European banks struggle with low interest rates and strict regulations.
Banks in Europe have been in a difficult situation lately. A new report reveals that financial institutions in the region faced serious difficulties in fiscal year 2018 and, despite all the cost cuts that followed, have failed to compensate for the decline in revenues in 2019. Historically low interest rates, new regulatory obstacles and competition from US banks. UU., Have joined the difficulties.
Corporate and investment banks see declining revenues
The financial industry in Europe faces some fundamental limitations, such as inelasticity of costs, decreased revenues and the avoidance of talent. The European CIB Outlook 2019, a study recently published by Eurogroup Consulting, focuses on how corporate and investment banks (CIS) on the continent can address these challenges.
Other threats they have to deal with come from the economic and regulatory environment, which has deteriorated. These include interest rates that have reached historical lows, new strict regulations that require compliance and greater market volatility. European banks had to make investments in infrastructure while being forced to significantly reduce spending at the same time.
According to the researchers, “in fiscal year 2018, a large majority of European CIBs experienced negative jaws.” In finance, the “jaw ratio” is an indicator that measures the difference between the growth rate of income and the growth rate of expenses.
During the 2018 financial year, CIB general revenues grew 3.5%. The upward movement was mainly catalyzed by equity and first-line services, as well as by a favorable exchange rate, the study authors said. However, by the first quarter of 2019, the main shares and businesses had fallen by 21.6%. That caused a 10% drop year-over-year in operating revenues. The report contains the following:
“Cost reduction programs have had problems keeping pace with the upper line’s decline, combined with greater market volatility and an unprecedented low interest rate.”
Digitization offers an output
Eurogroup Consulting notes that the study has evaluated how European CIBs can close the performance gap with US banks, which have been able to strengthen their position abroad thanks to two main factors: a stronger domestic market and a more favorable regulatory landscape. Corporate and investment banks in the Old Continent should consider structural changes, says the consulting firm, to address the fundamental constraints they face.
European banks must focus on the industrialization of assets, for example, in order to achieve a capital return (RoE) increase between 2 and 4%. They can also benefit from structured financial opportunities with revenue growth that leads to a RoE improvement of around 2 to 3%. Last but not least, talent empowerment can achieve a RoE expansion of up to 2%.
One of the main objectives of the report is to find ways for European CIBs to optimize their costs and revitalize their talent, as expressed by the authors. Naturally, in a time of rapid digital transformation, one of the ways to achieve this is through “digitalization”, through which digital initiatives will only succeed by aligning their strategy with the scale of disruption and maturity. ”
Disruption and maturity is really what some European countries and their banks have been demonstrating. In Switzerland, whose crypto valley has become home to more than 700 companies, traditional banks have begun to partner with fintechs to offer cutting-edge digital services. And the Swiss government recently presented a set of wide-ranging proposals to update its banking, corporate and financial infrastructure laws to accommodate the digital asset industry.
Germany can be taken as another example, where the new legislation will allow banks to receive, store and sell cryptocurrencies from next year. An association between an encryption platform and a local bank there already offers customers the opportunity to buy and sell cryptocurrencies directly from their bank account, which comes with an integrated bitcoin wallet. In addition, a growing number of companies, such as Cred, for example, provide global banking services tailored to the specific needs of encryption users.
Blockchain-bitcoin technology is changing the concept of the traditional financial industry, banks that do not adapt to this new way of creating wealth simply cannot compete in a financial world that, in turn, innovation and creativity has the floor. It is expected by new announcements.
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