McKinsey’s Global Banking Annual Review

As a result of the recent crises, cross-border capital flows have decreased significantly, and many banks in advanced nations are cutting jobs. Banking is becoming increasingly regional as well, as banks from underdeveloped countries continue to expand outside. New research has found that foreign banks with greater presences in the country are better equipped to provide long-term financing and better share risks with their domestic counterparts. When it comes to global banking’s long-term benefits, the financial crises have shown the necessity for a uniform framework for supervising and addressing the world’s largest banks.

Global banking

The global financial system is the structure of legal agreements, institutions, and both official and informal economic actors that collectively permit international flows of financial capital for investment and trade financing. International financial markets have become more open, regulated, and effective since the first modern wave of economic globalization emerged in the late nineteenth century. This wave was defined by the development of central banks, multilateral treaties, and intergovernmental organizations. Global migration in the late 1800s permitted extraordinary expansion in international trade and investment. World War I led to a contraction in international trade as money market illiquidity froze foreign exchange markets. A series of reciprocal trade agreements gradually cut tariffs around the world, easing the impacts of the global Great Depression, which had been exacerbated by protectionist measures. Because to post-World War II improvements in exchange rate stability, global finance experienced record expansion. In the world of global banking, people and trust are at the heart of everything. Assisting clients with mergers and acquisitions, raising cash, and custom solutions is what we do best. Using data and knowledge from throughout UBS, we help our clients make important decisions. We keep ahead of the curve by making judgments based on technology and data since the execution of equities capital markets and debt capital market transactions is becoming more automated. We need to adapt our approach and offerings to keep up with the changing landscape. The financial system on a global scale is becoming more stable, but governments still have to deal with regional and national differences. Others are growing the extent and scope of their unusual monetary policies, while others are striving to get rid of them. It is a delicate balancing act for emerging market officials who must implement sustainable macroeconomic policies while keeping investors from fleeing to stronger markets. The risk of future global financial catastrophes has been exacerbated by countries’ incapacity to align their interests and create international consensus on issues such as banking regulation.

Research and insights

As a result of the global financial crisis (GFC) and the subsequent eurozone crisis, global banking is undergoing significant transformations. The crises have resulted in significant balance sheet impairments, particularly for many banks in developed nations. They have also resulted in an onslaught of new rules, tougher monitoring and oversight, and the imposition of hefty fines for previous wrongdoings on some institutions. In addition, the crises have strengthened market discipline and made investors and creditors more suspicious of bank activity, especially international operations. These trends have compelled banks to acquire fresh capital, deleverage their balance sheets, including international balance sheets, and reduce their cost structures by eliminating staff and operations and altering remuneration. Other, more secular developments include new entrants in financial services offering prompted by advancements in delivering financial services through digital means, which place extra pressure on incumbent financial institutions. In addition, there has been an upward trend in the significance of emerging markets and developing nations in the global economy and in the financial sector, as seen by an increase in cross-border bank flows and direct foreign bank presence.

As these developments continue to transpire and institutions adapt, they have an impact on the structure and industrial organization of global banking. In turn, they have implications for the advantages and dangers that global banking delivers to financial systems and economies. Literature has demonstrated that risk-sharing through global banking has both positive and negative implications on the financial and economic stability of the global economy. On the one hand, local risks are more globally spread, and global banks can help their foreign affiliates during times of market stress in the host country. However, (financial) shocks to parent banks and home nations can be communicated to overseas affiliates and have a negative impact on local lending and economic activity. According to research, the degree of shock transmission varies significantly based on host and home nation conditions and bank characteristics. When geographically close, for instance, foreign banks are more likely to help local operations when local shocks arise. And while foreign banks tend to reduce local lending more than domestic banks during times of global stress, this is not the case when contrasted to domestic banks that are internationally funded, and lending is steadier when foreign banks are large locally and rely on local deposit-taking.

Test of resilience

Regulators are shifting their focus to the risks posed by the advent of digital tools and technology in banks and financial organizations. To keep costs down and keep up with client demands in an era of rapid innovation cycles, banks are increasingly relying on digitally-aided business models. There may be a greater urgency to create operational resilience as digitization transforms financial operations.

Even financial market infrastructure (FMI) companies are attempting to improve operational resilience in financial institutions. A growing number of regulators around the world are now looking at how well financial institutions can respond to and recover from operational disruptions, echoing the financial services industry’s critical role in society and the significant consequences that could ensue if they fail to operate effectively.

A broader view of resilience is being advocated by both industry insiders and government regulators. It might be difficult for boards to implement effective oversight processes because of the wide range of this notion. All parts of a framework for operational resilience can be brought together on a single platform via a powerful technological solution. Operational resilience solutions should not only help companies comply with regulatory requirements, but also enable them to achieve operational resilience by seamlessly integrating risk management practices into compliance, cybersecurity, and vendor risk management in order to prepare for possible disruptions in the future. A single, integrated, interconnected data model should serve as a single source of truth for real-time, risk-aware decision-making by uniting data, removing friction between functional silos, and connecting them all.

Conclusion 

More reforms are also needed on a global scale, as is evident from recent events. Significant changes are needed to improve the international financial system’s safety net and liquidity assistance measures for nations that are experiencing balance-of-payments problems. The structure for resolving large cross-border banks must also be improved. Global banks, in particular G-SIBs, present a number of policy challenges and options that are both challenging and nuanced. While there are a variety of ways that aren’t mutually incompatible, internal consistency is critical. In any event, a combination of national and international policy measures will be necessary to ensure that global banking grows in the most beneficial manner.

In addition to the numerous difficulties that policymakers must deal with, recent changes have raised a slew of new research questions. Developing countries’ and emerging markets’ banks are becoming increasingly important in the global financial system. Local competition and financial services accessibility could be improved if these banks open up shop in the area. Investing in countries within their region and with a similar (institutional) development may help these banks become better at collecting and processing soft data, allowing them to lend more and better to borrowers in these countries who are less transparent in terms of their financial information, such as small and medium-sized businesses and individuals.