Committee on the Global Financial System CGFS Papers No 60 Structural changes in banking after the crisis Report prepared by a Working Group established by the Committee on the Global Financial System The Group was chaired by Claudia Buch (Deutsche Bundesbank) and B Gerard Dages (Federal Reserve Bank of New York) January 2018 JEL Classification: G21, G24, G32, L25 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2018. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-131-1 (online) Preface The experience of the global financial crisis, the post-crisis market environment and changes to regulatory frameworks have had a marked impact on the banking sector globally. In response to their new operating landscape, banks have been re-assessing and adjusting their business strategies and models. At the same time, a number of advanced economy banking systems have to confront low profitability and legacy problems. Against this background, the Committee on the Global Financial System (CGFS) mandated a Working Group chaired by Claudia Buch (Deutsche Bundesbank) and B Gerard Dages (Federal Reserve Bank of New York) to examine trends in bank business models, performance and market structure over the past decade, and assess their implications for the stability and efficiency of banking markets. The following report presents the Group’s conclusions on structural changes in the banking sector after the crisis. The first message is that while many large advanced economy banks have moved away from trading and cross-border activities, there does not appear to be clear evidence of a systemic retrenchment from core credit provision. Second, bank profitability has declined across countries, and individual banks have experienced persistently weak earnings and poor investor sentiment, suggesting a need for further cost cutting and structural adjustments. Supervisors and authorities should monitor banks’ adjustment, assessing any risks that may emerge, but also play a role in facilitating the process by removing impediments where necessary. Third, in line with the intended direction of the regulatory reforms, banks have significantly enhanced their balance sheet and funding resilience and curbed their involvement in certain complex activities. Nonetheless, market participants and authorities should not become complacent about the progress to date and press on with the implementation of reform. The adaption of the banking sector to the post-crisis operating landscape warrants ongoing close attention. I hope that this work provides a useful resource by documenting the state of ongoing structural change in banking, and providing a starting point for further in-depth analysis. William C Dudley Chair, Committee on the Global Financial System President, Federal Reserve Bank of New York CGFS - Structural changes in banking after the crisis iii Contents Executive summary ................................................................................................................................. 1 1. Introduction ....................................................................................................................................... 5 2. An overview of banks’ operating environment ................................................................... 6 2.1 Background on banks’ experience in the financial crisis ....................................... 6 2.2 The post-crisis operating environment for banks .................................................... 7 3. Key trends in banking structure and performance .......................................................... 11 3.1 Banking system size ........................................................................................................... 12 3.2 Banking system concentration ....................................................................................... 13 3.3 Bank business models ....................................................................................................... 14 3.4 International banking ........................................................................................................ 24 3.5 Bank performance ............................................................................................................... 26 3.6 Summary of key trends in banking .............................................................................. 29 4. Implications for the stability of the banking sector ......................................................... 30 4.1 Bank risk buffers and risk-taking .................................................................................. 30 4.2 Bank risk governance and management ................................................................... 33 4.3 Market-based indicators of banks ................................................................................ 35 4.4 Future profitability and resilience of banks .............................................................. 39 4.5 Banking system-level risk and resilience ................................................................... 41 4.6 Overall assessment ............................................................................................................. 50 5. Implications for the efficiency of the banking sector ...................................................... 51 5.1 Bank credit provision to the real economy ............................................................... 51 5.2 Banks’ role in facilitating capital market activity .................................................... 58 5.3 Overall assessment ............................................................................................................. 62 6. Key messages .................................................................................................................................. 64 References ................................................................................................................................................ 70 Annex 1: Country banking data tables .......................................................................................... 77 Annex 2: Individual bank data ....................................................................................................... 115 Annex 3: Business model classification methodology ......................................................... 116 Annex 4: Cost of equity estimation methodology ................................................................ 118 Members of the Working Group .................................................................................................. 119 CGFS - Structural changes in banking after the crisis v Executive summary The decade since the onset of the global financial crisis has brought about significant structural changes in the banking sector. The crisis revealed substantial weaknesses in the banking system and the prudential framework, leading to excessive lending and risk-taking unsupported by adequate capital and liquidity buffers. The effects of the crisis have weighed heavily on economic growth, financial stability and bank performance in many jurisdictions, although the headwinds have begun to subside. Technological change, increased non-bank competition and shifts in globalisation are still broader environmental challenges facing the banking system. Regulators have responded to the crisis by reforming the global prudential framework and enhancing supervision. The key goals of these reforms have been to increase banks’ resilience through stronger capital and liquidity buffers, and reduce implicit public subsidies and the impact of bank failures on the economy and taxpayers through enhanced recovery and resolution regimes. At the same time, the dynamic adaptation of the system and the emergence of new risks warrant ongoing attention. In adapting to their new operating landscape, banks have been re-assessing and adjusting their business strategies and models, including their balance sheet structure, cost base, scope of activities and geographic presence. Some changes have been substantial and are ongoing, while a number of advanced economy banking systems are also confronted with low profitability and legacy problems. This report by the CGFS Working Group examines trends in bank business models, performance and market structure, and assesses their implications for the stability and efficiency of banking markets. The main findings on the evolution of banking sectors are as follows: Changes in banking market capacity and structure. The crisis ended a period of strong growth in banking sector assets in many advanced economies. Several capacity metrics point to a shrinking of banking sectors relative to economic activity in several countries directly impacted by the crisis. This adjustment has occurred mainly through a reduction in business volumes rather than the exit of firms from the market. Banking sectors have expanded in countries that were less affected by the crisis, particularly the large emerging market economies (EMEs). Concentration in banking systems has tended to increase, with some exceptions. Shifts in bank business models. Advanced economy banks have tended to re- orient their business away from trading and more complex activities, towards less capital-intensive activities, including commercial banking. This pattern is evident in the changes in banks’ asset portfolios, revenue mix and increased reliance on