Why Are Banks Optimistic About the Future?

Rising interest rates are one of the most pressing issues facing banks and it can impact personal finance, as well as the adoption of fintech in Malaysia, and more.

The banking industry can anticipate net profits from an increase in interest rates that is gradual, but it is important to consider the potential risks as well.

It might negatively affect banks’ cost of funding and asset quality if the combination between market expectations, monetary policy, and inflation dynamics causes a disorderly rise in market interest rates.

Therefore, supervisors and banks need to exercise caution. Supervisory focus on priority areas including credit risk management and counterparty credit risk towards non-bank financial firms must be sharpened due to the tail risk of a severe economic slump.

A distinct convergence of threats is developing in front of us. There are additional threats that aren’t now on our radar, and we need to make them visible.

A possible economic recession would harm banks’ profits by increasing the cost of borrowing money and deteriorating asset quality. Additionally, large or erratic increases in market interest rates have the potential to exert a significant negative influence on the risk profile of institutions that are under supervision, even in the absence of a recession.

All of these variables may have an impact on financial stability and significantly lessen the likelihood that banks will recover from the pandemic stronger.

Contrary To What Analysts Claim…

Though money may be what keeps the world going, actual cash is fast becoming a thing of the past. As a result of the introduction of contactless payments, credit cards, and digital banking, touchable money has been on its way out for years.

People who are interested in markets gather around the cashless society because they think that money and bills won’t be used in the future. They don’t anticipate the existence of any actual banking branches either. The fact that nations around the world are abandoning paper money is a clue that the bank of the future may be digital.

Not all wealthy countries have embraced the idea of doing away with real money with the same zeal. The transition to a cashless society was expedited by the pandemic.

Businesses rushed to introduce contactless payment options as a result of societal limitations and the concern that touching infected money might spread the infection. This effort appears set to intensify.

Financial Institutions ‘Banking’ On Sustainability

Banks, insurers, and investors must rethink their business structures to become more environmentally sustainable. Most central banks have taken action to safeguard the global financial system as regulators increasingly perceive climate change as a systemic risk to it.

The goal of the 54-member Network of Central Banks and Supervisors for Greening the Financial System is to “green the financial system and strengthen efforts of the financial sector in achieving the Paris climate agreement goals.” The group is made up of the majority of the central banks from the largest markets.

Regulators, central bankers, and policymakers are all moving at different rates, which is unfortunate since it portends badly for short-term global regulatory and policy cohesiveness.

As we try to reinvent how we work, live, and interact as a global society, it is hoped that the current environment will aid in moving global regulatory and policy changes linked to sustainability further along, and in more lockstep.

Banks are increasingly expressing a corporate purpose and outlining how that purpose will guide decision-making in response to stakeholder demands about sustainability. It is difficult for large, complicated enterprises to put this into practice.

Top executives must support the corporate purpose. The goal of green macro-prudential policy is to outline the standards for financial institutions and to reduce the systemic financial risks that climate change poses to the macroeconomy.

The banking system may be subjected to a climate stress test, various capital requirements may apply depending on how much of the bank’s portfolio is green, and limits on credit exposure and financial ratios may also be included in green macro-prudential instruments.

Such instruments can assist central banks and regulators in influencing banks’ lending behavior by motivating them to make more environmentally friendly investments.

The Impact of Digitization

Along the whole value chain, digitization is taking place. Cell phones are replacing face-to-face interactions as the primary means of communication with banking customers in the front office. Examples include robo-advisories, insurtechs, and neobanks.

Instead of allowing users to communicate with live agents, more speculative interfaces produce chat and voice using machine learning and natural language processing.

Because of this automation, there is intense vertical competition across different industry sectors as they change course to bundle and cross-sell their services. For instance, the best digital payments app and the best digital lender are now vying to provide the greatest digital bank account.

Although they make a good beginning, digital point solutions are not the end of our fintech journey.

You don’t go to the Panadol store when you need to purchase Panadol to treat a headache. You visit the pharmacy or 7-Eleven, both of which have a huge selection of goods. Similar to this, modern social and e-commerce platforms provide their users with thousands of functions.

Conclusion

The strength and resilience of banks can determine how successful a bank-supported economic recovery might be. Bank capital can be expected to be depleted as a result of losses from loan defaults and growth in risk-weighted assets.

Banking executives need to be ready for things to be quite different from the previous ten years in any scenario.

Banks in developed economies operate in what is known as the “cushion zone” and have established considerable capital buffers. Banks may enter the “caution zone” in the upcoming months and years, at which point they will need to dramatically alter the steps they take to protect and increase capital, as well as their decisions regarding dividends and buybacks, compensation, and cost structures.

Given their more restricted capital positions, banks’ capacity to support the real economy will also be closely examined.

Do you trust in the banking system? Let us know in the comments down below.