I have been thinking a lot about the restructuring of the banking industry currently underway and the woes affecting this business model. Some of these woes are self-inflicted, such as the challenges relating to building a strong and robust risk culture required to mitigate the strong financial incentives in place to take excessive risk. I imagine folks in the C-suite have been thinking about this too in the City and on Wall Street following recent banking headlines. Other woes are external in nature, such as the impact of fintech upon the sector. Fintech or marketplace lending is expected to take a bite out of employment numbers with some calling for a 30% reduction in headcount or 1.7m jobs over the next several years as marketplace lending continues to offer a viable lending alternative. Another sign of challenging times is falling banker pay. According to the NY State Comptroller, banking bonus are down almost 10% this year on average on the Street, underscoring a decline in FICC profits and investment banking fees as well as swelling compliance costs.
These are global pressures and no doubt the City will experience similar pressures as well as new regulations hit securitised products areas and growing operational capital needs bite. These pressures was identified recently by the CS CEO as one driver in its restructuring plans and DB is another player feeling the heat too. The IFR notes that DB held some one-third more nominal capital YOY last year directly related to operational risks, or some Eur10 Billion. Operational risk capital levels provide banks with a cushion for non-credit or market risks, such as the risk of IT or cyber risks, fraud, errors and trading breaches, an areas under growing scrutiny. More than ever, senior management and their boards are required to make tough decisions about their business models, risk-taking, culture, and managing through periods of change, while still keeping an eye on earnings and dividend strategy.
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