CHANGE IS IN THE AIR
By Jonathan Gregson
The emergence of universal banks fueled the trend toward globalization over the past 25 years, but the recent crises have been their undoing.
In the past 25 years major banks became truly global players. Indeed, by their facilitation of international investment and capital flows, they became the engine of globalization and, for the better part of two decades, of unprecedented wealth creation and economic growth.
In 1987 most banks depended primarily on their domestic markets. Before the Berlin Wall came down and Asia opened up, the world was very much beyond their reach. But change was in the air. The emergence of universal banks—and much larger investment banks—with a presence in all major financial centers ushered in the age of global banking.
Key to this, says Kevin Burrowes, PwC UK financial services leader, was instantaneous access to information and instantaneous execution. As the sophistication of financial products grew, global banks invested heavily in risk management systems and controls. But the ability of bank risk committees and board members to understand increasingly complex products diminished. The explosive growth of asset-backed structures in the early 21st century was intended to spread risk across more firms, but instead risk was concentrated in a few players like Lehman. Connectivity bred contagion. The party was over.
As Tom Kirchmaier, fellow of the Financial Markets Group at the London School of Economics, says: "There remains a problem in aggregating risk up within banks, and in resolving this there is clearly some way to go." He sees the enforced recapitalization of troubled banks as a viable alternative to deleveraging through restricted lending and asset sales. Tighter regulation seems inevitable.
Looking beyond the present crisis, "faster GDP growth in emerging markets," says Burrowes, "will make it economically viable for international banks to expand into territories where demand for their products and services, ranging from equity or debt management through to private banking, is set to grow." He sees demographic changes—the divergence between ageing and fast-growing populations—as having "an enormous impact on banking, with future product innovation growing out of that." Technologies will change. And concerns over sustainability will see the rise of "green" financial institutions.