Over Half of the World’s Banks Not Prepared for a Downturn: Report
According to a report from the consulting firm McKinsey & Co., more than half of the world's banks are already in a weak position.
In its annual review of the industry, Mckinsey said the majority of the banks globally might not be economically viable because they are not generating enough returns. These banks should quickly reinvent themselves to face a downturn.
Late Economic Cycle: A Do or Die Moment
About 60% of banks are banks are not generating returns on equity. This could exacerbate if another crisis hits.
“A prolonged economic slowdown with low or even negative interest rates could wreak further havoc,”
reads the 58-page report.
Chira Barua, McKinsey partner and co-author of the report called this a “do or die” moment. Barua said a serious downturn could be catastrophic for these banks and they need to take steps to “change their fortunes.”
“We believe we’re in the late economic cycle and banks need to make bold moves now because they are not in great shape,”
Kausik Rajgopal, a senior partner at McKinsey, said in an interview.
Low-Interest Rates and New Entrants
Record-low interest rates, that are affecting the banks across the globe are driving these banks down. Rising rates allow banks to lend out money to investors at a profitable rate of interest while lower interest rates restrict a bank’s ability to make profits.
Negative interest rates penalize the banks for holding cash deposits at central banks.
Since the financial crisis in 2008, we have seen a wave of innovation in financial services. And these fintech players and technology companies that have entered the banking space are another threat these banks are facing.
While banks set aside just 35% of their IT budget to innovation, fintech players spend over 70%, McKinsey said.
The environment is increasingly conducive for news firms to capture the share from banks. As such, banks’ valuation globally has fallen 15% to 20% since last year’s beginning.
As we have already been seeing, blockchain technology is also playing an integral role here. Ripple, a software solution provider to move money almost instantly to all corners of the world, has already partnered with more than 200 banks and financial institutions.
Moreover, banks are also taking the route of digital currencies, with JP Morgan already launched its JPM Coin.
The banking landscape is changing and it would be interesting to see who emerges as the winner.