Toward Transparency and Sustainability: Preparing for a New Financial Order

IBM Global Business Services

IBM Institute for Business Value

Toward transparency and sustainability:
Building a new financial order

An 18-month study of the future of the financial markets industry

© Copyright IBM Corporation 2010

Table of contents

Table of Contents

Introduction

Results

Appendix
Additional insights
Asset and volume trends
Full CFA Institute survey results

2 11/21/2010 © Copyright IBM Corporation 2010

Introduction

We surveyed over 2,750 industry participants and conducted secondary
research to determine how firms must prepare for the future

Which forces will disrupt the industry landscape?
What will clients pay for? IBM Institute for Business Value

How will the bases for competition change? CFA Institute
What steps must firms take today to win?

Scope Approach

Our analysis focused on selected financial We surveyed 2,754 industry participants2:
markets industry participants1: - Qualitative interviews of 185 executives and
government officials
- Buy side
- Survey of 1,493 executives and government
- Sell side officials
- Processors - Survey of 1,076 investors
- Others: academics, think tanks, industry - 33% Americas, 35% EMEA3 and 32% Asia
associations, regulatory bodies We conducted secondary research and
developed quantitative models

Note: 1Buy side includes institutional and retail asset management inclusive of private banking, hedge funds and the end institutional investor (sovereign wealth funds, retirement plans,
endowments & foundations) and individual investors, Sell side includes investment banking and capital markets, Processors include custodians, exchanges, ATSs and clearing firms; 2Primary
research was conducted between April 1st, 2008 through October 30th, 2010, 85% of business leaders are Board or C-level, EVP or divisional head with the remainder Director, SVP or VP level;
3EMEA is Europe, Middle East, Africa


Table of contents

Table of Contents

Introduction

Results

Appendix
Additional insights


Results

Historically firms have benefited from pockets of opacity; returns of the
past are over and firms must learn how to generate sustainable value

Summary of Findings

Sophistication has outstripped our ability to handle it

Together government and industry must balance stability and innovation

Daily realities must deliver on brand promises

To thrive, the industry must solve its identity crisis

The industry will consolidate and
unbundle as it addresses the
‘unknowns’ of client, scale and risk.

Results

Summary of findings






Results

Over the past decade, wealth was created in part by exploiting
pockets of opacity
Shadow Banking Example: Assets Held Derivatives Example: Global Over-
by Financial Institutions, U.S., 2007 the-Counter Derivatives, 1998-2007
($ Trillions) (Notional Amounts Outstanding, $ Trillions)

12
Bank holding 700
companies
10
Hedge funds 600

8 SIVs and other
500
conduits1

6 400 CAGR 41%
Triparty agent2

4 300

200
2 Investment banks

100
0
Traditional banking system Shadow banking system 0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Opacity exists when tangible or
intangible items are difficult to Interest Foreign Hybrids Credit default Equity- Commodities
rates exchange Swaps linked
see and analyze, thereby creating CAGR 26% 13% 24% 108% 21% 41%
unintended consequences.
Note: 1SIVs are structured investment vehicles; 2Triparty agents are custodians typically assigned to hold repo securities overnight
Source: http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html; BIS; IBM Institute for Business Value analysis


Results

Opacity-driven wealth is unsustainable
Recessions, 1890-2009 Annualized Global Financial Sector
(Measured in Number of Recessions1)
Returns and Financial Sector as a
Percent of Total Market Cap, 2002-20082
The current
Credit / crisis is #5
banking induced (Right axis) Financial
Services Market Cap as a
recessions
20% Percent of Total 30%
10
18%
3 1 25%
16%
14%
4 20%
18 31 12% (Left axis) Financial
Services ROE
Housing price Equity market 10% 15%
induced 9 induced 8%
recessions recessions 10%
6%
4%
5%
“The damage caused by bubbles can be 2%
greatly increased where innovation leads to 0% 0%
information loss.” – Merton Miller, Nobel Prize 2002 2003 2004 2005 2006 2007 2008
Winner in Economics
Note: 1Four prior instances of ‘the perfect storm’ which includes recessions characterized by simultaneous falls in asset prices, increase in consumer saving, and restrictions on bank lending due to a
shortage of bank capital; four prior instances of this type of crash include: the Bankers’ Panic (1907), the Great Depression (1929-1939), Sweden (1992), Japan (1990-2000); 2ROE is for retail and
wholesale banking, asset management and asset servicing, As of February 17th, 2009; Market cap figures are for retail and wholesale banking, asset management, asset servicing and insurance
Source: UBS; BIS; Standard and Poors; MSCI Barra; Thompson ONE Banker; IBM Institute for Business Value analysis


Results

Sophistication has unintended consequences; shocks are
increasing in frequency and magnitude

Integration and Instrumentation, 1996-2006 Frequency and Size of Crises, 1880-1997
(Cross-Border M&A vs. Global ABS, MBS, CDO (Number of Crises and Output Loss in Mature and
Issuance $ Trillions, % of Total M&A Activity) Growth Markets across 139 Countries1)

45% $3.0

40% 80
$2.5 120
35% 70
100 60
30% $2.0
80 Growth Markets 50
25%
$1.5 Mature Markets 40
20% 60
30
15% $1.0 40
20
10% 20 10
$.5
5% 0 0

0 1880-1913 1919-1939 1945-1971 1973-1997
0% 0

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 0%
-2

N/A N/A
Cross-border M&A as % of Total M&A -4

-5%
-6

Aggregate output loss
Collateralized debt obligation -8

Asset-backed securities -10 -10%
Mortgage-backed securities
Note: 1Output loss is calculated as the sum of the differences between actual GDP growth and the five year average preceding the crisis until growth returns to trend
Source: Inside MBS & ABS; Fitch and S&P Ratings; European Securitization Forums; Crises now and then: What lessons from the last era of financial globalization? University of
California and Rutgers University; IBM Institute for Business Value analysis


Results

The industry and governments have been blind to the dark side of
sophistication

Systemic Risk Example: Percent of Countries Global Return on Equity Volatility,
Experiencing Financial Stress Selected Financial Services Industries
(Sample of 17 Mature Market Countries1) 1994-2008
100
100%
30%
90
90%

80
80% 25%
Stock
70
70% market LTCM3
crash collapse 20%
ERM2
60
60% crisis
Scandinavian 15%
50% Nikkei/junk
50 banking
bond
collapse crises 10%
40
40%

30%
30 5%

20%
20
0%
10%
10 1994 1996 1998 2000 2002 2004 2006 2008
-5% Asset and wealth management
0%
0
1980 1985 1990 1995 2000 2008 Investment banking
-10% Asset servicing
Sector average
Commercial and retail banking

Note: 1Financial stress is measured based on an IMF-created country-by-country index which includes variables such as interbank spreads and equity and bond market performance; 2ERM is
exchange rate mechanism; 3LTCM is Long Term Capital Management
Source: IMF; Thompson ONE Banker; IBM Institute for Business Value analysis


Results

As a result, the industry is experiencing more painful risk
assumption and risk mitigation cycles
Global Financial Services Return on Equity, Sector Composition of Market
Value at Risk and Leverage Ratios, Capitalization, US and UK,
1992-20081 1899, 2005, 20092

100% Materials
30x 60%
(Right axis) VaR Telecommunications
Utilities
Iron, coal,
25x 50% steel Consumer discretionary
80%
(Left axis) 10% Financial services
20x Leverage ratio 40% 22% Industrials
60%
15x 30% Railroads
Consumer staples

10x 20% 40% Energy

5x 10% Information technology
(Right axis) ROE 20%

0x 0% 10% Health care
1992 1994 1996 1998 2000 2002 2004 2006 2008 0%
19 2
19 3
19 4
19 5
96

19 7
19 8
20 9
20 0
20 1
20 2
20 3
20 4
20 5
20 6
20 7
08
9
9
9
9

9
9
9
0
0
0
0
0
0
0
0
19

19

1899 2005 2008

Note: 1Leverage ratio = tangible assets/tangible equity, VaR = tangible assets*volatility/tangible equity; 2Market cap figures are for retail and wholesale banking, asset management, asset servicing
and insurance and are as of February 17th, 2009
Source: SNL Financial, Thompson ONE Banker; Yahoo Finance; Standard & Poors; IBM Institute for Business Value analysis


Results

Summary of findings






Results

Today’s financial architecture must be reconstructed to reflect the
increasingly sophisticated environment

Anticipated Regulatory Response New Maxims2 for Balancing
(Percentage of Survey Respondents1) Stability and Healthy Innovation

Transparency requirements

Capital / liquidity requirements Transparency, Leadership
systemic in a new era
Global harmonization intelli- of CSR3
Global gence
Security collabor- Cohesive,
ation and streamlined
innovation oversight
Retirement regulation

Conflicts of interest Mechanisms
Balanced
for protection,
Incentives
Climate change resolution,
and metrics Cultural insurance
alignment /
Other n=113
Shared frame
of reference
0% 5% 10% 15% 20% 25% 30% 35%

Note: 1Question asked: What regulatory actions do you anticipate over the next five years, select top two (IBM / EIU survey); 2 Maxim is defined as rules of conduct; 3CSR is corporate social
responsibility
Source: IBM / EIU Survey; The Yin Yang of Financial Disruption; IBM Institute for Business Value analysis


Results

To rebalance financial stability with healthy financial innovation,
tensions must be managed in an uncertain environment

Structural tensions must Uncertainty of Driving Forces in Financial Services
be managed: (Ranking Based on Percentage of Survey Respondents2)
Example tensions

High
Critical Uncertainties

GDP growth
Financial Stability Global wealth IT security Energy
distribution Geopolitical innovation
Energy
Demographics power prices
Gvt. intervention Free markets distribution
Business Protectionism
Income inequality standards Non-energy
Degree of importance
commodity prices
Commoditization vs. Transparency & investibility Regional core inflation
unbridled opportunism1 Data management Climate
innovation Fiscal policy change
Lender of last resort Taxation Extremism Global currencies
(access to) (relative value)
Finance & risk Savings Environmental (self)regulation
innovation rates
Client needs
Healthy Innovation
Privatization Global trade balance
Social Financial Compliance
Tactical focus Strategic focus literacy cost
Technological Democratization
Corruption
Innovation gaps vs. near- Environmental Societal attitudes Water
term performance gaps1 to compensation availability
Political
Low

Economic
Low Degree of uncertainty High

Note: 1Potential unintended consequences; 2Based on a survey of public and private sector executives, question asked: What are the top driving forces on the future of wholesale financial markets
Source: The Yin Yang of Financial Disruption; Primary interviews; World Economic Forum: “The future of the global financial system”; IBM Institute for Business Value analysis


Results

The financial architecture must be co-created to mitigate
unintended consequences of over-regulation
The financial architecture must be co-created by
governments and financial institutions

5 End goal: Systemic health
Financial (vitality, soundness), risk
Institutions (safety, stability)
1 4
Compliance Surveillance &
Monitoring
1 Oversight 4 Behaviors,
issues, trends
Regulators 5 Supervisors through the lens
2 3 of supervision
Laws &
Rules Standards

2 Behaviors, 3 Practices, enablers,
issues, trends Policy Makers constraints, limits
through the lens
of regulation

Source: IBM Institute for Business Value analysis


Results

Summary of findings






Results

To deliver on brand promises, firms must address the ‘unknowns’
of clients, scale and risk
Importance vs. Proficiency of Capabilities
10 (Percentage of Survey Respondents, Proficiency Index1)
Highly Proficient

9

8
Size of bubble
7 represents size of
gap between
Understand
6 importance and
client needs
proficiency among
Provide quality participants
5 Provide
relationship
unbiased
Manage risk management
quality advice
4 associated with new
products / markets
3 Ability to form and
manage successful Client capabilities
Ability to
Weak Proficiency

strategic alliances
2 Manage risk eradicate Manage
inefficiencies systemic risk Scale capabilities
across silos
1
Ability to Risk capabilities
implement / leverage
0 Important Highly Important
new technologies

2 3 4 5 6
Note: 1Question asked: In your opinion, In your opinion, what level of priority will your firm assign to the following items over the next five years, indexed results on a scale of 1-10 where 10=highly
proficient; Question asked: In your opinion, how proficient is your firm at performing select activities, Rate on a scale of 1 to 6, where 1=We are weak compared to others and 6=We are best in class
Source: IBM / CFA Institute Survey; IBM / EIU Survey; IBM Institute for Business Value analysis


Results

Firms must must address the unknown client by aligning interests
Trust Gap
Client Opinion: Providers offer Provider Opinion: Providers offer
products in the firm’s best interest products in the firm’s best interest
(Percentage of Survey Respondents1) (Percentage of Survey Respondents1)

Strongly Agree

Neutral

Strongly Disagree
n = 711 n = 762

70% 60% 50% 40% 30% 20% 10% 0% Americas 0% 10% 20% 30% 40% 50% 60% 70%
EMEA
AP
Note:1Question asked: To what extent do you agree / disagree with the following statements about trust, Please rank on a scale of 1-6 where 1=strongly disagree and 6=strongly agree,
Investment firms are likely to offer products & services in the investment firm’s own best interest
IBM / CFA Institute Survey; IBM Institute for Business Value analysis


Results

Providers must overcome their product-focused mindset to deliver
on what clients actually value
Provider Perceived Premiums Client Indicated Premiums
(Percentage of Survey Respondents1) (Percentage of Survey Respondents1)

Unbiased quality advice /
Best-in-class offerings client service excellence
One-stop-shop Convenience
Reputation / integrity Best-in-class offerings
Unbiased quality advice /
client service excellence Reputation / integrity

Convenience Customization
15% Premium
Modularity Transparency
10% Premium
Transparency Modularity 5% Premium
Not willing to
Global footprint One-stop-shop pay more

CSR / green Global footprint
n=398 n=754
Customization CSR / green

0% 10% 20% 30% 40% 50% 60% 70% 0% 10% 20% 30% 40% 50% 60% 70%

Note: 1Question asked: How much would your clients be willing to pay over existing rates to ensure that you deliver on specific factors, Select 0%, 5%, 10%, 15% or more, don’t know; How much
would you be willing to pay over existing rates to ensure that your provider delivers on specific factors, Select 0%, 5%, 10%, 15% or more, don’t know
IBM / CFA Institute Survey; IBM Institute for Business Value analysis


Results

To address scale squander and unnecessary costs, firms must
balance capacity reduction with efficiency creation

Assuming slow1 revenue growth through 2010, firms Type I: Move Down Cost Curve
will have to reduce Type II Costs2 by 20% in order to
return to previous levels of profit margin

Total Cost
Historical Pre- Type II Cost
tax Net Profit Reduction
Margin Required as a %
of Base Cost

Investment banking / Capacity
capital markets 28% 20.57%
Type II: Shift the Cost Curve Down
Asset management 36% 20.45%

Total Cost
Wealth management 24% 20.10%

Asset servicing 34% 20.55%
Capacity
Note: 1Slow revenue growth is based on a base case scenario of 0.65% growth year-over-year from January 2009 through January 2010; 2Margins are based on an average pre-crisis margin
for the period between 2005-2007 and are based on an industry average across investment banking, capital markets, wealth management, asset management and asset servicing for the
largest five organizations by market share; 2Type II Costs are cost take-out strategies that create operational efficiency without reducing capacity. Type I costs include capacity reduction in the
form of either headcount reductions or divestitures. Figures take into consideration headcount reductions that have already taken place from 2007 through February 20th, 2009
Source: C2 Profit Map Model; IBM Institute for Business Value analysis


Results

Firms can achieve type two scale efficiencies through streamlining,
sourcing and closing the business-to-IT gap
Efficiency / Streamlining Outsourcing Appetite Level of Integration of IT
Areas of Investment (Percentage of Executives Interviewed) into Business Strategy
(Percentage of Survey Respondents) (Percentage of Survey Respondents)

40% 70%
60%
60%

30% 50%
50%

40%
40%
20%
30% 30%

20% 20%
10%

10% 10%

0% 0%
0%

Automotive
Government
Pharma

Media / entertainment

Insurance
Banking
Industrial

Education
Retail

Healthcare
Defense
Telecom

Chemical
Energy / utilities

Consumer products

Financial markets

Electronics
Travel / transportation
Flexible architecture /

Diverse mgmt. team
component capabilities
Optimized resources

Centralized activities
Alliances

Other
Governance
Knowledge sharing

Wage arbitrage

Interviews Interviews
conducted conducted
between between
1994-2007 2008-2009
n=594
n=450
n=550



Results

At the same time, firms must rebalance their portfolio of risks and
returns to the increasingly sophisticated environment

Global Return on Equity & Volatility, Traditional Bell Curve Risk Model
Select Industries, 1994-2008 and Fat Tail Risks

- 8
20%

Normal Curve
- 6
15% Distribution
is migrating to a
- 4 ‘Fat Tail’
10%
Distribution

5% - 2

0% 0
Asset and Wealth Investment Retail and All Industries3 Standard Standard
Management Banking Commercial Deviation
Mean Deviation
Banking

ROE Volatility of ROE1 Modified Sharpe Ratio2



Results

Firms must develop capabilities to profit from risk by re-segmenting
clients and re-pricing products
Client Segments Based on Pricing Approaches
Behavior and Attitudes Example Ranking
(Percentage of Respondents1) of Risk-adjusted Simplistic
Profitability
Conflicts of Interest Avoiders
"I want to work with a provider that
has minimal conflicts of interest" 6
Active Demanders

Risk
"I am informed and squeeze as much
value from my provider as possible"
3
Convenience Desirers
“Make it easy for me" 2 Pricing segments

Service Expectants Sophisticated
"I require significant support" 4
Price-sensitive Analyzers
“I monitor prices and want the lowest 5
cost product / service"

Risk
Uninvolved Minimalists
"I rely heavily on my provider and n = 950 1
outsource as much as possible"
0% 10% 20% 30% 40% Pricing segments
Note: 1Statistical clustering analysis based on the following questions: Will the following capabilities become increasingly / less important to you over the next five years, Please rate factors on a
scale of 1-6 where 1=Becoming less important and 6=Becoming more important; How much would you be willing to pay over existing rates to ensure that your provider delivers on specific
factors, Select 0%, 5%, 10%, 15% or more, don’t know; Which factors will evolve over the next five years to enable you to become more active and informed? Please rate the extent to which
each of the following factors would enable you to become more active and informed on a scale of 1-6 where 1=Not at all and 6=To a great extent; To what extent do you think the financial
services industry will evolve over the next five years to allow you to overcome the following barriers? Please rate the extent to which you will overcome the following barriers due to the evolution
of the financial services industry on a scale of 1-6 where 1=Not at all and 6=To a great extent
Source: IBV / CFA Institute Survey; IBM Institute for Business Value analysis


Results

Summary of findings






Results

80% of firms have an ‘identity crisis’; This identity crisis was driven
by wealth destruction…
Financial Services Market Capitalization Example Firm Market Capitalization,
Decline and GDP Growth by Region June 2007 - January 2009
(Projected GDP Growth vs. Market Cap Decline1) ($ US billions, Rank Ordered by Loss as a
Percent of Total)
0%
-4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% RBS Citigroup Barclays Deutsche
-5%
Bank
10 Month Market Capitalization Decline

-10%
-15%
-20% GDP growth
Japan average = .2%
-25%
-30% ASEAN
Canada Goldman
-35%
Australia BNP Paribas UBS Morgan Sachs
US India
Ten Month -40% Stanley
Market cap decline Middle East China
average = 48% -45%
Switzerland -50% CEE
France-55% Brazil
Credit Suisse HSBC JP Morgan Santander
-60%
UK
-65% Russia
S. Korea
-70%
Bubble size represents equity and
-75%
Germany fixed income assets as of 2008
-80%
2009 GDP Growth / Contraction
Note: 1GDP is real GDP for 2009; Market cap based on top 5-20 financial services firms by country between April 2008-January 2009 June 2007 January 2009
Source: Reuters; Economist Country Forecast reports; EIU Macro Model; JPMC; IBV Institute for Business Value analysis


Results

…and significant revenue pool restructuring
Estimated Global Revenues for Selected Activities, 2007-2012
12
Transparency Index1, 10 = highly transparent

Exchanges
10
Infrastructure4 Exchange
Passive2
Traded Derivatives3

Wealth Management2 8
Agency
Prime Brokerage
Asset Servicing
Transparency Index: 6
2009 Industry Average = 5.41
Key6
Principal Client5 Private Equity Year 2007
Hedge funds: 4
Long-only Active2 Revenues
Underperformers2 Securitization Hedge funds: Year 2012
Revenues
Outperformers2
2

OTC Derivatives3 Weighted Average Revenue CAGR 2009-2012:
$20 Bn $150 Bn
Principal Proprietary5 Industry Average = -0.17%
0
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%
Revenue CAGR 2009-2012
Note: 1Transparency index is as of 2009 and is a 1-10 ranking where 1=highly opaque and 10=highly transparent, index is based on quantitative and qualitative factors for each activity
categorized by extent of 1) complexity of product offered, 2) shareholder and investor communications, 3) operational transparency; 2Wealth management revenues are duplicative of underlying
asset classes of long-only active asset management, passive asset management, hedge funds and private equity; 3OTC is over-the-counter, OTC and exchange traded derivative revenues are
duplicative of agency, principal client and principal proprietary; 4Infrastructure is sell side processing and clearing; 5 Principal Client represents trading revenues in which a broker / dealer
assumes principal risk on behalf of a client, Principal proprietary represent trading revenues in which a broker / dealer assumes principal risk on behalf of itself; 6Bubble sizes do not increase in
the same proportion as revenue increases
Source: IBM Institute for Business Value Financial Model


Results

As the industry solves its identity crisis, firms that focus will come
out ahead
Industry Perception: Industry Reality:
Business Model Leaders Leader vs. Laggard Index2
(Percentage of Respondents1)

Universal banks Independent financial
advisors / consultants
Focused universal banks Asset manager / custodian
Niche asset managers Global broker / dealer
Asset manager / distributor
Boutique investment bank
Niche distributor Institutional-oriented
asset manager
Alternative investment firms Regional broker-dealer
Boutique investment banks Stock exchanges
Information vendors
2009 Universal banks
Asset manager / custodian 2007 Retail-oriented asset manager

Regional exchanges 2005 n = 801 n = 803
Alternative investment fund

0% 5% 10% 15% 20% 25% 30% 0 2 4 6 8 10

Note: 1Questions asked: Which business model type is best positioned for the future as measured by consistently meeting client needs, Select top two; 2Statistical index analysis based on equally
weighted factors: 1) historical performance from 1994-2008 as measured by profit and revenue growth, 2) volatility of ROE, 3) extent of disconnects between provider and client responses
Source: IBV / CFA Institute Survey; IBM Institute for Business Value analysis


Results

Ultimately, there will be further rationalization as the industry
unbundles; ‘beta transactors’ will serve a utility function
Global Levels of Concentration, Industry Unbundling, 2012
1994, 2004, 2008 (Estimated Margin and Earnings Volatility2)
(Market Share of Largest Firms1)
100%

10%

Volatility of ROE, 1994-2006
80%
Size of bubble Alpha seekers
8%
represents
estimated revenues,
60% year 2012
6%

Beta transactors3
40% 4%
Rest
Volatility Advisors
2% Industry
20% Next 15 Average
= 3.8% Margin: Weighted
Industry Average = 25.0%
0%
Top 10
0% 0% 10% 20% 30% 40% 50%
Asset Exchanges Investment Wealth Asset Estimated Margin, 2012
94

08

94

08

94

08

94

07

94

07

servicing banking Mgmt. Mgmt.
19

20

19

20

19

20

19

20

19

20

Note: 1Asset servicing is based on share of assets under custody, exchanges is share of volume, investment banking is share of revenue, wealth and asset management represent share of
global assets under management; 2Estimated margins were derived from a scenario based forecasting model, volatility is historical ROE volatility from 1994-2008; 3 The majority of financial
markets firms will concentrate on becoming “beta transactors”, i.e., utilities that provide the infrastructure required to facilitate transactions in the same way that water companies provide the
reservoirs, purification processes and pipes required to deliver clean water; A smaller number of firms will concentrate on providing advice, i.e., wealth management or mergers and acquisitions
advice, and a handful of “alpha seekers”, typically private equity firms, hedge funds and boutique investment houses will focus on generating high returns from high-risk investments
Source: C2 Profit Map Model; IBM Institute for Business Value analysis


Results

The industry will strengthen as it learns how to deliver sustainable
returns

Final Thoughts

Success was derived from opacity and lack of stringent regulation –
these days are over

The industry will generate lower but more sustainable returns

Now is the time to deliver on brand promises and specialize


Table of contents

Table of Contents

Introduction

Results

Appendix
Additional insights


Appendix

Government backing and oversight will be required to restore
confidence and address longer-term structural tensions
Structural tensions must be
Adverse Impact of Credit Crisis
(Percentage of Survey Respondents1) managed: Example tensions
Financial Stability
Cost of borrowing
Government intervention Free markets
Business confidence
Availability of bank credit Potential unintended consequences:
Commoditization vs. unbridled opportunism
Availability of cap. mkts. debt
Share price Credit under-extension Credit over-extension
Ability to increase ROE
Economic contraction vs. asset bubbles
Ability to execute strategy
Capital expenditure plans
Increasing value of assets
Healthy Innovation
Strengthening balance sheet
Product focus Client focus
Ability to fund pensions

0% 20% 40% 60% 80% 100% Short-sightedness vs. innovation myopia
Very significant Not significant
Tactical focus Strategic focus
n=373
Innovation gaps vs. near-term performance gaps

Note: 1Question asked: What regulatory actions to you anticipate over the next five years, select top two (IBM / EIU survey)
Source: IBM / EIU Survey; Primary interviews; IBM Institute for Business Value analysis


Appendix

Given recent consolidation, regulators fear banks not only
becoming too big to fail, but too big to save…

US Example: Shotgun Concentration of Bank Assets Vs.
Consolidation Bank Assets as a Percentage of GDP, 2007
(Bank Assets as of Oct 2008) (US$ Trillions, Percent)

0 Top 400 Bank Assets
3000 2 4 6 8 10 12 14

• Asset Transfer of $2.7tr
2500 Top 5 Banks % of Total Assets: 92%
• $690bn evaporated with
UK
2000 bankruptcy of Lehman

1500
Top 5: 62%
US
1000
Top 3: 51%
Japan
500

0 Top 2: 82%
Switzerland
Wach
Leh
GS

WAMU
ML
Citi

MS
BoA

UBS
Wells

SunTr
JPMC

BearSt

0
100 200 300 400 500 600 700 800 900 1000%
June, 2008 (Pre-industry morphing)
Bank Asset % of GDP
Oct, 2008
Extinct

Source: The Banker Top 1000 World Banks, July, 2007; Economic Intelligence Unit, Reuters, Federal Reserve; Quarterly reports; Institute for Business Value


Appendix

…particularly, as the scale squander and complexity of
running ever bigger banks has taken hold

Financial Services Efficiency Ratios, Top 25 Banks’ Share of the
2003 - 2007 Top 100 Global Banks’ Assets
($ Trillions, Total FDIC Bank Assets Reported) Percent, Trendline

70
62%

60%
60
58%

56%
50

54%

52% 40
1996 1998 2000 2002 2004 2006 2008 (Q2)
2003 2004 2005 2006 2007

Source: FDIC, Thomson Financial/Sheshunoff Information Services, The Banker Top 400 Banks, Reuters IBM / EIU Survey; IBM Institute for Business Value analysis


Appendix

The industry has been blind to signs of industry maturity
Pre-crisis Global Return on Equity for Selected Industries,
Trendlines, 1994-20061
Integrated Custodian /
US Bulge Bracket Firms
30% Asset Managers
(pre-extinction)

25%

20%
Asset Management Specialists

15%
All Industries

0%
1994 2000 2006
90% of executives interviewed believe
Note: 1Pre-crisis is based on historical average ROE for the period between 1994-2006 the returns of the past are over.
Source: Thompson ONE Banker; IBM Institute for Business Value analysis


Toward Transparency and Sustainability: Preparing for a New Financial Order

Toward Transparency and Sustainability: Preparing for a New Financial Order

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Similaire à Toward Transparency and Sustainability: Preparing for a New Financial Order

Similaire à Toward Transparency and Sustainability: Preparing for a New Financial Order (20)

Dernier

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Toward Transparency and Sustainability: Preparing for a New Financial Order