This new report (Feb2015), from the EBA sub-group on vulnerabilities (SGV) 1 , provides a global overview of the
potential implications for business models resulting from the collective implementation of the regulatory measures developed since the financial crisis: (CRR/CRD IV capital requirements, Basel III leverage ratio (LR), liquidity coverage ratio (LCR), net stable funding ratio (NSFR), reforms in banking structures, resolution regimes and EMIR).
The analysis focuses on the potential implications of regulation for business models after the financial crisis and the likely first-round affects of the new banking regulations during the transition period during which the new rules have to be implemented. These potential implications of the regulatory changes were assessed in a qualitative manner using supervisory expert judgement and the assessment. is not mean to be an impact assessment of regulation, neither does it evaluate the long-term benefits of regulation for the economy. The report also provides a matrix giving supervisors an overview of the global trends that might affect banks’ business models following the implementation of the new regulatory framework.
The analysis shows that there are significant potential implications of the new regulatory measures for certain components of banks’ business models. There is likely to be pressure on the future profitability and the returns of the banking sector as it changes to meet the new requirements.
The complexity and costs of managing the change in the regulatory environment will be high and some banks will need to develop new business models, which will be successful once the regulatory framework is finally in place. The other important aspect of changes in banks’ business models are the potential implications for lending to the real economy as banks ascertain which areas of lending are the most favourable.
Changes in a bank’s business model is also likely that aspects of lending will move to the shadow banking sector. Non-traditional banking institutions will start to participate in markets that ‘traditional’ banks, either for reasons of profitability or complexity, decide to leave. This trend is already evident in the increasing role that private equity firms and hedge funds are playing in the commercial real estate segment in some countries.
There is also cross-sector interplay/ Insurance firms have started to participate in areas of lending/financing, leading to some overlap with the banking industry. As a result of measures taken by various NSAs it is also likely that banks will re-consider the markets in which they wish to be involved and the way in which they themselves are organised.
There is need for further work to explore the impact on banks ‘counterparties and to support the analysis using a more quantitative approach based on existing internal and industry impact assessments. A quantitative assessment will be challenging given that some of the regulatory rules have not yet been finalised and there are few studies that consolidate the various effects of regulatory changes.
