Daily Management Review

PwC: Three scenarios for central banks in 2020


Central banks are trying to keep up with the times, being dictated by complexity of activities at the rapidly developing market of financial services. To do this, the financial institutions are conducting researches and analysis of new and unstable market environment.

In its new report " Central Banking 2020: Ahead of the curve", PwC is considering actions of central banks that help them keep up with changes in society, economy and communications sector, and monitor emerging risks in this system.

The banking sector has not yet completed process of reform of the legal framework. Therefore, it is tempted to consider the regulation as a key factor determining the sector’s future shape.

However, under the circumstances, the regulation does not play the most important role.

It is necessary to take into account other factors that have a significant impact, such as great changes in technology, shifts in the society’s expectations, as well as output of banking activities beyond the traditional banking sector.

PwC’s experts believe that these larger developments will ultimately determine motion of the banking sector as a whole, and what role the banking regulation should finally play.

On the basis of these observations, PwC has formulated three hypotheses and possible consequences of the shifts for central banks.

1. Banking services will increasingly be rendered outside the regulated banking sector

PwC specialists expect that non-bank structures will be faced with fewer obstacles when offering typical banking services. At that, ties between the traditional and the "shadow" banking organizations will be strengthening.

The challenge for central banks is to understand how to use constantly expanding boundaries of the banking sector to patrol areas such as market lending, new digital currency, "shadow" banking and business models using the blockchain technology.

These changes are giving rise to decentralized networks, operating in real time, and, probably, are enhancing transformation of commercial payment transactions.

It is obvious that central banks will need new professionals and new system solutions in order to be step ahead of everyone, says Jeremy Foster, Central Bank Group Leader at PwC.

This begets need to make big investments in predictive data analytics tools to identify high-risk areas in the financial system.

"A central bank, which extracts maximum benefit from opportunities provided by tools for working with large data sets, including developing a strategy to work with data and disclose information to a wider audience, encouraging intellectual activity and formation of new ideas, will have a strong position", - says Foster.

2. Banks not only need to increase investment, but also to rethink their key role in society

Banks still have certain advantages. However, in order to maintain their position in the future, they need to participate more actively in the investment activity, to rethink and reformulate their role in society, as well as to enlist support of those who make key decisions.

Despite the fact that the financial crisis has damaged brands and reputation of banks, they largely remain in force since they are well-known, have experience and are regulated.

To consolidate the positions, it is important to return the banks to public confidence and meet their expectations.

This can be achieved by changing the corporate culture and behavior in the organization.

Banks need to demonstrate safety, integrity, reliability and high quality of services offered.

3. Regulators should pay more attention to protective functions

If the society creates a system in which banking services will have to be more atomized and blurred, then, logically, regulators and the public will focus on products and services, rather than companies.

PwC believes that actions and behavior regulation, carried out at local level, should be paramount. Micro- and macro-prudential regulation will play a limited role, focusing on systemic issues, rather than the companies themselves.

Jeremy Foster emphasizes: "Central banks and regulators, for obvious reasons, have focused on the fact that banks should not become too big to fail. As a result, certain legal acts are sometimes unsystematic, fragmented. To avoid this, regulators and central banks should re-focus efforts on how to bring regulation to the level that is acceptable for companies, oversight of which they have."

source: finchannel.com