Complexity within the UK financial services ecosystem
Brexit is creating complexity within the UK financial services ecosystem, with the Corporate and Investment Banking (CIB) sector most impacted.
Forecasted impacts of Brexit
10-15% UK Corporate and Investment Banking (CIB) Revenue decrease by 2020, due to its international context and the main players being global with c65% comprising cross-border business. Local to Global financial institutions will be the most impacted as a result of their international operation and the ease of clients moving business to the EU.
60-90bps UK CIB ROE decrease by 2020, as a result of the incremental operational & capital costs, and inefficiencies associated with Brexit, combined with revenue decreasing. Local to Global institutions will encounter the largest drop in ROE.
Factor of 4 UK CIB impacted, compared to Retail Banking : due it being largely domestic based in nature, Retail Banking will be comparatively unscathed as a result of Brexit – the main driver being falling UK economic performance (GDP). Revenue and ROE decreases in CIB will be 4 times more than Retail Banking. Asset & Wealth Management and Insurance sectors will be impacted as well (more than Retail Banking), but to a lesser extent than CIB.
CIBs need to deploy a Day 2 ready Agile Operating Model with 3 Remediation Steps
Enhanced client service
- Undergo a client rationalisation exercise to assess which clients (and segments within that) should be prioritised post-Brexit
- Evaluate current level of client offering and mobilisation (including digital offering and most efficient trading entities for clients)
- Gauge if the global coverage plan needs to be revised , including possible mutualisation opportunities across divisions (e.g. CIB and Wealth Management)
Simplified Entity Structure
- Undertake a legal entity rationalisation and consider alternative entity structures that ensure long-term continuity of business within all eventualities (subsidiaries must meet prudential requirements on a standalone basis)
- Assess if favouring an EU entity (dependent on client mix & booking model) will allow centralised risk management and improved efficiency
Optimised Booking model
- Day 1 back-to-back booking will lead to capital inefficiencies via increased inter/intra company transactions. Possible Day 1 organisational inefficiencies include fragmentation of market and credit risk management, and duplication of the governance, infrastructure and financial resources which underpin it
- Review Day 2 mid-long term booking model options (utilising digital where applicable) that cater to post-Brexit and global regulations, business needs and increase agility (e.g. a localised entity specific risk management model)