2012-09-18-奥纬咨询-Sobering_Up_To_Scarce_Liquidity_4页_163kb

Summary: Prospering in a Cash-Constrained World

1. Key Problem & Shift

• Prior to 2007, banks enjoyed abundant, cheap capital (high leverage ~35:1) and low funding costs due to ample wholesale liquidity and government support.
• This abundance led to scant attention to capital and liquidity management, creating an illusion that scarcity was overcome.
• Since 2007, conditions reversed dramatically:
  • Liquidity became scarce and expensive.
  • Capital also became scarce and costly, forcing banks to hold more capital and liquid liabilities under Basel 3.
  • This causes funding costs to rise for banks and increases pressure to deleverage by reducing lending.

2. Consequences of the Shift

• Incentive Loss: Managers lost motivation to be astute with previously abundant financial resources.
• Strategic Inertia: Banks and insurers continue old lines of business despite evidence they have no future, ignoring financial scarcity constraints.
• New Realities:
  • Managing scarce financial resources is now crucial, unlike five years prior.
  • New regulations (Basel 3, Solvency 2) increase liquidity costs and capital requirements.
  • Banks face reduced returns compared to previously abundant conditions. Annuities provide a more efficient source of debt funding due to their stable liabilities.

3. Challenges (Leverage Both Sides)

• Banking:
  • New Basel 3 rules force funding illiquid assets with illiquid liabilities, increasing risk.
  • Need risk returns decisions more influenced by capital/funding constraints.
• Insured Firms (Solvency II):
  • Sobering effect: Creates volatile liabilities, especially long-term debt, increasing capital requirements.
  • Despite challenges, insurers face even new burdens (Solvency II) and enjoy a structural advantage over banks due to stable liabilities.
  • Strategic inertia persists within insurers, mirroring banks.

4. Solution & Imperative

• Strategic Adjustment: Banks and insurers must adapt their business models to the new environment of financial scarcity.
• Expert Financial Management: Managers must prioritize financial resource considerations (capital, liquidity) in strategy formulation and business decisions.
• Performance Management: Incentive schemes and performance management must better reflect the impact of business decisions on scarce capital and liquidity.
• Take Opportunity Seriously: Insurers, in particular, must pounce on the opportunity created by being historically constrained now, which banks helped create.