SOURCE: The Boston Consulting Group

The Boston Consulting Group

November 19, 2013 00:01 ET

The Next Acid Test for Banks: Adapting to Relentless Waves of Financial Regulation

Global Banking Has Diverged Into a "Three-Speed World," and Ongoing Reforms Are Now a "Barrier Banks Must Breach," Requiring a Strategy of Prioritizing and Executing Against Current and Evolving Rules, BCG Says

LONDON, UNITED KINGDOM--(Marketwired - Nov 19, 2013) - Whether a bank prevails in global competition will be determined, in large part, by its ability to adapt proactively to relentless waves of regulation, according to the latest annual risk report released today by The Boston Consulting Group (BCG).

The report, Global Risk 2013-2014: Breaching the Next Banking Barrier, concludes that the new global and local financial reforms "collectively represent the next level of regulatory tightening -- a barrier banks must breach to remain competitive."

The banks that prevail in this environment, the report says, will be "proactive -- not reactive -- players. They will need a strategic approach that allows them to categorize, prioritize, and execute" against current and evolving regulations.

The study also found that the banking industry has reached a new postcrisis inflection point: some banks returned to profitability, while others did not. Although bank performance, averaged globally, changed little in 2012 from the previous year, profits differed sharply by region and also between developed and developing economies.

"Banking has now diverged into a three-speed world," said Gerold Grasshoff, a BCG senior partner based in Frankfurt, the global leader of the risk segment of BCG's Financial Institutions practice, and a coauthor of the report. "While developing markets performed strongly and North American banks moved beyond the financial crisis, European banks registered their worst year since the start of the crisis -- and in fact stagnated," he said.

The report is BCG's fourth annual assessment of the health and performance of global banking. Its findings are based on economic profit data from 318 retail, commercial, and investment banks that represent 90 percent of global banking assets. Economic profit weighs risk costs, as well as refinancing and operating costs, against income, providing a comprehensive measure of financial conditions facing banks.

The report notes that North American banks have recovered faster than those in Europe. It says this suggests that the U.S. crisis-management approach of clearing books with enforced early write-downs has been more effective than the step-by-step approach followed in Europe. From 2008 through 2009, U.S. banks incurred more than three times as many loan loss provisions as European banks. This more radical bank recapitalization "was the main driver of U.S. bank recovery in 2012," the report says. "Its benefits are likely to endure."

A Framework for Navigating Global Reforms

BCG's study offers an in-depth look at the balkanized universe of financial rules and regulations and assesses the increased costs and operational complexity that they impose on banks. "The winners will be the institutions that take a long-term view of their circumstances and adopt a proactive, strategic approach," the report says.

To support this effort, the report classifies global reforms into three broad clusters, and it provides a framework to help navigate them. In addition, it suggests a set of levers banks can use to gain operational excellence, especially in risk functions.

"Banks globally face the same need for value creation," said Thomas Garside, a BCG partner based in London. "Regulatory change has restrained economic profits. Therefore, banks will be compelled to optimize their risk functions and maximize the value of their 'risk dollars.'"

The report also includes the following:

  • An overview of the industry's comparative global and regional performance
  • An analysis of reform measures based on the BCG Regulatory Database, which tracks more than 1,200 regulatory requirements globally
  • An assessment of the three leading topics on the chief risk officer's agenda: optimizing the risk function, turning new regulations to competitive advantage, and improving bankwide steering

A copy of the report can be downloaded at

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 78 offices in 43 countries. For more information, please visit

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    Tel +1 617 850 3783
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