Banking, Mortgages & Credit Industry Market Research

READ MORE

With few exceptions, the banking and lending industry has rebounded to a much healthier condition after suffering intensely from the Great Recession that officially ended in 2009, along with the related financial meltdown that brought the world of banking into a state of crisis.  Meanwhile, global financial regulators have steadfastly continued the struggle to improve banking reserves and oversight to the point that future meltdowns might be avoided.

On the positive side, banks in Europe and the U.S. have been put through stress tests by regulators, and have been forced to dramatically increase their levels of capital.  Banks are posting very high levels of capital that will give them a significant cushion of reserves against potential losses.

Consumers in America have been more reluctant to go into debt than in the past.  Nonetheless, some forms have credit have been growing: 1) Consumers have greatly increased their purchases of automobiles, and the total amount of car loans has been rising.  This is due to the fact that consumers delayed car purchases during the recent recession, have a bit more confidence now and are taking advantage of low interest rates.  2) Total student debt rose significantly in recent years due to rising tuition costs and college fees, along with the fact that many people returned to college or graduate school because they were discouraged by a difficult jobs market.  3) Mortgage debt has been on a slow rise as the housing market picked up and foreclosures slow down.

The drop in credit card and consumer debt has been much more dramatic.  Balances on U.S. credit cards peaked in 2008 at $866 billion.  By the second quarter of 2016, balances were $730 billion (which was up from $678.3 billion for the same quarter in 2014).  The number of open credit card accounts has also fallen, from 496 million in 2008 to 337 million as of the third quarter of 2016, according to Argus Information & Advisory Services LLC.

Banking has become a highly globalized industry.  This was fueled by four factors:  1) the availability of global electronic networks for distribution of funds and real-time management of information; 2) the easing of local restrictions on ownership of banks by foreign entities; 3) the opportunity to serve the needs of multinational corporations; and 4) the increasing attractiveness, from a banker’s point of view, of rising household wealth in emerging economies.  New opportunities were sought out globally by major banks, especially in such booming markets as China and India.  U.S. and European banks particularly took ownership in Chinese banks.  Elsewhere, Spanish banks acquired banking firms in South America, Mexico, Puerto Rico and the United States (particularly in Hispanic markets within the U.S.).

U.S. Financial Regulations Likely to Change Dramatically as a Result of the 2016 Presidential Elections:  The results of the 2016 presidential election in America dramatically change the outlook for banking regulation.  The Trump administration will likely be very focused on streamlining Dodd-Frank, in particular making the burden lighter on smaller banks while retaining reasonable capital requirements on large banks.  Some elements of the now defunct Glass-Stegall Act may be reinstated, an idea that is popular among many Republicans and Democrats.  A modernized Glass-Stegall law would make large firms separate their commercial banking and investment banking activities, perhaps through spin-offs and reorganization.  Another likely step will be to significantly curtail the power of the recently-established CFPB, the Consumer Financial Protection Bureau.

In the U.S. and Europe, one rapid result of the global financial crisis was a cry in the halls of government for greatly increased supervision and revamped regulation of the financial industry, from banking to insurance to the investment sector.  Regulations enacted after the financial crisis of 2007-2009 put banks, insurers, investment managers and credit card firms under pressure, making it more difficult to operate and harder to earn profits.  In America, all recent regulation will be subject to deep review and rewriting.

Basel Regulations Have a Global Effect:  The global committee known as the Basel Committee on Banking Supervision (BCBS) continues to monitor the health of the banking system and issue recommendations for minimum bank capital and risk management.  The biggest changes faced by banks that plan to comply with the latest round of recommendations, the “Basel III” accords, will be in raising sufficient capital.  Compliance with Basel accords is recommended to the governments and regulatory authorities where global banks are based, including the U.S.  Nations may choose whether and to what extent to comply on a voluntary basis.

While this may be desirable from a stability point of view, it places burdensome constraints on banks.  As a result, they will earn a lower profit ratio on assets.  Also, in many cases, they are required to sell large amounts of new stock, thus diluting the positions of existing stockholders.  (An alternative way to raise capital is to sell large amounts of assets, which many banks have been doing.) 

In addition to the Basel accords, an international group known as the Financial Stability Board (FSB) makes recommendations to the world's governments as to regulation of financial services industries.  In November 2014, the FSB issued new guidelines that would require massive injections of new capital (or the availability of vast amounts of cash on hand through the issuance of new bank debt) at many of the world’s 30 largest banks.  The intent is to make sure that the banks have sufficient “loss-absorbing capacity” in the event that a major financial disruption occurs which would drive down the value of loans and assets held by the banks.  A further goal is that the banks should be able to stand on their own, in case of a financial shock, without the need for government bailouts. 

Dodd-Frank:  In the U.S. a sweeping reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed by President Obama in July 2010, after European finance ministers approved similar regulations for much of Europe a few months earlier.  In general, requirements under the law include broad powers for the government to monitor systemic financial risk and to intervene where it deems necessary.  For example, it requires a bank to shrink in size if the government believes that the bank is posing financial risks, and an orderly liquidation process has been set out for extreme cases in which regulators need to seize and auction off financial firms that are nearing bankruptcy.

Another requirement of Dodd-Frank was the creation of the Consumer Financial Protection Bureau (CFPB) to oversee and regulate the issuance of things like mortgages, credit cards, personal loans and retirement plans.  For example, fees charged to consumers and businesses for checking accounts have increased.  However, certain types of credit card fees have been restricted by recent legislation, including a ban on high “activation” fees, a deep cut in fees that can be charged to stores for debit card transactions, and certain restrictions on raising promotional interest rates.

Under Dodd-Frank, a new Federal Insurance Office within the Treasury Department was established to oversee the insurance industry. 

Solvency II in the EU:  In the European Union, the Solvency II set of regulations for insurers took effect as of January 1, 2016.  They impose uniform rules, including solvency and minimum capital requirements, in addition to intensifying governance and supervision, reporting and disclosure procedures.  The new rules impose staggering amounts of paperwork and, in some cases, the need to beef up the amount of capital insurers maintain. 

The “Shadow Banking” System:  Non-bank companies that offer financial services are a competitive threat to traditional banks.  Retailers, automobile manufacturers, stock brokers, insurance companies and other business sectors are offering a growing array of bank-like services, from loans and mortgages, to credit cards, to money market accounts with checking account-like features.  Wal-Mart has become a retail financial services giant by opening banks within its stores in Mexico, along with “Money Centers” within hundreds of its U.S. stores.  Its Bluebird cash card enables customers to pay bills, cash checks and perform other non-depository business.  In September 2014, Wal-Mart announced a partnership with Green Dot Corporation whereby the retailer now offers low-cost checking accounts called GoBank, through a Green Dot-owned bank.

Hedge funds and other alternative investment companies are making corporate loans, taking market share away from commercial banks.  General Electric makes massive amounts of corporate and business loans.  The Financial Stability Oversight Committee, part of the U.S. Department of the Treasury, is increasing its oversight of the largest non-bank financial services firms.  More recently, trends in financial technology have enabled non-bank lending firms to proliferate on the Internet.

Financial Technology (FinTech) Becomes a Hotbed of Innovation:  A revolutionary wave of apps for smartphones that act like debit cards and manage financial accounts is sweeping Asia and slowly taking root in Europe and the U.S.  Firms on all sides of this market are trying to gain an early lead, including tech companies like Google and Apple; cellphone manufacturers like Samsung and Huawei; and credit card companies like Visa.

Financial services technologies receiving the most investment and effort include those for:

• Mobile payments

• Insurance sales and distribution (eliminating the traditional broker/middleman)

• Management of investment accounts through artificial intelligence (“robo-investing”), with the effect of reducing management fees

• Consumer and business lending.