By Andreas Charalambous and Omiros Pissarides
About a month ago we wrote an article about the challenges facing banks today*. In the present article, we will expand on the global trends that banks will be called upon to address.
We note that, although Covid-19 poses significant challenges at this stage, additional fundamental factors – such as geopolitical tensions, macroeconomic challenges, intense competitive conditions and evolving legal and regulatory regimes – will cast an even greater impact on the medium- and long-term course of the banking industry.
In the presence of prevailing uncertainty, the leaderships of banks need to appreciate and assess the global trends in order to properly plan for the future of their organisations. In this context, the main trends with the largest anticipated impact on financial services can be summarised as follows.
First, given the second wave of the coronavirus in combination with the limited likelihood of a resurgence of inflation, strong interventions from the monetary authorities will most likely continue. Consequently, the period of low interest rates is expected to be extended, with negative consequences for the profit margins and the business model of the banks.
Second, the current recession will inevitably lead to an increase in non-performing loans which will limit the banks’ risk-absorbing capacity and impact their ability to support the real economy when it enters the recovery phase. Furthermore, the most likely scenario is that escalating credit risk will lead to increases in the banks’ risk weighted assets and possibly necessitate further efforts to strengthen their capital base.
Third, alternative capital providers are widely expected to develop into an integral part of the international financial system at an ever-increasing pace. Considering for example that non-bank payment agents, such as electronic money institutions, possess comparative advantages in terms of a lower cost base, more efficient use of technology and superior customer service capacity, traditional banking organisations will need to strengthen their ability to respond to these evolving realities.
Fourth, contrary to some initial views, the coronavirus is not expected to delay – on the contrary it will possibly accelerate – the strengthening of supervisory measures. More specifically, apart from the temporary suspension of the implementation of certain measures, no deviations are either observed or predicted from the strict regulatory framework which has been taking form in recent years.
Fifth, banks will continue to face pressure to increase their productivity by digitising operations and enhancing the skills of their workforce. Clearly, the customer-led shift to financial services which are based on advanced technology platforms and ecosystems will create a new wave of intense competition. Important steps that should be undertaken by banks, with the support of Central Banks, concern the promotion of digital currencies, the upgrading of productivity through a progressive system of evaluation and skill development of their employees, and also the wider use of innovative practices and technologies in order to place the customer at the centre of the banking business model.
The future does not appear easy, especially for banks that carry accumulated weaknesses and operate in small countries such as Cyprus, which do not occupy the required size to absorb the cost of adjustment. It is therefore a pressing necessity for the shareholders and the management of Cypriot banks to formulate key decisions on the basis of a long-term horizon and a comprehensive strategy. Ultimately, the winners will be those organisations that manage to overcome burdens of the past and rise beyond outdated business and working models in order to successfully meet the challenges ahead.
* Article in the Cyprus Mail on the 25th of October 2020 entitled ‘The challenges facing the banking and financial sectors’.
Andreas Charalambous is an economist και former director of the Ministry of Finance. Omiros Pissarides is the Managing Director of PricewaterhouseCoopers Investment Services.
