility of the banking profes- all but disappeared. Consolidation is financial advice are being questioned.sion, particularly among long-term creating high levels of concentration The independence and relevance of the investors, pension fund and endow- in the banking industry; witness J.P. institutions that support confidence in ment managers, and large depositors.Exhibit 1 A Reordering of the Worlds Leading Banks, 20072009Top 20 (February 2007)Top 20 (July 2009)Market CapMarket CapRank Company RankCompany (US$B)(US$B)1Citigroup U.S.2471China Construction Bank China1812Bank of America U.S.2272HSBCU.K. 1723HSBCU.K.2033JPMorgan ChaseU.S. 1454JPMorgan ChaseU.S.1724Bank of America U.S. 1285Mitsubishi UFJJapan 1345Banco Santander Spain1176China Construction Bank China 1276Wells Fargo U.S. 1147UBS Switzerland 1257Goldman Sachs U.S.838Royal Bank of ScotlandU.K.1248BNP Paribas France789Wells Fargo U.S.1179Mitsubishi UFJJapan 69 10Banco Santander Spain 116 10Royal Bank of CanadaCanada67 11BNP Paribas France 97 11BBV ArgentariaSpain 61 12Unicredit Italy96 12Industrial & Commercial Bank of China China 60 13BarclaysU.K. 95 13Credit Suisse Switzerland 56 14BBV ArgentariaSpain86 14BarclaysU.K.55 15Intesa Sanpaolo Italy86 15CBA Australia 54 16Credit Suisse Switzerland84 16Westpac Australia 53 17MizuhoJapan83 17Toronto Dominion Bank Canada50 18Goldman Sachs U.S. 83 18Unicredit Italy 49 19Morgan StanleyU.S. 80 19UBS Switzerland 47 20Socit GnraleFrance 78 20Standard CharteredU.K.46 Fallen from Top 20 since 2007 New to Top 20 since 2007 Source: Datastream Booz & Company 3 6. THEDespite all of this chaos and restruc-money. And they assess their custom-ers financial needs and advise them asturing, the primary purpose of FUNDAMENTALS banking remains unchanged. Banksto the products and services that best OF BANKING ARE have always performed a critical setmatch their financial objectives.of functions in support of society and UNCHANGEDhuman endeavor. They provide a safe Finally, the core organizational capa-haven for the savings of individualsbilities that banks need to pursueand businesses; they allocate capital their purpose and meet customersacross the economy efficiently andneeds have not changed. These areeffectively; and they bridge the diver- customer management, product andgent maturity needs of short-term offer development, risk managementdepositors and long-term borrowers. and pricing, distribution management,If the global financial crisis has dem- operations and IT, asset and liabilityonstrated anything, it is the continu-management, capital managementing and essential nature of these and portfolio strategy, talent manage-banking functions to society. ment, investor relations and stake-holder management, and performanceThe functions of a bank reflect the management.needs of its customers, and these, too,remain unchanged. Banks provide So, if the fundamental nature ofaccounts and services that enable bankingits purpose, the needs of itsindividuals and organizations to safely customers, and the core capabilitieshold cash and make transactions. They it requiresremains unchanged, howprovide loans that enable customers towill the future of banking be affectedbring forward expenditures or invest- by the current financial crisis?ments that would otherwise requireyears or decades of saving. They help As noted above, some overarchingprotect customers by absorbing risksdevelopments have been set in motionthat otherwise could not be borne atby recent events. They represent threeeither an individual or organizationalbroad areas where financial serviceslevel. They provide savings vehiclesinstitutions will need to change theirthat enable customers to invest their practices and ways of thinking. 4 Booz & Company 7. THE UTILITY- The magnitude of the governmentresponse to the financial crisis willIn many countries, the regulatory pen-dulum in banking had swung toward LIKE have fundamental and long-lasting

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