Banking: decline of mature markets – fulfilling the prophecy


Whilst Western eyes are scanning other BRIC markets and wondering what they can do to “weasel” their way out of a predicament of their own making, others (no more credible than they) are adopting a strategy popularised by Warren Buffett:

“Be fearful when others are greedy and greedy when others are fearful”

More than 20 years after Soviet tanks and soldiers pulled out of then-Czechoslovakiain Eastern Europe, Russian influence is on the rise in what was once its imperial backyard. Where guns and bullets failed, rubles are succeeding.

Local governments are selling off state assets to plug gaping budgetary holes as the global financial crisis bites. Western corporations are tightening belts and selling off some assets in the region. Stepping into the void are eager Russian businessmen, some backed by the Kremlin, as money trumps lingering suspicions from decades of Moscow-led Communism.

Link

I can see, precisely, where the headline-writer was coming from and why. The extract of the article from ft.com is below but I felt the need to bring this together with an IBM report (a link to the report at the end of this article) that gets closer to the root of the problem – it still falls short – but points in the direction of an alternate path…

imageBy my interpretation, IBM are telling banks to “look within for the answers they seek”. They have highlighted something pretty fundamental. Made even more tantalising when they quantified it at $200 bn per annum with an emerging market of $900 bn per annum to play for!

“The financial system on which Dodd-Frank is being imposed is far more complex than the lawmakers, and even most regulators, apparently contemplate,” wrote Mr Greenspan.

“We will almost certainly end up with a number of regulatory inconsistencies whose consequences cannot be readily anticipated . . . These ‘tips of the iceberg’ suggest a broader concern about the act: that it fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008.”

Just turning back the clock does not seem a viable avenue. These concerns do create even more urgency for regulators to insist that Wall Street spends money on making all the information it has more accessible.

John Liechty, a professor of marketing and statistics at Pennsylvania State University, helped create the Office of Financial Research, a new agency created by the Dodd-Frank Act that is charged with identifying systemic risk in the financial sector. He first got the idea when he met regulators at a workshop after the crisis.

“It really was surprising to me,” he said. “Regulators had a complete lack of real information about how the markets work, the size of positions and exposures among institutions.”

He believes there is a “national need” to gather the data and do the research to understand markets better, just as was done to better model hurricanes and their impact. It took decades – and was a serious project.

Mr Greenspan believes the markets are “unredeemably opaque”. Mr Liechty thinks this can be remedied – and pushing Wall Street to track data and use common tags to identify counterparties would make a huge difference.

Making this a priority for the financial industry is tough. But without a better way of knowing what goes on in the complex and interconnected markets…

via FT.com / Markets / On Wall Street – Understand the financial system first, then regulate it.

I am no world authority on the subject but invite challenges to my simple logic: more regulation is NOT the way forward. Nor is the separation of banking activities. Either approach hinders the ability of a bank to compete in a global marketplace so will only result in the need for more operational or product complexity = less customer value.

If my memory serves this quote comes from a McKinsey publication and makes perfect sense.

“Adding complexity to cope with complexity is a seriously flawed approach”

I must agree with Prof Liechty’s suggestion that tracking counterparties, presumably to monitor the potential for systemic risks associated with the industry but, is a MUST DO. As far as improving the customer proposition is concerned this is where early adopters can really secure and sustain some competitive advantage relatively painlessly. Read on…

If the above doesn’t excite you as much as all that talk of hundreds of billions of dollars per annum then, I suppose I shouldn’t be too surprised. So, here it is:

imageimage

Let me translate, because the following is only part of the whole story. For a bank or any financial organisation to be more “Client centric” requires that they STOP structuring, exclusively, WIN/LOSE contacts.

Quite simply, this is THE, vital, first step on a path that leads toward rebuilding TRUST. The bi-product of such a cultural change is that, so much of the costly complexity that comes with “disguising” products and services as customer centric; misaligned operations that have evolved over years of new or different technology; partial IT integrations and a prevailing culture that puts Corporate profit (and individual reward) above all else. All of these have required more GRC (Governance, Regulation & Compliance) whilst making actual compliance more difficult and costly.

The abandonment of strategies that placed the customer at the centre of the proposition, in favour of a results/reward-driven culture that fed high leverage/high growth models certainly satisfied its initial purpose but to the long term detriment of the individual organisations, global industry both in financial and reputational terms.

Gresham’s Law

image

Problem

IBM point the way but the sheer size of the “rewards” indicate the scale of the problem! Banks simply cannot afford to “come clean” about how skewed their operations and culture have been – although any informed observer already has a pretty fair idea – so a means of transition WITHOUT admission of culpability is required.

They have not provided a detailed plan for the transition because – whilst I have no doubt that the depth of understanding of COMPLEXITY lies within IBM at a philosophical level – they do not possess the practical tool-kit to tackle what they have identified.

Solution: Quantitative Complexity Management

Ontonix already have the required depth of understanding, rigorously tested technology and tool-kit to be able to tackle the problem highlighted by IBM. Of course of all the reports on the impact of complexity on business IBM’s is merely the latest and most specific to banking.

To be able to do so under the banner of “managing complexity” avoids the additional “pain” and potential loss of office or wealth associated with further public scrutiny!

Benefits: immediate and future

Added benefits: extended “risk horizon”, identifying “reducible uncertainty” within the system; gaining micro-level insight into causality; “crisis anticipation” e.g. deteriorating credit risk or customer relationship.

image

The cultural change also paves the way for Banks to fully, openly, engage with customers via a “Social business” strategy: lack of transparency being a major obstacle at present. This is the channel into which operational savings from reducing complexity can be invested and multiplied as

Over the last 12 months I have commented upon reports from, such as, KPMG, McKinsey, PwC, Economist Intelligence Unit. In addition complexity figured prominently in the World Economic Forum report on Global Risks 2010.

The attached White Paper “Reveal Your Hidden Profits by Simplifying your Business!” serves to reinforce much of what others have already said. It is very good.

However,  until IBM quoted these staggering amounts and “extra profit of 20%”, AT Kearney were the only one’s to conservatively suggest that managing complexity would add 5% to the bottom line.

The report: From complexity to client centricity

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