Could banks cope with the new world order by transferring risk to non-regulated entities to generate liquidity?
“One oft-ignored link between banks and non-regulated entities is their relationships with hedge funds. Banks and their investment banking subsidiaries offer prime brokerage-related lending services to hedge funds, potentially creating a channel through which credit and market risks flow from hedge funds to banks and vice-versa,” says Parwada.
Banks are feverishly looking at alternative funding and pricing strategies and new investor bases as they deal with a landscape full of regulatory burdens, technological change and innovation, evolving customer behaviours and shifting demographics. Each of them is fast-tracking strategies to help them maintain growth, including IT investment, offshore expansion, pricing and brand positioning.
Clearly Basel III will force a major rethink of the entire customer proposition. Strong relationships with customers – close engagement, superior service, and a thorough understanding of the full spectrum of their needs – will be a key differentiator, says Scoular.
Investment in IT is fundamental to understanding and serving customers not just at the profit level, but also in terms of how much of a risk they are, how much capital they use and whether they are depositors as well as borrowers.
Australian banks have underinvested in technology for some time and are mostly now playing catch-up to identify new customers, deal with them through different channels and understand the risks that all this poses in a new environment. This will continue to place pressure on core earnings for some time.
There are a number of trends reshaping the way banks market to customers in the world of social media and meet different customer expectations. One is the concept known as “big data”. Measured in petabytes and zettabytes – or billions and trillions of bytes – “big data” refers to all real-time data – not just transactional data that gets stuck in warehouses but everything banks can get their hands on from Facebook, digital devices and emails.
There is emerging evidence of competitive advantage for organisations that collect and use “big data” to drive new insights and strategies, reports Scoular. One example is the Commonwealth Bank of Australia (CBA), which has made a significant investment in developing deeper relationships with customers by moving to a new core-banking platform based on a customer-centric model. “This helps us better understand customers, their roles and relationships, compared to an account or product-based view,” explains CBA’s senior media adviser Steve Batten. “The bank is actively pursuing technology trends like big data to get deep insights about our customers from a wider range of sources, and be more meaningful in their lives.”
The message is clear. Banks must change because their customers certainly have. And, in the wake of the financial crisis, customers want to know every conceivable aspect of banks’ risk positions and performance. By asking banks to publicly report on capital adequacy, Parwada says regulators are indirectly creating a culture in which consumers regard regulatory information as necessary to assess whether they will or will not open an account. The culture has not taken hold yet, but over time it will become usual for lenders to divulge this type of information to customers, whereas previously customers tended to be oblivious to such issues as risk management and capital adequacy.
Reassuring as this is for customers, banks are now facing detailed, more frequent reporting on nearly every aspect of their operations, which is onerous. It’s yet another challenge at a time when more sophisticated reporting requirements are also coming from management and business teams. And, aside from the increased capital and liquidity demands, Basel III has put an extra burden on IT as banks have been forced to deal with reporting requirements that were completely outside their normal systems.
Stringent demands from regulators, better data and the emergence of new competition will mean an ongoing journey for the banks as they strive to grow.
