risks to banks

As commercial lenders look beyond the pandemic, three fast-growing sectors represent new risks, according to a report.

As the world emerges from the pandemic, traditional banks face a renewed triple threat from big tech, shadow banking and China’s state-owned megabanks, according to a report ‘Banks in the post-Covid-19 world’ by asset manager Amundi.

Fintechs may have disrupted the financial sector by offering cheaper and slicker services, but Pierre Blanchet, head of investment intelligence at Amundi, argues the principal competition over the next few years could come from global tech firms, such as Apple, Google, Alibaba, Amazon and Facebook, as they move into the digital payments space.

The tech giants boast advantages in scale and global reach, sit on vast IT budgets and have access to a trove of customer data. Moreover, as millennials and Generation Z — who have adopted digital banking services — make up more of the addressable market, they can be easily migrated to other online platforms, the report warns. “Big tech represents a significant threat,” Mr Blanchet says.  

A lot of the asset management business is going into de facto banking, which is going to be a competitive issue for banks

Pierre Blanchet, Amundi

But in the face of this ominous new challenge, traditional banks may hold an advantage. “Big tech may increasingly be involved in finance, but a key part of finance is protecting clients’ assets. On large platforms people’s data is stolen every day. The new competition will find that it’s not so easy to protect clients’ information,” Mr Blanchet says. “However, this is something that traditional banks are very good at. The core purpose of banking is to safeguard client assets, gather and protect information and, of course, create money via lending.

“This new competition will face issues around the overall soundness of the infrastructure, whether people’s information is secure, and whether transactions can be conducted in a safe and efficient way. Traditional banks start with a significant advantage in this regard,” he adds.

Shadow banking

Banks will also face growing competition from other financial institutions in traditional banking areas because of low interest rates, says the report.

Low or negative bond yields in Europe have incentivised asset managers to compete with banks on lending, according to the report, which claims banks and asset managers increasingly participate in deals such as private loans to corporates. “Funds are now involved in primary credit lines,” Mr Blanchet says. “This is a developing form of shadow banking.”

Shadow banking, by definition, is when an organisation operates in the same space as banks but without being governed by the same regulations. These activities include, for example, asset managers looking for higher yields for their end-clients by disintermediating banks and leveraging credit analytical skills to lend money to corporates via their funds; insurance companies offering banking services and savings product to their clients; and peer-to-peer lending that bypasses banks by offering short-term funding.

Overall non-bank financial intermediation is growing faster than total financial assets, according to the Financial Stability Board, and stays largely out of the scope of Basel III.

“A lot of the asset management business is going into de facto banking, which is going to be a competitive issue for banks. It’s very much a function of low interest rates. If rates moved back to previous levels, then a lot of these players would not be competing against banks,” says Mr Blanchet.

China’s megabanks

Incumbent banking leaders around the world also face a significant threat from China’s giant state-owned lenders. The country’s four largest banks — ICBC, China Construction Bank, Agricultural Bank of China and Bank of China — sit in the top four places in The Banker’s Top 1000 World Banks ranking. Their position as the dominant force in the global banking industry has been bolstered further by the country’s speedy bounce back from the pandemic. “These are huge and influential organisations,” Mr Blanchet says.

In the past, China’s megabanks tended to focus on their national market. “There has been the perception that Chinese banks acted as the financing arm of the Beijing government. While this remains the case, over the last couple of years some of those banks have become more involved in the competitive global landscape, just like any other bank. Such moves support two goals: they leverage Chinese banks’ huge balance sheets, and they also support efforts to promote the renminbi as a reserve currency,” he continues.

“Beijing’s ambition to internationalise the renminbi requires Chinese banks to lend money in renminbi, not only to Chinese entities who already hold renminbi, but also international third parties.”

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