With uncertainty persisting across the economic and political landscape in Germany, Europe, and overseas, we find ourselves glancing at giants of the financial industry, observing their approach to the volatility, ambivalence, and fear of economic stagnation. Naturally, we are drawn to the key players, who inherently face the pressure of our times, more than most other institutions: banks.
What big banks have been experiencing for many years is a decrease in interest rates, directly affecting their core activities; they suffer from diminishing margins and sinking profits. The issue is rooted in bond yields, or rather the years spent driving bond yields down in parts of the world in an attempt to boost the local economy while facing the threat of an economic downturn. Lower yields allow for cost-cutting, thus making borrowing and taking risks more attractive for businesses and investors. Mortgage rates for housing options tend to follow government bonds. The problem for banks is that cutting deposit rates cannot occur at the same pace, as customers will instinctively switch to other options.Thus, the net interest margin, the gap between long-term rates and short-term funding rates, keeps decreasing.Besides, monetary policies signal that rates will be kept low soon, weighing down net interest margins. Negative interest rates and the prospect of excessive borrowing, as well as an economic downturn, has put growing pressure on banks. While US institutions have proven more robust, European banks are experiencing more challenges, along with central banks charging for extra deposits.
Nevertheless, everyone seems to face the margin trend, and thus earnings are universally moving down.
As a result, banks search for other business options and diversification through investing into new technologies, business models with the promise of sustainable profits, identifying unique customer bases as well as increasing aspirations in cash management and creating digital systems.
The pressure to reinvent and adapt to overcome any future economic turmoil is rising, placing importance on flexibility and inventiveness, and actively considering the next strategic move. This will prove of exponential relevance with the added threat of Fintech players and tech companies who are seeing increased opportunities in entering the banking market.However, strategies largely depend on the performance, and the market banks find themselves in. Undoubtedly, institutions that manage to endure this period successfully will emerge as leaders in the next cycle.