At our most recent Industry Dinner, we brought together Finance leaders to explore the complex interplay of regulation, strategy, and technology shaping the future of banking.
While the challenges are significant, so too are the opportunities for those who align their business models, culture, innovation, and geographic footprint.
Regulatory divergence and fragmentation
Guests noted that the global banking sector faces significant regulatory divergence.
- The U.S. is “repointing” its regulatory approach, prioritising effectiveness and easing capital requirements to stimulate economic growth through easier credit conditions. The U.K. has shown early signs of following suit, with hopes that simplification could boost lending beyond the mortgage-dominated banking sector. The EU’s regulatory stance remains largely unchanged and is focused on simplification.
- The “eternal triangle” of business, politics, and regulation is weighted differently across regions: in the U.S., businesses and politicians have aligned to focus on growth, while in the U.K. and EU, regulators and politicians have prioritised safety over innovation. However, the EU is now considering weakening the AI Act to foster competition and innovation, and balance consumer protection with economic growth.
- Europe’s fragmented regulatory and supervisory approach is a critical weakness. Progress in the Savings and Investment Union is urgently needed to strengthen the financial sector and support economic growth. It’s “five minutes to midnight”. However, politicians often prioritise local concerns, hindering alignment.
- Europe’s focus on building resilience through strict regulation may have gone too far, pushing assets overseas and into the shadow banking sector, and hindering the financial sector’s ability to drive the economic growth that the U.K. and Europe urgently need.
Practical takeaways
- Advocate for regulatory convergence to create a level playing field and reduce systemic risks. Collaboration between the EU, U.K., and Switzerland is essential.
- Promote integrated thinking between banking regulation, public policy, and economic growth. Position banks as drivers of economic expansion, not just risk takers.
- Encourage cross-border cooperation to unify capital markets and supervision, recognising that some banks operate on a scale beyond their national markets.
Business model vs. capital: The real driver of bank viability
Guests observed that a sustainable business model is more critical to a bank’s success than capital reserves. Recent failures show that even well-capitalised banks can fail if doubts about their business models erode confidence and trigger liquidity drains.
- U.S. regulators prioritise business model clarity, understanding that no amount of capital can offset a flawed strategy. Weak models also increase compliance risks and open the door to financial crime such as money laundering, undermining long-term viability and reputation.
Practical takeaways
- Reassess bank business models to ensure they are sustainable and aligned with market needs, underpinning compliance and success.
- Engage with regulators to shift the focus from capital requirements to business model resilience.
The rise of shadow banking and private credit
The shadow banking sector has grown significantly, now representing nearly 50% of global financial assets at $250 trillion. While it provides flexibility and innovation, it also introduces systemic risks that traditional banking regulations do not address.
- The next financial crisis is more likely to arise from the shadow banking sector or its secondary impacts than from traditional bank failures.
- Within the $4 trillion private credit market, risk practices vary significantly. While larger players maintain robust frameworks, many smaller, underregulated non-bank lenders have weaker risk management. Risks have shifted from bank balance sheets to the shadow banking sector, and private credit’s interconnectedness with the broader financial sector heightens counterparty exposure.
- Private credit has filled gaps in lending where regulatory capital requirements have made it uneconomical for banks to operate. However, maintaining continuity of lending to these segments of the economy poses a significant systemic risk if private credit lending contracts.
Practical takeaways
- Monitor exposure to private credit markets and ensure robust risk management practices. Advocate for regulatory frameworks that address the risks of shadow banking without stifling innovation.
- Focus on maintaining the continuity of lending to the real economy, which is being hollowed out by the shift to private credit.Encourage cross-border cooperation to unify capital markets and supervision, recognising that some banks operate on a scale beyond their national markets.
Culture and leadership: The unregulated pillar of success
Guests agreed that culture is a critical yet intangible driver of a bank’s success, shaping behaviour, compliance, and adaptability. Banks with strong cultures proved more resilient during the 2008 financial crisis than those without.
- Culture must be set at the top and reinforced through leadership behaviours, incentive structures, and retention strategies.
- The adage, “What you’re willing to walk past, you’re willing to accept,” captures the importance of addressing issues promptly.
Practical takeaways
- Recognise that culture trumps strategy in retaining talent and navigating challenges. Invest in fostering a culture of integrity, adaptability, and client focus, starting with leadership.
- Monitor “yellow flags” such as high turnover or short management tenure as signs of cultural weaknesses.
Disruptive forces: Technology, AI and innovation
Guests concurred that technology and AI are reshaping traditional business models, with competition intensifying between established banks adopting technology and new disruptors.
- Boards need deeper technology expertise, not just a single tech-savvy member. Technology literacy is a collective responsibility.
- Technology subcommittees can accelerate progress but risk shifting responsibility – and insight – away from the main board.
- The question, “What is the role of a bank when operational friction is removed? Just a wallet keeper?” highlights the need for banks to redefine their value proposition in a tech-driven world.
- While AI has yet to deliver significant ROI in banking, it holds the potential to unlock new business models.
Practical takeaways
- Build a tech-savvy board capable of driving business transformation and engage disruptors in strategic discussions to stay ahead of innovation trends.
- Avoid “hobbies” – projects outside the bank’s core strengths, even if they seem exciting. Focus on the new business models enabled by emerging technologies, rather than just their current capabilities.