The day after tomorrow…

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PricewaterhouseCoopers analysis

The global financial landscape has reshaped significantly, states a recent paper by PricewaterhouseCoopers, “The Day after Tomorrow”, that analyses the emerging themes and new models as the fallout from the credit crisis continues and financial services providers grapple with a new environment.
According to the PwC paper, a distinguishing feature of the new landscape is an accelerated shift of economic power towards the East; a simpler more transparent form of banking based on a more classic banking model; governments “inside the tent”, raising significant conflicts of interest; a stricter governance structure based on national and international regulation and the need for sustainable business models that move financial institutions from survival to longer term strategies.
“Financial transformation of this kind is unprecedented and as the financial crisis has developed it has become clear that the only thing you can expect is the unexpected,” said Jeremy Scott, global financial services chairman, PricewaterhouseCoopers. “Consequently, old ways of working may no longer apply in some instances and wholesale change across the sector can be predicted. The interdependency of the global markets combined with the vast array of stakeholders: Government, regulators, management and shareholders with interests in returning to less volatile times, make it ever more vital that action to deal with uncertainty is taken.”
According to the PwC paper, a smaller, more tightly regulated banking system and the dominance of the universal banking model will be central features of a new banking landscape. The shadow banking system will largely be dismantled. Banks that relied heavily on capital markets for their liquidity and that were specialist rather than universal are having to restructure.
“In future, this “Nouveau Classic” banking model will be simpler, more risk averse and more transparent. Profits will be lower, but risk-adjusted returns will not drop by as much, because the risk profile of the business mix will also decline,” added Richard Kibble, partner, PricewaterhouseCoopers LLP. “Banks will retain a larger part of their own origination and will take more responsibility for the due diligence necessary to ensure credit quality.”
Governments are expected to intervene more heavily in the way the financial system operates, in order to stimulate worldwide economies. This intervention is already evident in the US and UK, with pressure being applied to state-supported banks with respect to re-possessions and foreclosures and SME lending. More conflict should be expected as Governments reflect society’s wishes and exert influence on banks’ governance, tax, dividend policy and compensation. After such a massive bail out, society expects that the banks will adjust their behaviour to reflect the wider public interest and not necessarily shareholder interests.