Report: More Than 50% of the Worlds Banks May Be Too Weak To Survive A Recession

[Hydrogen]

More than half of the world’s banks are already in a weak position before any downturn that may be coming, according to a report from consultancy McKinsey & Co.

A majority of banks globally may not be economically viable because their returns on equity aren’t keeping pace with costs, McKinsey said in its annual review of the industry released Monday. It urged firms to take steps such as developing technology, farming out operations and bulking up through mergers ahead of a potential economic slowdown.

“We believe we’re in the late economic cycle and banks need to make bold moves now because they are not in great shape,” Kausik Rajgopal, a senior partner at McKinsey, said in an interview. “In the late cycle, nobody can afford to rest on their laurels.”

The decade since the global financial crisis has seen a wave of innovation in financial services, bringing new competitors from fintech startups to giants like Apple Inc. and Alphabet Inc.’s Google. Banks have pondered whether to compete with, partner with or acquire some of these newcomers. Some established firms have sought to rebrand as technology companies, in part to attract hard-to-get talent.

McKinsey, whose clients are some of the biggest corporations in the world, consults on topics ranging from strategy and technology to mergers and acquisitions, outsourcing and stock offerings. In its report, the firm said banks risk “becoming footnotes to history” as new entrants change consumer behavior. Most recent attempts by banks to boost efficiency have been “business-as-usual,” it said.

Banks allocate just 35% of their information-technology budgets to innovation, while fintechs spend more than 70%, McKinsey said. Combined with regulatory factors lowering the barrier to entry -- like open banking and looser requirements for startups -- the environment is increasingly conducive for newer firms to take share from banks.

The report points to Amazon.com Inc. in the U.S. and Ping An in China as examples of technology firms that are capturing financial-services customers. To make matters worse for the old guard, the new players tend to go after the business areas that create the highest returns at banks -- credit cards, for example.

Investors have taken notice. Globally, banks’ valuations have fallen 15% to 20% since the start of last year, McKinsey said, adding that “the drop in valuation suggests that investors anticipate a sharp deceleration in earnings growth.”

Lenders can cut costs and find funds for technology by outsourcing what McKinsey calls “non-differentiating activities,” including some trading and compliance functions. Banks “need to get much more comfortable with external partnerships and being able to leverage talent externally,” Rajgopal said.

Read more: BofA’s cloud expansion could ‘save a ton of money’

Another way to free up money: get bigger. BB&T Corp. and SunTrust Banks Inc. said as much when they announced their decision to combine earlier this year -- the biggest U.S. bank merger since the financial crisis. Rajgopal said he expects M&A to continue in the late cycle.

“Going forward, scale will likely matter even more as banks head into an arms race on technology,” the report says.

https://www.bloomberg.com/news/articles/2019-10-21/banks-must-act-now-or-risk-becoming-a-footnote-mckinsey-says

....


This may not be a good time to have money stored in banks, if indeed more than 50% of them are weakened and may not survive an economic downturn.  

It should be mentioned that even china's largest and most prosperous banks are facing great difficulties atm. These negative trends relating to banks are not isolated events. Rather they are becoming normalized and widespread throughout the industry. Excitement and risk have a tendency to be correlated. Whether in gambling or investment markets, where one is found it is common to find the other. With many banks engaged in leveraged investments tied to global economies, upticks may produce profits, while a turn in the opposite direction can carry devastating effects.

Hopefully we won't ever have another 2008 bank crisis.    Even though everyone seems to be shouting exactly such a thing will happen inevitably from the mountain tops.

[mu_enrico]

I have experienced this situation where a lot of banks got liquidated in 1998 in Indonesia. Yeah, it was a mess, but from a business perspective, it's the way of removing unprofitable banks. The problem with this issue in the present day however, the Government of Indonesia now will "bailout" the users' saving account up to 2 billion IDR (about 142K USD) per person.

If that happens, guess how the government will pay? By printing more money from thin air, or in other words, debasing the currency.

[ivakar]

global recession can start from falling one system (huge) bank anywhere.
as it was in 2008, there the trigger was lehman brothers, after it fell, the whole world shake
so now in 2019 we have deutsche bank which is now in the same position as it was with lehman bank, and could be the trigger that world's economy started falling apart

[Wexnident]

Some banks are already preparing for it. the De Nederlandsche Bank or Dutch Central bank has hoarded gold worth around €6 billion. They've already stated that once the recession starts and the market crashes, they could fall upon the gold they have and start all over again. A recession would most likely happen since I have not seen any progress to reduce the global debt that the world currently has. On the contrary, it has increased more and more and made it most likely impossible to pay it back.

[Lucius]

Banks always play their game, and if they messed up, there is always a politics to save them from their sins, all to the detriment of their clients and all other residents of a country. If we wonder why politicians saved banks, the reason is simple and lies in the fact that there are strong and unbreakable links between banks and politics anywhere in the world.

From what I read in the posted article, only way for banks to survive is to adapt to new technologies and to merge. Traditional banking obviously has major problems in today's society, and it needs to make radical changes if we don't want to have a new recession every ten years

I hope people have learned something from the last recession, money is not secure in banks unless there is a government guarantee for deposits up to a certain amount. But still, the vast majority of people believe in banks as the safest way to keep their money, although there are good alternatives, and one of them is certainly Bitcoin. From our point of view, the money invested in Bitcoin has not only been preserved but at one point has increased its value by as much as 100 times since 2015.

[ecnalubma]

This may not be a good time to have money stored in banks, if indeed more than 50% of them are weakened and may not survive an economic downturn.  

This is scary due to not only banks may close but also major businesses. I am also worried about innocent people entrusting almost all of their financial assets to banks without knowing the upcoming threats. I think if we suffer a financial crisis, it will be worst than the previous one.

[beerlover]

That is a scary stat, I mean I knew that there were a lot of banks that couldn't handle it when the time comes but I didn't know it was as high as 50%. If we get even 2 or 3 huge banks like JP Morgan level then we are going to have a world financial collapse once again. It is just not feasible enough.

Yeah, it is impossible to keep the world from going to a recession, finance is something that goes up and down but at the end of the day if the recession kills this many bank then we are looking at a unstoppable level of disaster that is unavoidable by any standard whatever we do about it. That is why having your money in bitcoin instead of bank could save you, at least if the world finance collapses you would have bitcoin that would gain value over fiat when that happens.

[LeGaulois]

In Europe, the banks struggle in NPL management, there are over 636 billion euros of non-performing loans. These same NPLs only represent 3% of the total loans granted, you may think it's quite low,  I say it's subjective: Doesn't it remind you of the subprime mortgage crisis in the US.? Well at that time the US. banks had a rate of ~1.5%.

So banks need to increase their reserve but they can't, for a majority. On the top, their rentability is decreasing, and to compensate it in the current situation of low or negative rates they didn't find anything better than provide massive loans to bet on volumes...

Latest stress tests:

The deterioration in banks' net liquidity position (as a percentage of total assets, on the Y-axis) shows a median survival period of 6 months (176 days) in the event of an adverse shock (orange curve) and 4 months (122 days) in the event of an extreme shock (red). In blue, the curve of the base scenario, without shock.

(Credits: ECB)

[TrevorS]

I confess I think the figure is 50% slightly underestimated, I won’t be surprised if a much larger number of banks are not ready for the upcoming recession.
The banking system itself has a mechanism in itself which under certain circumstances will always fail.
Usually this happens during a global recession, because people are in a hurry to get their money from the bank.
I am sorry for those people who do not have time to collect their money from the bank, because they will not get absolutely nothing as it always was when the banks collapsed.
Each time the same thing.

[1Referee]

This may not be a good time to have money stored in banks, if indeed more than 50% of them are weakened and may not survive an economic downturn.

All banks are inherently weak during a recession, or when they have too much exposure in x/y/x/ country or industry. I don't consider that to be much of a problem.

The real problem is where we go with our money, and no one seems to have a proper answer to that question. One could say that buying Bitcoin or Gold is a good option, or real estate, but even when doing that, there will always be a significant part of our worth stored in bank accounts because a bank is still the best place to actually store our money.

I personally have bank accounts with different large banks that with a high probability will receive financial support in case things turn ugly, because they are too big to fail. Another thing that you can do is to open bank accounts in foreign countries with a stable financial system and economy. In other words, diversification/distribution amongst different banks is what I suggest.

[STT]

Some banks are already preparing for it. the De Nederlandsche Bank or Dutch Central bank has hoarded gold worth around €6 billion.

I'd love to congratulate them on their good balance but 6bn isnt alot for an entire country, this is about €350 per person excluding any money owed elsewhere.  They got something solid in the pocket change there so its something but not very much.     Norway is one of the few exceptions to the rule and stored €70,000 per citizen in a sovereign wealth fund, they had the good luck of alot of off shore oil and I'm not sure how much is gold if any but they got more sense then most countries have exercised. 
   I'd hope alot of banks, countries are accumulating reserves of this sort where value cannot half if economic recession occurs, solid long term value.   We mostly store vast amounts of debt now which is a very unknown future value combined with a fixed nominal value relying on politics, the certainty being alot of the value evaporates over time and thus the debt helps government overspend every year on the fiscal budgets.

The consideration of commercial banks for stress test apparently does not consider excessive inflation, it does not recognise we may have overproduced currency and debt obligations near term and this will result in prices becoming far greater in future.    Its likely most banks would suffer badly and be badly backed by actual asset value, its hard to say as the debt would be worth less also.

Dont store money in one thing and obviously not just one bank, but hopefully people would have their accommodation paid and money not invested or reliant on just one economy.   If national currency falls in value then some foreign income is a good hedge.
https://us.cnn.com/2019/10/25/politics/trump-us-budget-deficit-2019/index.html

[Pearls Before Swine]

It should be mentioned that even china's largest and most prosperous banks are facing great difficulties atm.

China is China, tho.  I'm in the U.S. and I remember very well how many 'stress tests' the banks that got the bailout money had to go thru in order to pay out dividends on their common stock again.  The fact that most banks in the U.S. passed those tests doesn't necessarily imbue me with total confidence in them, but it is at least mildly reassuring.

I would *not* keep any surplus money in a banking account, however.  Interest rates aren't even close enough to warrant that nowadays.  Maybe if deposits were paying 10% interest I might do it, but I'm a firm believer in putting such money to work if I'm not going to spend it.  The only way I know how to do that is to invest it, so for the past 10 years it's been mostly stocks and a smattering of crypto.  

The banks can do what they want, and if they all suddenly failed it would be complete chaos but I wouldn't be bankrupted.  For one thing, even if I did have money deposited in a bank it's insured by the federal gov't...but the main reason is that I *don't* have any money in a bank account except for a checking account which I just use for paying bills.  

[panganib999]

I have experienced this situation where a lot of banks got liquidated in 1998 in Indonesia. Yeah, it was a mess, but from a business perspective, it's the way of removing unprofitable banks. The problem with this issue in the present day however, the Government of Indonesia now will "bailout" the users' saving account up to 2 billion IDR (about 142K USD) per person.

If that happens, guess how the government will pay? By printing more money from thin air, or in other words, debasing the currency.

This crisis or phase is just to filter out which banks are really functional and is profitable for only those who are strongly inclined of banking can survive the phase. Also, banks are near into experiencing recessions because of the enormous emergence of digital banks plus the growing adaptation of bitcoin which people is loving more because of its decentralization and the technology provided by blockchain which can hold theur assets without fees and threats unlike banks.

[Hydrogen]

All banks are inherently weak during a recession

During the 2008 crisis, some banks were doing well financially and had no need to be bailed out.

The main determining factor for whether banks needed bailouts in 2008 hinges upon a commercial banking versus investment banking paradigm.

Commercial banks are more prone towards limiting themselves to smaller profit margins from traditional bank revenue sources. This implies interest earned from loans or generally reliable and stable streams of income. Investment banks have a more untraditional model for generating revenue. They normally have higher potential profit margins on average, but accumulate greater risk as a result. Investment banks also collect a higher proportion of depositor's funds and invest them in whatever ventures they choose, which leaves them in a more leveraged position if investments go bad.

In recent times, within the past 2 decades, most banks shifted away from commercial banking towards investment banking paradigms. And yes there is a high correlation between this trend and the higher proportion of bank failures we've witnessed.

investment banks have taken on greater risk, utilizing a higher percentage of their depositor's funds, with more spectacular negative outcomes. This is the reason so many banks are failing globally, while being unable to pay their customers. Banks are gambling on greater risk / greater reward investments, with the funds of their depositors--those who traditionally believe banks are stable and safe places to store money.

[teosanru]

More than half of the world’s banks are already in a weak position before any downturn that may be coming, according to a report from consultancy McKinsey & Co.

A majority of banks globally may not be economically viable because their returns on equity aren’t keeping pace with costs, McKinsey said in its annual review of the industry released Monday. It urged firms to take steps such as developing technology, farming out operations and bulking up through mergers ahead of a potential economic slowdown.

“We believe we’re in the late economic cycle and banks need to make bold moves now because they are not in great shape,” Kausik Rajgopal, a senior partner at McKinsey, said in an interview. “In the late cycle, nobody can afford to rest on their laurels.”

The decade since the global financial crisis has seen a wave of innovation in financial services, bringing new competitors from fintech startups to giants like Apple Inc. and Alphabet Inc.’s Google. Banks have pondered whether to compete with, partner with or acquire some of these newcomers. Some established firms have sought to rebrand as technology companies, in part to attract hard-to-get talent.

McKinsey, whose clients are some of the biggest corporations in the world, consults on topics ranging from strategy and technology to mergers and acquisitions, outsourcing and stock offerings. In its report, the firm said banks risk “becoming footnotes to history” as new entrants change consumer behavior. Most recent attempts by banks to boost efficiency have been “business-as-usual,” it said.

Banks allocate just 35% of their information-technology budgets to innovation, while fintechs spend more than 70%, McKinsey said. Combined with regulatory factors lowering the barrier to entry -- like open banking and looser requirements for startups -- the environment is increasingly conducive for newer firms to take share from banks.

The report points to Amazon.com Inc. in the U.S. and Ping An in China as examples of technology firms that are capturing financial-services customers. To make matters worse for the old guard, the new players tend to go after the business areas that create the highest returns at banks -- credit cards, for example.

Investors have taken notice. Globally, banks’ valuations have fallen 15% to 20% since the start of last year, McKinsey said, adding that “the drop in valuation suggests that investors anticipate a sharp deceleration in earnings growth.”

Lenders can cut costs and find funds for technology by outsourcing what McKinsey calls “non-differentiating activities,” including some trading and compliance functions. Banks “need to get much more comfortable with external partnerships and being able to leverage talent externally,” Rajgopal said.

Read more: BofA’s cloud expansion could ‘save a ton of money’

Another way to free up money: get bigger. BB&T Corp. and SunTrust Banks Inc. said as much when they announced their decision to combine earlier this year -- the biggest U.S. bank merger since the financial crisis. Rajgopal said he expects M&A to continue in the late cycle.

“Going forward, scale will likely matter even more as banks head into an arms race on technology,” the report says.

https://www.bloomberg.com/news/articles/2019-10-21/banks-must-act-now-or-risk-becoming-a-footnote-mckinsey-says

....


This may not be a good time to have money stored in banks, if indeed more than 50% of them are weakened and may not survive an economic downturn.  

It should be mentioned that even china's largest and most prosperous banks are facing great difficulties atm. These negative trends relating to banks are not isolated events. Rather they are becoming normalized and widespread throughout the industry. Excitement and risk have a tendency to be correlated. Whether in gambling or investment markets, where one is found it is common to find the other. With many banks engaged in leveraged investments tied to global economies, upticks may produce profits, while a turn in the opposite direction can carry devastating effects.

Hopefully we won't ever have another 2008 bank crisis.    Even though everyone seems to be shouting exactly such a thing will happen inevitably from the mountain tops.

Now the thing here is that fiat is designed in such a way that these types of thing have to happen after a few time so that the situation is itself corrected and we move back on the mean economic growth pace. Even if we have another 2008 bank crisis I think this still is a better alternative than simply bitcoin. Simple reason is because bitcoin isn't stable enough to survive these shocks either. We just saw a 10% downfall in btc a few days ago and then automatically it jumps up by 30% this too is very unstable for any currency of the masses.

[mu_enrico]

Also, banks are near into experiencing recessions because of the enormous emergence of digital banks plus the growing adaptation of bitcoin which people is loving more because of its decentralization and the technology provided by blockchain which can hold theur assets without fees and threats unlike banks.

Bitcoin is irrelevant since its users only accounted for less than 0.1% of the global population, its often criticized by Nouriel Roubini that said

the number of active bitcoin users is only between 2.9 and 5.9 million

https://www.banking.senate.gov/imo/media/doc/Roubini%20Testimony%2010-11-18.pdf

In short, way more people use fintech products instead of Bitcoin.

A recession occurs because of mismanagement, boom and bust cycle, geopolitical instability, etc., not because of Bitcoin.

[Leonardo7]

Banks are the real enemy of the people, I once worked in a commercial bank in Nigeria, I had to resign because of the volume of work they pile on me and pay peanut, I happen to be part of some cost management in my local branch, we spend money on many useless things and careless about staff warfare compare to what we spend huge money on. Banks are the real bad guys when they are distressed, they get a bailout.

[dothebeats]

A recession occurs because of mismanagement, boom and bust cycle, geopolitical instability, etc., not because of Bitcoin.

I echo these thoughts. Even though bitcoin per se is considered as disruptive in today's standards, I still don't buy that bitcoin and other crypto are the reasons why there will be a recession. For the most part, banks and governments cause these recessions themselves until it creates a chain reaction on different parts of the industry because by then, everyone and their mothers would be in a hurry to get their assets out of a bank, causing it to implode from the inside and boom, money is gone.

The real problem is where we go with our money, and no one seems to have a proper answer to that question. One could say that buying Bitcoin or Gold is a good option, or real estate, but even when doing that, there will always be a significant part of our worth stored in bank accounts because a bank is still the best place to actually store our money.

For years, I have tried to answer this question: where should I put my money when even banks don't know where to put theirs? For every economic collapse, a different asset shines, but gold together with other precious metals somewhat remained stable, or so I think they are during downturns. Most probably I won't be storing my money in the banks, not during this expected collapse.

[Periodik]

A recession occurs because of mismanagement, boom and bust cycle, geopolitical instability, etc., not because of Bitcoin.

I echo these thoughts. Even though bitcoin per se is considered as disruptive in today's standards, I still don't buy that bitcoin and other crypto are the reasons why there will be a recession. For the most part, banks and governments cause these recessions themselves until it creates a chain reaction on different parts of the industry because by then, everyone and their mothers would be in a hurry to get their assets out of a bank, causing it to implode from the inside and boom, money is gone.

Recession is an integral part of the economic cycle. It is not there simply because a failure is done somewhere along the way. It is there because it is part and parcel of the economic cycle. The economic activities of a certain country or even region constantly expand and contract. That is the norm in the market. The spending rises and falls. And when the spending falls way below the normal level, it is when recession takes place. It is as old as humanity. It does not have anything to do with Bitcoin. 

[CryptoBry]

Hopefully we won't ever have another 2008 bank crisis.    Even though everyone seems to be shouting exactly such a thing will happen inevitably from the mountain tops.

The same history can be repeated because the many big lessons of the past and the recommended changes that should have taken place in the banking are largely ignored in the name of making more profits. Instead of getting stricter, the whole banking industry decided to relax and enjoy the sunshine. Now, the shadow of the past (the great 20018 economic crisis that started in the USA and which circled around the globe) is now starting to be showing up. We are hoping that the banking industry will be listening to this urgent warning and will be decisive enough to patch up possible leaks of the boat they are in. This around, it would be a great catastrophe to affect all countries especially those economies which are not resilient and not prepared.