MCKINSEY & Company (McKinsey) has reported that the global banking sector would have to strengthen its competitive advantage and follow through on respective strategic choices in order to face challenges to the industry.
Based on insights from Panorama, McKinsey’s proprietary banking-research arm, as reported under McKinsey’s eighth annual review of the global banking industry, the global banking sector would need to strengthen their competitive advantages and make definitive strategic choices in order to weather challenges in the future.
The report, entitled “New rules for an old game: Banks in the changing world of financial intermediation,” said: “Looking ahead, we believe the rewards will be disproportionate for those firms that are clear about their true competitive advantage and then make—and follow through on—definitive strategic choices. The result will be a financial sector that is more efficient and which delivers value to customers and society at large. That is a future that should energize any forward-looking banking leader.”
The report explained that the global banking industry, as well as financial regulators, have worked together through the years in order to improve the level of safety of the global financial system, which is shown in the rise within measures used for risk.
Under the Global Tier 1 capital ratio, the global banking sector has increased to 13.2 percent in 2017, from 9.8 percent in 2007, in one measure for banking system safety.
Other measures of risk, like the ratio of tangible equity to tangible assets, have also increased to 6.2 percent in 2017, from 4.6 percent in 2010.
“In addition, global banking’s market capitalization increased from $5.8 trillion in 2010 to $8.5 trillion in 2017…. These are solid accomplishments, the report added.
In terms of revenues however, the report pointed out that revenue growth for the global banking sector remains muted, with its price-to-book ratio also consistently lower than that of every other major sector over the period from 2012 to 2017.
“However, growth for the banking industry continues to be muted—industry revenues grew at 2 percent per year over the last five years, significantly below banking’s historical annual growth of 5 to 6 percent,” it said.
Based on McKinsey’s new analysis of the global financial intermediation system, the revenue pool associated with intermediation was roughly $5 trillion in 2017.
The global financial intermediation system is a system that stores, transfers and invests between lenders and borrowers.
“We believe the lack of investor faith in the future of banking is tied, at least in part, to doubts about whether banks can maintain their historical dominance of the financial intermediation system,” said McKinsey Senior Partner Miklos Dietz.
In the future, McKinsey pointed out that the current complex and interlocking system of financial intermediation will be streamlined by technology and regulation into a simpler system including in the areas of commerce and transactions, as well as products and services, among others.
“Institutional intermediation would be heavily automated and provided by efficient technology infrastructures with low costs,” the report added.
“We believe that the changes coming to the global financial intermediation system will be profound.
However, they do not assume that banks will become irrelevant. For instance, there will always be demand for risk intermediation. The question is whether banks will be disintermediated, disaggregated, commoditized or whether banks can maintain and expand their role in intermediation,” said McKinsey partner Rushabh Kapashi.
The report includes the banking sectors in Denmark, Russia, Australia, India, China, Japan and the United States, among others.