A black swan is a rare phenomenon in nature and one that lends its name to once-in-a-generation, severe, unexpected events for that reason. The last few years, however, have seen the world struggle through many near-cataclysmic events; from war, climate change and population migration, to runaway inflation and a pandemic. Geopolitical tensions, the polarisation of wealth and supply chain disruptions impact everyone. How the banking sector responds will, to a large degree, determine what happens to the world next. This report, based on discussions at The Broker Club 2023 Conference, The Future of Broking, will explore the direction the financial industry is taking and how economics, regulation and technology may influence it.
The events of the last few years have meant that the long-awaited economic boom that the world had anticipated since the financial crisis did not materialise. Indeed, the global economy was still limping along by the onset of the pandemic in 2020, but it was the war in Ukraine that tipped the scales and added the energy crisis to the mix. The economic result of this toxic scenario – high inflation and a deepening cost-of-living crisis – rippled upwards into investment banking space, leading indirectly to the collapse of Silicon Valley Bank (SVB), Credit Suisse, and then two mid-size American banks, Signature Bank and First Republic.
The SVB’s failure was the result of several factors, including a decrease in the value of its investments and depositors withdrawing large amounts of money. Those events triggered a run on deposits in Signature Bank, sending shock waves through the global financial system, which ultimately resulted in the collapse of Credit Suisse. The Swiss bank had been embroiled in numerous scandals in recent years, including a spying scandal, the collapse of two investment funds in which the bank was heavily involved, and a rotating group of executives.
In this context, the resilience of the financial sector is coming under increased regulatory scrutiny and banks are looking to ascertain what they can do to ensure that they can ride out this ‘perfect storm’ of brutal economic shocks, and prepare for the next. Bolstering their ability to identify and mitigate risks before they become issues and enhancing their ability to remediate in good time any issues that do manifest should be a key objective in 2023. One of the ways that firms can do this is by enhancing their stress testing and scenario testing capabilities, and that may mean that they need to invest more into their underlying infrastructure.
