By Jeremy Awori
Increased international regulation is changing the banking landscape because many global banks are finding they cannot carry the higher liquidity requirements when it comes to their units in other markets.
These regulations, across the globe, came on the heels of the September 4, 2008, plan by US Treasury Secretary Hank Paulson to seize Freddie Mac and Fannie Mae, dismiss their management teams and inject $100 billion of capital in each, to save the US financial system in the aftermath of the global financial crisis.
When this was announced shortly afterwards, very few could have imagined the depth and span of what was to follow: regulations aimed at avoiding a repeat crisis, reducing systemic risks and address the challenges posed by the so-called “too big to fail” financial institutions.
Arguably, the biggest factor still impacting the industry is the requirement for banks to hold more capital of higher quality than before the crisis. Rules were also introduced or adjusted to ensure that banks had more liquidity. Both measures were aimed at ensuring that banks had sufficient money or assets to cover a potential sudden and significant outflow of funds.
Banks are now less vulnerable and are better capitalised, which is positive – but there has been collateral impact that raised questions about the future and sustainability of global banking.
New regulations introduce new processes and need expertise and infrastructure to implement. This means the costs of complying with these requirements, introduced mainly by the Basel Committee through Basel III, which is in the process of implementation across the global banking sector, are significant, with some media reports showing how costs have doubled for some companies between 2007 and 2013.
Not only did the cost of conducting business rise in line with tightened regulation, but banks are now incurring very large penalties for misconduct. Deutsche Bank having previously been fined $14 billion to settle a high-profile probe tied to residential mortgage-securities in the US. Last month, Barclays PLC agreed to pay $2 billion in civil penalties to resolve U.S. Justice Department claims that the lender sold mortgage securities which allegedly helped fuel the financial crisis.
Following the global financial crisis, banks around the world are required strengthen their capital and liquidity positions, reduce risk, and restore profitability, and, to do this, are reducing or selling assets.
Barclays PLC’s announcement in March 2016 that it would reduce its shareholding in Barclays Africa Group to a minority level is an example of this. The shareholding reduction was motivated by the fact that Barclays PLC carried all the financial responsibility for Barclays Africa, while receiving only 62% of the benefits, as it owned 62% of Barclays Africa but held capital for 100% of the business.
Yet, selling down isn’t just happening in Africa: Shortly after announcing it would sell down its African interests, Barclays PLC said it would sell its Portuguese and Spanish credit card business to local lender Bancopopular-e. It also moved to divest its French consumer business to private equity firm AnaCap, and sold its wealth and investment management business in Singapore and Hong Kong to Singapore’s Oversea-Chinese Banking Corporation, among other disinvestments as it focuses on its UK and US businesses.
Barclay PLC’s news that it would sell down its stake was followed by a move from Citi bank to sell its consumer banking operations in Brazil, Argentina and Colombia, while HSBC has pulled out of Brazil and Deutsche announced the sale of its Abbey Life business.
With global banks retreating at a time when global economic connectedness is increasing, there has been a growing need for banks to remain connected through what is known as ‘Correspondent Banking’ relationships. These relationships enable the provision of cross-border payments and play an important role in facilitating trade and in the transfer of remittances from abroad.
However, global banks’ relationships with correspondent banks have also come under pressure as policymakers tighten measures to stop the illicit flow of funds for the purposes of avoiding tax, money laundering, terrorism and other crimes. Global banks have started cutting ties with correspondent banks to reduce the risk of non-compliance with rules such as KYC (Know Your Customer). This phenomenon raises concern about financial exclusion, especially in Kenya and in Africa generally. Such an outcome is not good for poverty alleviation and development, but provides a growth opportunity for local and regional banks.
Given the decline in correspondent banking, regional banks in Africa are now more vital to ensure the continued connectedness of Africa to the global economy and to facilitate regional trade. Simply put, it is less onerous for companies with regional expansion ambition to do business across jurisdictions using one bank, rather than many.
There is no doubt that the key reasons for enhanced global regulation of the financial sector are all well-intentioned, and that most large banks have become more resilient as a result. However, we can also see a number of competing priorities at play which are currently shaping the future of the financial services industry in Africa.
In isolation, each of these priorities makes sense.
Firstly, there is a clear need for ‘too big to fail’ to be addressed through regulation. The 2008 financial crisis proved that the unknown consequences of a big failure can have disastrous consequences. This regulation will, however, in turn result in the decline of global and, potentially, regional banks.
Secondly, while the need for strengthened anti-money laundering controls cannot be argued, this is difficult to achieve as an institution unless you manage the controls yourself and not try and manage a third-party’s systems, as is the case when correspondent banks are partnered with. This legislation is prompting a decline in correspondent banking relationships exactly at the time they need to increase due to continued global and regionalisation taking place.
Thirdly, Kenya, like most countries, wants to see increased competition to drive better service, products and cost advantages for consumers. However, it is clear that due to their systemic importance to the economy, banks need to be regulated which will in turn allow the regulators to be central to the innovation and consequent evolution of banking and financial markets.
It is useful to view the decision by the international Barclays PLC group to reduce its shareholding in Barclays Africa Group against the backdrop of the changes that have taken place in the financial services sector and regulatory environment since the global financial crisis in 2008. Regulatory changes have made it less attractive for international banks like Barclays PLC to own stakes in big banks abroad.
The solution for the need to have more liquidity and better capital reserves is for banking groups to be locally relevant, while maintaining international standards and to have a solid balance sheet. This is part of our strength at Barclays Africa Group, which will be renamed Absa Group once regulatory and shareholder approvals have been obtained. Barclays Bank Kenya’s shareholding hasn’t changed and we continue to be part of the Barclays Africa Group, which has a balance sheet of about $100 billion, or Kshs 10 trillion.
Barclays Africa Group announced a new corporate strategy on 1 March this year and it is very much a growth strategy which will open up opportunities for us in Kenya, where we would like to be part of the landscape for another 100 years and more, even if our name changes.
The writer is the Managing Director, Barclays Bank of Kenya
