Are the banks regaining health or just zombies limping along?

The crisis has dramatically affected four major economic groups, creating half dead, half alive zombies: banks, governments, companies and consumers. Banks are still struggling along thanks to government intervention, but the zombie phenomenon will ensure that none of them will operate in the same way as they did before the crisis, or be able to perform the functions we expect of them in supporting the growth of the economy.

PA Consulting Group's book 'The zombie economy' asks: are the banks regaining health, or are they zombies, existing in a twilight world and struggling to rebuild their balance sheets?

To order your free copy of 'The zombie economy' please click here.

It will be several years before the banks regain health and are able to provide the levels of credit companies need to escape the zombie economy.

1. Solvency: Banks may be declaring huge profits but the reality is different. Huge losses, in the order of $3.4 trillion, mean that solvency remains a grave issue. If the banks were to sell their toxic assets they would be forced to recognise these losses, raising solvency questions and affecting confidence.  The other side of the balance sheet is equally complicated: deposit, term borrowing or capital all have the ability to move elsewhere, making planning, investing or even doing daily business very difficult.

2. Regulation: Banks must now comply with swathes of new and impending regulation, as governments and regulators struggle to prevent a similar crisis reoccurring without undermining the health of the finance sector. In an extreme case we could see a world in which utility banks are separated from ’casino’ banking with much higher capital requirements. Systemically important banks would pay a risk-weighted premium for their too-big-to-fail status, bringing far-reaching change to the dynamics of the banking sector.

3. Risk management: In the pre-zombie world, very few banks truly understood the risks  they were exposed to, and the speed at which things could deteriorate. Traditional risk models, which were at the heart of the crisis, failed to cope and since September 2008 no new risk models have emerged. Banks now need to come up with something new that will reassure a cynical public.

4. New competitors: The lack of trust in traditional financial institutions presents an opportunity for new competitors, who are poised to pick up the pieces while the banks are under the spotlight. Several of these competitors boast well-loved brands, the very thing banks need ,yet lack, the most: for example, Tesco, which is planning to open banking units in its stores. Banks will need to work hard to regain trust and compete with these new players.
   

To order a copy of 'The zombie economy' please click here.

To discuss how to steer your business successfully through the zombie economy please contact us now.