Building sustainable models for banks and their investors

November 2015

The seventh Bank Governance Leadership Network (BGLN) Summit took place on September 30 and October 1, 2015 in New York. This year’s summit focused on how banks are adapting strategies, business models, and operations to a changing competitive landscape. Non-executive directors and senior executives from among the largest global banks were joined by regulators and other participants representing investor and other stakeholder perspectives for discussions on some of the challenges and opportunities for banks as they seek to improve returns and attract investment.  

BGLN discussions have focused on the implications of regulatory reforms and market changes and the impact on business models since the network’s beginnings. Participants discussed the long and rocky road along the journey to a “new normal,” and the need to “keep debt and equity holders on board” along the way. In 2015, the market may no longer give bank leaders credit for being on the journey, wanting more clarity regarding the destination. The summit offered a unique opportunity to explore these issues as bank leaders shape the future of their institutions.  

For the first time, BGLN participants were also joined by participants in the Insurance Governance Leadership Network (IGLN) for two joint discussions on issues of common interest. The combined group included more than 50 directors, executives, regulators, and industry experts representing many of the largest financial institutions globally, collectively representing nearly $25 trillion in assets.

This ViewPoints synthesizes themes emerging from the summit discussions, incorporating insights from other network discussions throughout 2015. It is organized around the following themes:

  • Regulation is driving changes to bank structures, operations, and business models (pages 3-10). Regulation is a central force in reshaping the economics of banking. While much of the regulatory framework is now complete, the constraints on different businesses are beginning to lead to different strategic responses, even from once similar banks. A central focus now is on structural reformmaking large banks simpler and more resolvable. In response, bank leaders are taking a closer look at their structures, operating models, and streamlining. And participants expect regulation to remain in flux, with tools like stress testing used to tweak capital requirements. Engagement between board leaders, regulators, and supervisors has become a regular practice and will remain important as the focus of regulation and supervision continues to adjust.  

  • Building more agile banks that attract investment (pages 11-23). At the core of the challenge for bank leaders is addressing what one participant called “agility risk,” i.e. how do banks develop business models that are more efficient, flexible, and innovative, but also sound and stable from a risk perspective? While investors see reduced risk in banks, they expect continued regulatory pressure and returns to remain below the cost of capital in many large banks. Financial technology companies are increasingly putting pressure on banks to improve their customer interface and upgrade their technology. While banks are changingimproving efficiency, addressing cultural issues, and investing in technologyparticipants note they can only move so fast and invest so much. But bolder strategic decisions may still be needed as banks consider exiting businesses or major asset swaps. Ultimately, an increasingly diverse mix of financial institutions will serve customers as banks become more differentiated and new competitors increase in scale.  

  • Board-shareholder engagement in an era of increasing activism (pages 24-28). As banks come under pressure to improve returns, they can expect increasingly active investors to seek engagement with directors to discuss not just governance issues, but strategy as well. In addition to activist investors increasingly targeting larger financial services firms, large institutional investors are becoming more active as well. Some are issuing “requests for activists,” looking to partner with activists to drive change in their portfolio companies. As a result, boards should develop communication and engagement strategies and be prepared to articulate their plans to improve returns. 

  • Market liquidity: the unintended systemic risk? (pages 29-35) Participants see new sources of emerging risk in the potential implications stemming from a lack of liquidity in certain capital markets, particularly those for bonds. A serious disruption in capital markets could cause significant challenges for banks and insurers. BGLN and IGLN Summit participants convened for a joint discussion about these potential sources of systemic risk and their implications, as banks and insurers overlap and interact in many markets but are subject to different regulations. Participants discussed the potential triggers for a liquidity crisis, how their firms can prepare, and what steps may be required by financial services companies, regulators, and central banks in the event of a crisis.