The Strategist

McKinsey: More than half of banks will wind up their business

11/01/2019 - 03:58

More than half of the world's banks will not survive the next crisis - this is the conclusion reached by experts at McKinsey, an international consulting company. The economic downturn makes lack of profits, lack of capital and declining demand for bankruptcy loans inevitable.

Ten years after the global crisis, the global banking industry faced another cyclical downturn. This is indicated primarily by a decrease in demand for loans: in 2018, the volume of borrowing grew by only four percent, and this is the lowest indicator in five years. In addition, investor confidence in banks is weakening due to the expansion of operations with risky assets.

Against the backdrop of the ongoing slowdown in the global economy, record low interest rates have become a real test for banks, states McKinsey in their paper “Global banking annual review 2019: The last pit stop?”.

Experts explain that raising interest rates is beneficial for banks, as it allows issuing more expensive loans. Low rates bring profit to nothing.

The European Central Bank experiment with negative interest rates has been going on for more than five years. The goal is to stimulate economic growth and prevent deflation. However, while such a monetary policy has no effect: the economy is not accelerating.

According to Deutsche Bank estimates, credit institutions in the Eurozone are losing eight billion dollars a year due to negative rates. “In fact, banks are punished for storing free cash on deposits with the Central Bank,” McKinsey said.

Large banks missed a chance of survival, without paying due attention to modern financial technologies. McKinsey estimates that banking giants spend less than a third of their budgets on technology platform development, innovation and digital services for customers. For promising fintech startups, this figure reaches 70%.

Finally, the remaining 35% are problem organizations operating in adverse markets. For such players, the only possible survival option is to merge with the same banks or sell them to stronger competitors.