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Creating sustainable business models for financial institutions

Since the global financial crisis, the finance industry has faced a period of tumult not seen since the Great Depression. Policymakers and regulators have responded with a variety of reforms with major implications for business models. Though the industry has made substantial changes, a range of political, market, and economic forces may drive even more fundamental transformations.

The breadth and depth of new international and domestic regulations aimed at reducing systemic risk – most notably, increased capital and liquidity requirements – have challenged financial institutions to revisit fundamental assumptions about the products and services they provide and how they operate. Many policymakers are considering further structural reform measures that could undermine the benefits of scale and diversity for large, global financial institutions. Stronger consumer protection (or market conduct) regulation could challenge retail and wholesale business models.

Concurrently, new competitive threats may emerge from a range of non-traditional sources, such as technology companies and asset managers. These competitors could enter into new markets without the same legacy costs and regulatory constraints as large banks and insurers, increasing the pressures to serve customers efficiently and generate returns for investors.

A sustained dialogue among boards, executives, supervisors, and external stakeholders can help institutions react effectively to this rapidly changing environment and provide the leadership needed to develop safe and sustainable business models for the long-term.

Explore this issue:

  • The changing shape of international banking and the future of Europe

    BGLN participants met on November 28, 2017 in London. They were joined over dinner by Lord Jonathan Hill, former European commissioner. Banks remain under pressure to focus on core businesses, reduce costs, and update their technology, while still in the midst of implementing a range of new regulations. European banks, particularly in wholesale and investment banking, face global competition, while retail banking faces the greatest threat of disruption from new entrants. These pressures reopen debates about the relative benefits of simplicity and scale in various businesses. Participants discussed these issues, as well as Brexit, subsidiarization, and other challenges for international banking models, including the implications of Brexit for European operations.  

  • Data governance: securing the future of financial services

    Data is an increasingly valuable asset. Technology is enabling the creation of more data, improving the ability of financial institutions to gather, store, and analyze it. Protecting that data from cyber-attacks or breaches of customer privacy is imperative. Getting the balance right between managing the risks and grasping the opportunities increasingly requires a strategic approach to data governance and attention from boards of directors. On October 11th and 12th participants in the Bank and Insurance Governance Leadership Networks – directors, executives, regulators, and subject matter specialists – met in New York for the Financial Services Leadership Summit to discuss related issues. ViewPoints synthesizes key themes emerging from discussions, before, during, and after the Summit.

  • Innovation in banking and the changing financial services policy landscape

    Rapid advances in technology, changing customer expectations, and competitive pressures are driving bank leaders to identify opportunitites for innovation. But encouraging innovation in the context of large, international institutions, which are closely supervised, is not easy. Nor is it easy for boards to understand what is possible and how quickly and in what areas they should be investing in innovative approaches. Regulators are determining how best to encourage responsible innovation, while politicians debate significant changes to regulation in the US and internationally. BGLN participants discussed these and related issues over the first half of 2017, culminating with a meeting in New York on June 8.

  • Talent strategy: designing a workforce for the future of insurance

    For today’s leading insurers, board-level talent discussions extend far beyond the traditional topics of top management compensation and succession planning, as boards seek to align talent management more closely with business strategy. Insurers have always viewed human capital as an important asset, but formulating the right talent strategy has become increasingly critical as technological developments transform the way the industry works and the talent it requires. At the same time, an impending wave of retirements and the increasing prominence of millennials in the workforce have implications for recruitment, training, and workplace culture. Facing stiff competition for talent from other sectors, industry insiders worry that they may not be able to attract, retain, and develop the workforces they will need. This ViewPoints synthesizes views among insurance leaders about how boards can best meet this challenge and build the insurance industry workforce of the future. 

  • The future of distribution: insurers grapple with a rapidly changing landscape

    Advancing technology, changing customer preferences, new regulations, and market conditions are propelling significant shifts across the insurance distribution landscape. The need for insurance to be sold more directly and at a lower cost is not new; however, the mandate for change is greater today than in recent memory. Put simply, distribution is taking too much money out of premiums and insurers and customers increasingly believe the current structure does not provide enough value for the money. In this ViewPoints, leading insurers exchange views on how distribution systems may evolve in the near future, as well as how best to modernize distribution systems by addressing possible impediments to change, mitigating risks through the transformation, and providing appropriate board oversight.

  • Banking in transition: overseeing non-financial risk in the midst of technological and business model transformation

    Non-financial risks have been among the greatest sources of risk for large banks since the financial crisis. Conduct and compliance issues, systems failures, and cybersecurity have risen to the top of risk committee agendas, but remain difficult to monitor, measure, and predict. Even as technology offers new mitigation tools, the transformative changes underway in large banks are creating new and different sources of non-financial risks. As banks overhaul systems, operations, business models, and structures to become more agile and efficient, the pace and scale of change is creating execution risk. As banks navigate their way through this transformation, boards and executives are identifying ways to improve management and oversight of these risks.  

  • The transformation mandate: insurers address complexity and sustainability

    An array of challenging conditions, including the accelerating pace of technological change, are making many historical insurance business models unsustainable. As a result, virtually all complex insurers are undertaking massive and often near-continuous transformation efforts. Both transformation and the need to stay abreast of the changing environment demand a different approach to governance. ViewPoints synthesizes discussions among insurance leaders on enterprise transformation and the role of the board.

  • The paradox of unity and division: an unprecedented political landscape leads to high policy uncertainty

    In the US, the Republican Party now controls the presidency and both houses of Congress for the first time in a decade. This may clear the way for a more pro-business policy agenda; however, populist and anti-business sentiment remains strong and, to date, President Trump has proven to be a highly unconventional leader. A participant summarized, “Whatever rulebook you thought this all played by is going into the shredder. Plan for unexpected events and curveballs.” In this ViewPoints, leading insurers exchange views on the changing US political landscape and the potential effects on US commercial markets and the insurance sector. 

  • Revolutionary change is transforming the financial services landscape

    In October 2016, Tapestry Networks and EY hosted the Financial Services Leadership Summit, which brought together more than 80 financial sector leaders to discuss the extraordinary changes happening across the financial services landscape. Participants included directors and executives of the largest global banks, insurers, asset managers, regulators, fintech entrepreneurs, and other subject matter experts.  ViewPoints synthesizes these and other discussions with participants in the Bank and Insurance Governance Leadership Networks over the second half of 2016. Technology is lowering the barriers to entry for emerging competitors and transforming the way incumbents do business, rapidly altering the competitive marketplace. At the same time, unprecedented macroeconomic and geopolitical conditions, driven by underlying structural changes, are creating a degree of uncertainty about the environment through which leaders must guide these institutions. Regulation will need to continue to evolve in response. A summit participant summarized, “Revolutions only get called with hindsight … We are in a period of accelerated evolution that will be called a revolution in financial services.”

  • Accelerating the technological transformation of banking

    Technology is reshaping the competitive and operating landscape for banks. They face competition from tech-enabled competitors with new models, and pressure to reduce costs and improve efficiency. As technology becomes increasingly central to all facets of bank strategy and operations - from compliance and data analysis to the customer interface - bank boards need a more holistic, strategic view of technology investment. Regulation meanwhile, is slowly adapting to the changing environment. 

  • Changing regulatory capital regimes: implications and market reactions

    Despite years of regulatory reform, insurers now face another wave of new requirements. The European Union’s Solvency II has just come into force, and the International Association of Insurance Supervisors, anticipates completion of the International Capital Standard and additional systemically important insurer requirements by 2020.In this ViewPoints, leading insurers share perspectives on how these regimes may operate or require adjustment in the future, as well as how shareholders and markets may interpret and react to new solvency metrics.

  • The future of banking in Europe: regulation, supervision, and a changing competitive landscape

    All large banks continue to face political, regulatory, and market pressure.  European banks face particularly daunting challenges. As Europe pushes for a banking union, the ECB’s role as a single regulator and supervisor for the Eurozone becomes an important player in the transformation of European banking. Having completed its first year, it wants to establish itself as a strong regulator and ensure the stability of the European banking system.  At the same time, many European banks are faced with the need to fundamentally address their business models in the context of a broader policy debate about what banking structures will best support European economic growth.

  • Sustaining growth and innovation in the insurance sector

    The insurance sector faces one of its most difficult periods in recent memory. Economic, regulatory, technological, structural and shareholder challenges are driving insurers to redesign many aspects of the business and key elements of strategy.In this ViewPoints,leading insurers share perspectives on the outlook for the sector, opportunities in asset management governance, and new models for growth and innovation.Insurers, together with leading banks, also explore broader challenges facing financial services, including market liquidity risks and the need for increasing board-shareholder engagement.

  • Leading insurers address reputation and its risks

    Reputation has long been thought of as the cornerstone of any brand. But in the current environment, reputation has increasingly become not just an asset but also a risk to be managed. For some companies, reputational risk can threaten not just their well-being and but existence. Although reputational challenges have arisen in the past, the viral nature of modern communication has radically changed the dynamic for large public firms. In this ViewPoints, leading insurers share perspectives on why reputation is so difficult to manage and how companies can more effectively govern reputation and its associated risks. 

  • Leading the digital transformation of banking

    Regulators, directors, and executives all concluded that digital transformation is now one of the most critical strategic issues for bank leaders. The competitive landscape is changing as new and existing players adopt digital models. Not all boards have fully appreciated the scale of digitization as a core strategic issue, and therefore may not be spending enough time discussing the implications, but the opportunity for banks is substantial.

  • The need for strategies that fit today’s reality

    “There is no sustainable business model for the industry.” Each bank is individually responsible for building its own platform of solid earnings that meets regulatory and credit-rating agency expectations, but also delivers value to debtholders, shareholders, and employees. To set a forward-looking strategy, four strategic questions need to be addressed regarding: geographic footprint, physical versus online delivery, strategic investments in information technology (IT), and emerging non-bank competitors.

  • Global banks now need to transition to materially different business models

    Developing sustainable business models that attract long-term funding has been a recurrent theme in BGLN discussions among bank directors and executives, supervisors, and members of the investor community. Global banks face several key challenges in their efforts to shape new strategies, including: uncertainty regarding regulatory reform; the emergence of non-bank competitors; the need for boards to critically challenge conventional wisdom; and how banks can bring key stakeholders along on their journey to the "new normal."

  • Bank boards must plan for "radical change" to their business models

    During the fourth Bank Directors Summit in October 2012, board members of global banks discussed the strategic and structural implications of the many changes taking place in the industry, including cultural reform, international regulatory change and enhanced consumer protection.

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