Challenges for Financial Services Industry

Challenges for Financial Services Industry in Current Economic Envirnoment

Loosening global monetary policy synchronization, the tighter regulatory regime is creating new challenges for financial services industry.

The positive verdict of European Central Bank’s (ECB) Stress Test and Asset Quality Review in the Europe has given the much awaited breathing space for the banks. Only 13 of the 130 big Eurozone banks failed the test.  But the ECB’s inability to lift up the inflation rate despite cutting deposit rate to a record low of negative 0.20% remains a challenge for the overall European economic growth. In the Japan as well as in the Europe profitability remains a key challenge in a low interest rate environment amid weak economic growth and deflationary trend. Important to mention Japan fell into recession contracting 1.6% in the third quarter on an annualized basis in the July-September period following a 7.3 % contraction in the previous quarter which after 3% sales tax increase on April 1 2014.

Dealing with Chinese economic slow down amid looming credit crunch has been a major area of concern for global financial institutions. People’s Bank of China (PBOC) has been delaying the highly anticipated credit crunch in the country. In its latest action PBOC reduced the benchmark interest rate by 0.40% to 5.6% from 6%. This surprise move has arrived following multiple instances of a liquidity boost by the Chinese central bank since the start of the second quarter of 2013 when a sudden rise in interbank interest rates stunned the financial stakeholders.

The risk of sudden reversal of capital into the emerging market has been looming since May 2013 when US Federal Reserve first indicated the winding up of monetary stimulus. Countries with large negative current account balances (almost all) witnessed sharp currency depreciation. This was the time people went back to revise the lesson learned from the Asian Financial Crisis 1997. It would not be prudent for financial services industry to not to discount the impact of winding up of Federal Reserve’s stimulus since the long term interest rate in the US is still hovering around all time low and is poised to shoot up in the context of strong momentum in US Economy which grew 3.9% (annual rate) during the third quarter of current year.