Banks: Most of the world’s biggest banks face fundamental challenges to their business models
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Banks: Most of the world’s biggest banks face fundamental challenges to their business models

Banks are trying, and most are struggling, to come to terms with the triple threat of moribund markets, bigger capital requirements and changes to their business strategies inflicted by both regulators and the fallout from the sub-prime crisis.

Almost without exception, they have lowered expectations on the return they will be able to provide on the equity that their shareholders supply. Gone are the days of RoEs of 25% or more. Now, a much more conservative 12% to 15% is the target.

But in so many cases, big successful banks are struggling to hit even those targets. Euromoney has reported before (see ‘Banking isn’t working’, Euromoney, April 2011) on the fundamental issue of banks not being able to provide a return on equity above the cost of their capital. That’s not a recipe for survival, let alone prosperity, in the future.

Banks have lost a lot of their high-margin businesses, such as the world of structured credit, and have been forced to give up their proprietary operations. This has forced them into a much more client-centric focus. And with client activity subdued because of uncertain markets, bank earnings are suffering too.

Client business faces its own challenges. Banks’ funding costs have risen dramatically. Many companies now find that they can fund themselves at much lower rates than their banks. That hits lending, which remains the core of much global banking.

Bob Kelly, BNY Mellon: a good driver forced off the road by shareholders

Bank of New York Mellon chief executive Bob Kelly

A more fundamental question, perhaps, needs to be asked: can big global banks, with all the infrastructure that comes with an operation on such a scale, actually make a decent return simply from client business? The answer for many seems to be: not in these markets.

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