The Bankwatch

Tracking the consumer evolution of financial services

The Great Unwinding | part 2 of 3: 2012 – 2020 of 3

Part 1 of this series was a dire assessment leaving doubts about of survival at all.  It was a broad brush assessment of the crisis to date and directions being taken.  However there will always be winners and losers.  The future is rarely linear, and out of this mess some will raise sooner, and in ways that are unexpected.

The report, The Future of the Global Financial System deals with this unpredictable future by outlining four scenarios that encapsulate the broad sets of potential directions that will occur in the worlds banking ecosystem.  As with Part 1 the research used to source this series is primarily from The Future of the Global Financial System together with supporting data from G20, and IMF.  I also acknowledge strong influences from Niall Fergusons “The Ascent of Money” and his other writing here at the Financial Times plus John Maudlins pragmatic view of the world.

Part 1 highlighted the imbalances that produced the growth over the last 20 years lies in four areas:

  1. expansionary monetary policy (excessive money supply)
  2. expansionary fiscal policy (reduced taxes)
  3. excessive financial deregulation
  4. ill considered use of credit and leverage

In the US credit market borrowings have increased from 160% of GDP to 350% of GDP in 2008.  This increase has been roughly equally distributed between consumer debt and financial services debt. The Great Unwinding reflects the management of that debt to align with current asset values income and economic climate.

Long Term Scenarios for the Global Financial System

The central question asked when determining the long term scenarios is this:

How might the governance and structure of the global financial system evolve over both the near-term and long-term.

This question was then laid out against driving forces and critical uncertainties thus preparing for the four scenarios.  The report authors developed 37 driving forces and distributed them according to uncertainty (most uncertain in upper right)

The Future of the Gloobal Financial System - WEF

Seven out of the top thirteen uncertainties are economic in nature, with inflation, currency values and growth featuring highly.  However the two highlighted overall uncertainties that the report concludes are:

  1. degree of international co-ordination on economic policy
  2. pace of geo-economic power shifts between advanced and emerging economies

While those factors seem esoteric in day to day life it is not hard to see how protectionism, or not, for example would have consequential impacts on any individual country.

The Four Scenarios

The upper two forsee a world where everyone gets along with the lower two being much less so.  The pace of change is slow on the left and gaining speed across to the right.


The implications of these outcomes for banks are quite diverse.

Financial regionalism sees an isolated US and emerging economies choosing to isolate themselves from the advanced economies.

Banks will contend with different regulatory environments in Europe, US and Emerging economies.

Re-engineered Western Centrism has a highly co-ordinated and homogenous world.

Banks will deal with a new supranational regulator, and after some hiccups will see significant profitability once more.  Potential for future crisis of even greater significance is high.

Fragmented protectionism has a very localised and volatile world.  Capital and movement of money controls are in place.

Fragmented regulation and rampant nationalisation of banks, with restricted capital flows amongst countries.

Rebalanced Multilaterism sees an integrated global system that is dominated by emerging economies.

Global risk management focussed on macroeconomic policy.  Biggest focus is on crisis prevention.

Implications for banking innovation

The report concludes that there will be three near term impacts on banks.

  1. Interventionist regulatory framework: all of the scenarios see new regulation.
  2. Back to basics banking: survivors will reorient their business around client needs and core competencies.
  3. Restructuring in alternative funders: hedge funds and that related industry will see structural changes – this may or may not have direct impact on banking, but cannot be ruled out.

Relevance to Bankwatch:

The scenarios for the Global Financial System offer some clues to the future that involves increased regulation, a reversion to “basics” and possibility of new competition from alternatives.  Within that context the role of strategy planning for Banks will as discussed in Part 1 be first and foremost focussed on balance sheet repair but looking beyond the near term will have to address basic questions such as gathering deposits, and management of good quality lending customers.

The report authors are preparing a second report that will address strategic options, and I look forward to that.  Meantime, I will do one more and final post for this series, Part 3 and will come down from the clouds to a more down to earth and pragmatic look at innovation potential and opportunities in financial services.  I will include a look at the non bank ecosystem that is creeping up on banks at potentially the worst time for them, and will reference some of Jim Bruene’s blog posts are reference material for context.

Written by Colin Henderson

February 5, 2009 at 12:40

2 Responses

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  1. This is real good stuff! Thank you.


    February 13, 2009 at 00:54

  2. @covert … thank you!


    February 13, 2009 at 11:01

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