The finance industry is under enormous and ongoing pressure to change. Experts suggest that sustainable success can only be achieved by restructuring and focusing on core competencies. Following this advice would entail spinning off individual lines of business or even entire business units, because without a clear focus, banks are in danger of losing their market position.
The 2008 financial crisis is generally regarded as a wake-up call for the banking industry. The only way to escape the downward spiral appeared to be industry-wide self-reinvention, perhaps accompanied by a return to core competencies. For some, this meant returning to the traditional banking model and replacing the “general store” image. But redefining mission statements was not the only challenge facing banks. In the aftermath of the crisis, regulatory bodies also stepped up their activities at national and international level, significantly intensifying the regulation and supervision of financial institutions.
To approach this realignment strategically, executive and supervisory boards first had to address the key factors for assessing their own business activities. Factors such as lack of profitability (cost/performance ratio), rising cost and risk pressures, or necessary repositioning, all played a major role in this process.
Reducing absolute costs by spinning off services is a proven method for boosting corporate success in the long term. Real-estate finance is a good example of such business separation. By deciding to remove real-estate finance from their portfolios, banks cut down their organisational overhead, but no longer generate any revenue from this activity – at which point they must decide whether a strategic partnership with a major mortgage lender makes more sense.
Restructuring should always be based on a holistic strategy, to identify and then implement the optimal scope of resources, staff, customers, products, IT systems and so on. From a technical perspective, it is also important not to lose sight of digitalisation, and consequently to clarify questions concerning computer-assisted opportunities as early as possible. Some banks are considering the advantages of becoming fintechs, while others are backtracking and relying on standardised systems that do not need adjusting. While this may save costs, best practice has not yet been established at this stage.
The financial crisis enormously exacerbated risk-related issues. One method of alleviating risk is to outsource it by literally removing it from the bank’s own ledgers. By reassigning non-recoverable and illiquid financial instruments to a “bad bank”, banks can ease their equity position and adjust their balance sheets. In some cases, this may even pave the way for taking full advantage of public-law guarantees or sureties.
Furthermore, spinning off services may also provide a basis for starting up new businesses. Indeed, it is perfectly feasible to establish an independent bank to provide these services – a process known as a carve-out. However, there is more to a carve-out than simply outsourcing individual lines of business. In addition to the products concerned, it is also essential to consider the impact on customers, processes, IT systems and any internal dependencies within the bank.
For career changers with executive or managerial backgrounds who are currently confronting these banking industry challenges, we offer our Banking for Graduates certification course. Our programme will give you a solid grounding in banking and equip you with the skills you need in your daily work. As Frankfurt School lecturers, we have a broad range of specialist knowledge at our fingertips and, in addition to the banking basics, will provide you with everything you need to know about current trends and industry strategies. As part of our Banking for Graduates programme, we highlight correlations with significant events and are always happy to answer your individual questions or discuss specific scenarios.