Tech that's helping banks weather economic headwinds
Fifteen years post the global financial crisis, the world of banking is facing major challenges again. Inflation is higher; bank failures are rising; perceived risks are up; geopolitical uncertainty is increasing; interest rates are rising. It’s a perfect storm with the world’s banks in its eye.
Financial institutions – once again – must be on the front foot when it comes to managing their clients’ cash and their own balance sheets. And, remaining liquid is critical. In this environment, Australia is not immune.
Following the ninth interest rate rise in the past 12 months from the Reserve Bank of Australia (RBA), local banks will be striving to reassure their clients, investors, regulators and the market in general that they are prepared for such a challenging environment.
Now and then
Each crisis comes with its own set of challenges and in its own context. Today, the world is different from when the global financial crisis was precipitated by the collapse of the subprime mortgage market in the US. The event hit an unsuspecting world with calls on bank capital that destroyed bank equity and ushered in a global recession. So what has changed?
Financial standards of banks’ balance sheets are much stronger
Banks need to meet more difficult regulatory measures around capital adequacy, leverage, and liquidity. But there’s always room for improvement, as Silicon Valley Bank and Credit Suisse have demonstrated.
Non-financial standards are also becoming more stringent
The investments of organisations to meet carbon net zero targets; social diversity and stronger corporate risk controls – the environmental, social and governance (ESG) promises – will not come for free and will continue to impact markets for a few years. But these commitments are not destabilising – quite the opposite.
Amongst other things, improved corporate governance should deliver reduced operational losses emanating from improper operating practices, fiduciary breaches, aggressive sales practices, privacy breaches, account churning and misuse of confidential information.
These practices have come to the fore in Australia with the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. From an environmental point of view, ASIC’s first court proceeding against a financial services provider for greenwashing reflects an expectation for financial institutions to establish transparent and robust ecological practices.
The profile of banking assets has changed
This is driven in part by the Basel III capital, leverage and liquidity ratios, and also by credit teams keen to avoid asset classes that are hard to value.
Interest rates are higher
Interest rates are higher than they have been in a generation, and are slowly eroding the value of medium and long-term banking assets – even traditional, familiar and less complex asset classes. It’s a silent danger that is not easy to hear coming.
Channels of communication
Channels of communication are more available, more immediate and more adopted. News, rumours, soundbytes, memes, data and information are shared faster than ever before. A whisper becomes a roar in an instant, and a tweet can cause a run on a bank.
The rise of fintech
New financial technologies have emerged that have been both friendly and threatening. Some technologies have delivered positive new capabilities to the banking community – saving costs, reducing operational risks, supporting good governance, and enhancing the client experience.
Others have undermined and disintermediated the banks. Digital banking and fintech innovation have been a focus of the federal government through initiatives such as the enhanced regulatory sandbox (ERS) to help the Australian market face new challenges such as those mentioned above.
Open banking
Regulatory-sponsored innovations in open banking and payments have radically changed the speed with which money can be accessed and moved. Great for the client, but this brings potential deposit and liquidity volatility. Rapid changes to a bank’s liability mix may give rise to a new set of risks that the bank needs to manage.
Powering a better bank
Of the seven shifts described above, three are technologically based. Systems, software, and solutions are at the heart of banking today, and it is to such technology that bankers must turn to find answers that will ensure a bank’s survival and prosperity.
As regulations and governance hardened in the wake of the global financial crisis, so banks were forced to become more aware of the importance of managing their own balance sheets more closely, while simultaneously assuring their clients of the best service for their cash and liquidity balances.
Every dollar of corporate liquidity is a dollar of bank liability. Hence, an ecosystem of complementary and composable corporate treasury services is crucial to support banks in delivering client-orientated capabilities for automating the management and deployment of client cash. At the same time, banks must deploy tools within the ecosystem that help protect them and enhance their return on equity.
We call this ecosystem the Corporate Treasury Exchange (CTX); a composable set of services designed to be cloud-native, technologically homogeneous. These services are able to support even the most demanding requirements of a bank’s clients – whether they be from business, commercial, corporate, governmental or institutional client segments.
The challenges for which Corporate Treasury Exchange was developed are fundamental to a financial institution’s health – and its share price. Clearly, the bank needs to be able to offer the best cash management services to gain and retain clients. This is where its revenue is derived.
Beyond that, helping the bank to access the best quality liabilities is crucial for improving bank returns. The better the quality of a bank’s liabilities (retail deposits, SME deposits, and corporate deposits that support the working capital cycle), the less capital that the bank needs to set aside to run its business. The less capital, the higher the returns.
So, regulation is helping compliant banks to become more profitable. But this changing framework has created challenges – how does a bank differentiate itself to gather the best deposits? And how does it measure its progress?
CTX helps banks address these challenges. Today, banks operate in a highly-competitive, super-connected, digital world. And technology is imperative to meeting the challenges of differentiation and performance measurement. Software systems are the key. Systems that connect, systems that enable interaction between the client and its bank, systems that automate workflows, systems that deliver easily-consumable information, and systems that provide insights and intelligence.
Does it matter?
Does it matter to me, you may ask? Well, probably, yes; and for a number of reasons.
1) If a bank can manage its liability book, if it can gather high-quality deposits, it can use those deposits to lend to its clients more effectively, and more profitably.
To explain; good quality deposits (despite them being instant access) can be relied upon as stable liabilities of the bank. So, the regulations allow these deposits to finance medium-term loans. If banks can manage and grow these liabilities, then they are able to increase the amount of mortgage lending they are able to support, and at better interest rates.
The same applies to other loans that are critical to economic growth and supporting our way of life – to individuals, small businesses, and large organisations.
2) As the world moves towards net zero, banks need to be able to support their clients’ ESG targets. CTX has tools to help this; enabling clients to deploy excess cash into ESG-compliant investments; or rewarding clients that have higher ESG scores with better interest rates on their deposits. And all done automatically.
3) And, of course, protecting the bank means fewer bank failures. During, and in the immediate aftermath of the global financial crisis, Australia – like the rest of the world – saw financial institutions fail. Some required bailing out by the taxpayer, or by the stronger players (like the takeovers of St George and Bank West) often at a significant loss due to unpaid loans made between the institutions.
The impact of these failures polarised the deposit and lending business with the big four Australian banks and reduced the choice to the neediest clients. Avoiding the global financial crisis fallout would have saved the taxpayers billions of dollars and kept the market more open for businesses and individuals with weaker financial situations.
4) Meanwhile, looking at pension investments, banking shares will sit in the portfolio. If these banks are performing well, and returning better value to shareholders, the dividends will be healthy, and the share prices will remain strong.
So, stronger banks are important to all of us. Banks that can steer a safe path around the challenges of today and tomorrow to reliable and scalable profitability are needed. And part of the solution is better balance sheet management enabled by modern technology.
