Restructuring and Innovation in Banking

In this chapter, the Schumpeter’s framework of creative destruction is considered and discussed on how it could apply in a more profound and novel way to the industry of the financial services and at global level, as a result of the remnants of the past financial crisis and of the profound changes introduced by quick digitization. The chapter also discusses why this “creative destruction” has so far been very limited because of the assumed principle summarized by the sentence “banks cannot fail”. Actually, the chapter reviews what led to the failure of a major bank such as Lehman Brothers and what could happen if a SIFI (Systemically Important Financial Institution) were to fail, and what kind of systemic impacts could this last one bring about. The chapter is then discussing why a “bankaround” (a significant turnaround of banking) is now long overdue and almost inevitable—we are just at the beginning, in short, and not at the end of the change journey that started with the global financial crisis of 2008. The models, methodologies and approaches that will be helpful to consider to successfully face this challenge of change will then be presented and discussed in future chapters.

In this chapter, a more structured analysis of the wave of financial innovation—driven mainly by digitization and new technologies—but also by shadow banking players acting just outside the boundaries of regulations, is presented as it applies and impacts on the industry of financial services—with a number of potential disruptors acting across the value chain and with a different set of competitive advantages. The discussion develops therefore on the topic of the potential changes impacting across the main fundamental functions of the global financial system—from payments to lending, from investment banking to insurance and so on. A number of potential taxonomies of emerging winners are introduced and a discussion is developed on the potential strategies that could be adopted by incumbents—that could either fall victim of the innovation, or reap most of its benefits, embracing this wholeheartedly and considering also alliances with new digital players. All of this is also considered as the potential engine of the many restructuring and resolution cases that could happen because of the inability (or outright unwillingness) of some of the incumbent players to change and adapt.

In this chapter, an overall, comprehensive approach (the RTX2) to drive the “bankaround” challenge is presented, covering four fundamental phases (mostly complementary, and partially substitute). The restructuring phase—split into financial and industrial—is discussed as it applies to the initial phased of the banking crisis, when the bank is just trying to survive till next Monday, and then over a horizon stretching to few months. It follows (if successful) a turnaround phase, now addressing the business and operating model at a more structural level, and then (again, if successful) a full transformation one, potentially spanning across few years and leading to significant and definite change in the way the bank works and competes in its core markets. In case of failure, or even in case of success and as a complementary measure to be adopted for not viable businesses, the resolution phase—and its last resort liquidation procedure—is finally described at high level.

In this chapter, a more in depth discussion on the new resolution regime developed and now being implemented in the European Union is presented—a description of how the single resolution regime is working and how it interacts with the resolution fund is also described. Starting from the discussion of the safety net mechanisms, the “bail-in” rule, as opposed to the “bail-out” one is then presented and discussed with few noticeable cases, and considering the potential implications on the overall approach: how it could make the “bankaround” challenge more effective and efficient but also potentially more destabilizing at the level of the fabric of society. Also, the implications of the shareholders, as opposed to the debtholders and to the tax payers are discussed. Finally, the characteristics of the emerging leader of a bankaround is discussed at high level, showing the many winning traits she/he should possess in order to manage successfully all the main phases of the RTX2 approach.