ResearchAndMarkets.com released a collection of its best financial services reports of 2017. Some select lessons from the collection include a dampening optimism about regulatory relief, increasing risk levels for banks and a critical juncture for cross-selling.

Regulatory Relief: Optimism Gives Way to Reality

The banking industry has been waiting for years to secure regulatory relief in the wake of the 2010 Dodd-Frank Act. With Republicans in control of the White House and Congress following the November 2016 elections, observers were quick to predict that this could be the term where banks of all sizes finally won their hard-fought reforms.

Optimism skyrocketed in the early days of the new administration, when President Trump vowed to make substantial changes to the crisis-era law and issued an executive order demanding review of the financial regulatory system, just days after his inauguration.
But in the intervening months, hope has been tempered by the political realities facing the president and members of Congress. Even if major legislation emerges from the House, the Republican-controlled Senate would need to win over at least a handful of Democrats in order to sign a new banking bill into law. That could prove to be a high hurdle in the current environment, which at least one key Republican senator has called “toxic.” New regulators appointed by Trump could spur some reforms of their own, though those efforts would take time to come to fruition.

Surveys of financial services executives conducted in February, 2017 and again in April showed that the industry was still hoping for and expecting regulatory reform, but what shape that reform ultimately takes – if any – remains to be seen.

Are Risk Levels Rising for Banks? Execs Think So

In the years following the Great Recession, the banking industry wrestled with a historic reckoning over the excesses, practices and structures that led to the biggest financial crisis in more than three generations.

Amid a radical overhaul and expansion of the supervisory apparatus, regulatory risk emerged as the most dynamic element in the risk manager’s docket. By contrast, as the economy grooved into a steady but unspectacular recovery, loan losses dwindled and credit risk faded. Weak productivity growth and central bank stimulus compressed rates and net interest margins, but at least the torpor subdued interest rate risk.

Regulatory risk continues to command intense focus. But after multiple increases in overnight rates, interest rate risk has overtaken it on the list of rising threats, according to a recent survey of bank executives. Readings of credit risk have jumped too, bespeaking fears that the trend of strong and stable credit quality is quite long in the tooth.

In fact, more bankers now say that risk is rising – across every major category – than they did in the survey two years ago.

Perceptions of cybersecurity risk are surging in particular. Already identified as the second-fastest rising threat in 2015 – just behind regulatory risk – cybersecurity risk has vaulted to the front as massive data breaches and vicious hacking attacks have continued to metastasize into a geopolitical phenomenon. The threat continues to be a principal driver of defensive spending on staff and technology.

The survey was fielded online in April. The author’s research canvassed 120 executives at banks across the asset-size spectrum (Figure 1 shows the distribution). About 15% of respondents serve as president, chief executive or chairman of their institution, and about 22% said that their primary functional responsibility entails risk management and compliance.

Cross-Selling: What’s Really Going On?

Cross-selling is at a critical juncture. One of the virtually undisputed pillars of bank profitability, the practice of graduating a single-product consumer into a “relationship” covering the full breadth of his or her financial services needs, has abruptly found its way into the regulatory cross-hairs.

Regulatory scrutiny is nothing new, of course, but the potential ramifications of this particular episode are far-reaching given that it goes to one of the central premises of retail banking – that the profitability of a customer relationship increases as the relationship broadens.
This report aims to explore banks’ current practices as they relate to cross-selling: whether banks assign explicit cross-selling targets to their sales staff; whether compensation in the bank is tied directly to cross-selling targets; the extent to which management and executive level staff are compensated based on cross-selling; and whether the banks have undertaken internal reviews of their own cross-selling practices in the wake of heightened government attention to the topic.

The survey reveals an industry that is in fact quite divided. Formal cross-selling targets are far from the norm – only about a quarter of companies surveyed set them. Among banks that do have well-defined cross-selling objectives (number of products per relationship, for example) the vast majority use formal incentive programs to encourage cross-selling. And tellingly, within this latter group nearly half are in the process of conducting an internal review of their cross-selling practices.