Financial Services: Problems and Challenges
European financial services have accumulated very large losses in the last decades. The Italian government is working on plans to set up a €50 billion bad bank bailout. From the spread crisis of 2011, the overall Italian universe of banks has produced nearly €50 billion of net losses. The Royal Bank of Scotland, since the beginning of the crisis, has accumulated ?48 billion of losses. Deutsche Bank, for instance, suffered a heavy and continuous contraction of the profitability. It registered in 2015 its own record amount of a €6.8 billion loss. Other large banks, such as Commerzbank, and, unexpectedly, Credit Suisse had similar financial problems. More specifically, the accounts of the Swiss institution for 2015 closed with a net loss of €2.6 billion, where the heavy depreciation (€3.5 billion) of the investment bank Donaldson, Lufkin, and Jenrette, acquired in 2000, has turned out to be a heavy toll to pay.
Stability in the financial services sector is critical for a smooth functioning of the real economy due to the magnitude of the impact that negative externalities could have on it. The recent global crisis has largely shown the negative effects of a bad functioning of the financial services system and, most importantly, of its failures. Small businesses, overtopped by information asymmetries, might not be able to get the funds to pursue their initiatives. Customers with deposited savings might postpone their investments, and even the payment system, as the Greek case clearly shows, might be at risk.
Following these events, regulators have moved toward a new direction:
- (1) New solvency regulation
- (2) Upgraded capital regulation
- (3) Focus on structural reforms in the financial services
The rationale behind this trend is the concern on the stability in the financial services sector, even in times of crisis or of stressing situations. A large amount of losses has, in a certain number of cases, been covered by governments or by central banks, including the European Central Bank (ECB). Without the support of the public finances, the amount of losses undergone by these financial institutions would have been disastrously high and the real economy would have had a critical hit. Notwithstanding this support, most of the financial institutions have not reached the levels of profitability registered before the crisis. New and changing hurdles have quickly turned into losses, whereas the actions put in place did not seem to be highly effective.
New challenges are more and more appearing:
- • the continuously increasing relevance of fintech initiatives; and
- • a new stability-focused regulation
Therefore, traditional financial services are taking drastic measures. Cost-cutting policies are the traditional countermeasures to fight the reduction in the levels of profitability. By reducing head count, a number of physical branches, selling, general, and administrative expenses (SG&A), and operative expenses, traditional financial institutions expect to achieve a sustainable comeback to the pre-crisis levels of profitability.
Some figures from three financial giants show an example of what institutions are doing to aim to achieve a sustainable growth by means of cost-cutting policies. Deutsche Bank has announced a slash in its workforce of 9000 permanent staff and 6000 contractors, in addition to other 20,000 workers in the process of selling and outsourcing businesses and assets. According to John Cryan, the chief executive, this will allow savings for €3.8 billion by 2018. Unicredit, as part of a more general overhaul, will eliminate about 18,200 jobs, allowing savings for €1.6 billion, by 2018. Barclays, on the other hand, will cut about 1000 jobs in investment banking worldwide.
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