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After the crisis...?


How to rebuild retail and commercial banking in tumultuous times

Among the most crucial consequences, the banking sector is still dependent on government and central bank support for funding and for the creation of a functioning inter-banking market.

Moreover, the post crisis environment will be characterized by low growth rates and margin compression; even if the worst is over, in mature economies a negative headwind will affect retail banking in the years ahead. We estimate that the Basel III agreement of September 2010 will reduce the ROEs of banks by around 2%.

Yet, the higher capital requirements arising from Basel III are only part of the story. Clients' increased price sensitivity, consumer protection measures and increased competition will account for a large part of margin compression. Therefore, overall ROE margin compression is expected to be even higher, depending on a retail bank's specific client focus and funding profile.

In particular, the cost of funding will increase for banks that have a small retail deposit base. Going forward, we estimate that banks that lack a stable base of retail deposits will face a 1% higher cost of funding.

Lastly, the gap between the best and worst-positioned banks will widen, putting those banks that fail to adapt to the new environment under increasing pressure.

On the positive side, reforms are being phased in gradually in order to minimize the disruptive effects on the banking system and the economy as a whole. This means that a window of opportunity is opening up for those banks that are ready and willing to adapt.

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