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2020 banking and capital markets outlook Fortifying the core for the next wave of disruption

For this year’s outlook, we’ve identified seven additional topics for the banking and capital markets industry: US tax reform, cyber risk, M&A, fintechs, LIBOR, privacy, and climate change.

With some estimates showing that the financial services sector is four times more likely than other industries to be victims of hackers,152 it’s no surprise that many institutions increasingly name cybersecurity as the most important risk type.153 Cyber threats will likely increase in magnitude, as adversaries become more organized and sophisticated.

Moreover, banks should reassess how they deploy their cybersecurity budgets because higher spending does not always yield better outcomes.154 Some of the most mature programs in the industry attribute their success to improving governance by involving senior leadership in the journey, raising cybersecurity’s profile to an enterprisewide responsibility, putting cybersecurity at the center of digital transformation efforts, and aligning cybersecurity efforts with strategy.155 Additionally, cyber threats have begun to blur the lines between financial and nonfinancial risks.

This fusion of risks has been aptly named “CyFi.” Regulators are increasingly scrutinizing banks’ operational resilience and have begun to link cyber threats to financial stability as a result.157 To combat this emerging subset of risks, banks should consider fusing their cyber and financial intelligence frameworks so they can unify capabilities and improve threat visibility across cyber, fraud, and anti-money laundering domains.

In the United States, total deal value reached US$16.5 billion as of August 2019, excluding the US$28.3 billion megamerger between BB&T and SunTrust announced in February.158 The number of deals year over year is roughly in line with the 259 deals reported in 2018.159 However, median price-to-tangible book value has declined over the year as expectations from both sellers and buyers have adjusted to reality (figure 8).160

Lastly, the Indian banking industry is expected to undergo a massive wave of consolidation, as the government plans to merge 27 state-run banks into 12 well-capitalized, future-ready banks.164 The fintech landscape is evolving rapidly.

According to Venture Scanner data, Asia’s share of funding rose from just 9 percent in 2014 to 30 percent in 2018, even after excluding Ant Financial’s US$14 billion investment.166 That said, there appears to be no dearth of funding at a global level.

The number of mega deals (US$100 million or more) in banking reached almost 70 in 2018, from just 26 in 2014167—another sign that the fintech landscape is maturing, with late-stage startups attracting a greater share of funding.

Leveraging its hugely successful payment platform, Stripe, for instance, has forayed into small business lending.168 Challenger banks from Europe, meanwhile, are seeking new markets after seeing rapid growth in their home region.

While concern still exists about fintechs’ growth and their impact on the financial system,169 regulators are encouraging innovation through sandboxes and new charters or licenses.170 No matter what the next phase in fintech brings in terms of investments, business models, or regulations, banks and fintech partnerships will likely continue, leading to new innovations across the industry.

SOFR floating-rate notes have been issued by major entities such as the World Bank,171 MetLife,172 and Fannie Mae.173 Furthermore, SOFR futures volume on the Chicago Mercantile Exchange (CME) crossed US$1 trillion in 2019.174 However, recent liquidity challenges in the US repo market have raised some new questions about the stability of SOFR as an alternative.

For instance, by 2100, rising sea levels could cost the world US$14 trillion a year,182 and the US economy could shrink by as much as 10 percent.183 Unsurprisingly, for the third consecutive year, world leaders ranked environmental threats as the biggest risk to the world.184 The banking industry is not immune: A recent Fed report found that the effects of climate change have a “pervasive effect” across all sectors of the US economy, including the banking industry.185 As such, central banks around the world, including the Fed, the ECB, and the Bank of England, are examining the implications for monetary policy and are also seeking ways to “bolster banks’ resilience amid economic disruptions caused by extreme weather.”186 They have also organized theNetwork for Greening the Financial System (NGFS) to boost climate risk management.187 Additionally, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD).188 Many banks are already committed to improving the environment and combatting climate change.

But these initiatives are typically implemented from a corporate social responsibility perspective rather than a risk management agenda.189 To manage climate risk effectively, banks might need new, robust frameworks and analytical approaches.

In this regard, boards, CEOs, and chief risk officers (CROs) can play a crucial role, providing leadership on climate risk management by placing climate risk high on the agenda and shaping their institutional responses.

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