Challenges facing the financial system

Following the 2008 financial crisis our current banking and financial system suffers more challenges than ever..

This is probably the largest issue currently facing the financial system. With the Dodd-Frank Act introducing rules to prevent proprietary trading and Basel III increasing tier 1 capital requirements to 7-10% (dependent on size etc) banks are having to restructure their businesses, which is costing them on the bottom line. Recent developments in the LIBOR rigging scandal also mean new procedures are being put in place to prevent future occurrences. This means more compliance and risk monitoring costs.

Cyber security
We’ve all heard of Ashley Madison in the news, but did you know in 2014 JPMorgan Chase was subject to the biggest cyber hack in american corporate history? Approximately 2 out of 3 households in America were affected. Names, addresses and phone numbers were taken; apparently by the Russians. This has repercussions on the reputation of the firm and demonstrates the need to invest more heavily in cyber security protection

Interest rates
Uncertainty over when the Fed will raise interest rates is a cause of concern for some banks. JPMorgan recently announced earnings of $1.32, lower than $1.38 expectations. A Basel III report suggests a 100bps increase in rates would raise net interest income revenues at JPMorgan by $2.8bn.

China (economic downturn)
Economic crises rarely have a positive effect on the banking system. With the Chinese stock market down 34% since its height in June there are clearly issues coming out of China. Commodity prices are also reaching new lows (copper down ~20% since May), highlighting fears of slowing economic growth in the biggest importer of raw materials. If we suffer a global downturn, banks will be expected to maintain or increase liquidity to help keep consumers and businesses afloat. With increased capital ratios and leverage requirements this might be difficult.


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