Banks at the time of ‘make or break’ – Markets Media

Banks are at a crossroads, according to the Deloitte Center for Financial Services, as digital assets will revolutionize the way money is created, transferred, stored and held.

Deloitte stated in its Banking and Capital Markets Outlook 2022 that more than a tenth of Americans bought or traded cryptocurrency between June 2020 and June 2021.

“In the not-so-distant future, digital wallets may become the preferred vehicle for exchanging money and storing assets,” the report adds.

Brian Armstrong, co-founder and CEO of Coinbase, said this week that people see the company as a centralized exchange, but that it aims to become the primary financial account in the crypto economy where customers can store coins. assets, trade, lend and carry out other transactions. services.

Brian Armstrong, Coinbase

“Coinbase is going to adopt DeFi because we think it’s a very important trend,” Armstrong said. “You will see DeFi products and services appear in the Coinbase app, either as third-party apps or as more proprietary apps and interfaces.”

DeFi, or decentralized finance, allows customers to recreate some traditional financial services in a decentralized fashion on a blockchain using smart contracts, such as lending their assets.

Deloitte said the growth of the cryptocurrency market to more than $ 2 trillion in total has forced banks to consider expanding their underlying infrastructure to introduce new trading and custody services, although the he engagement was sporadic. The report gave the example of Bank of New York Mellon planning to administer and maintain digital assets alongside traditional holdings.

Other applications of digital asset technology, such as tokenized assets, could also have far-reaching implications for financial services. Tokenization can create entirely new markets by establishing liquidity for illiquid assets, such as art or real estate, and increasing the ease with which they can be traded and held.

“New capabilities in smart contracts could transform the enforcement of multi-party agreements, the handling of insurance claims, supply chain management, tax collection, labor compensation and rewards, and dispatch. of the company’s property rights, ”the report said.

Deloitte pointed out that there are significant barriers to widespread adoption of crypto assets, including tradeoffs between public and private blockchain networks, inadequate custodial infrastructure, the perceived association with nefarious activities, high volatility, and the lack of a global regulatory framework.

Deloitte said: Nonetheless, banks should accelerate their engagement in the digital asset space, even though regulatory clarity is currently lacking. For example, they could either build or plug into developing ecosystems.

Technology

The pandemic has accelerated IT modernization for many banks, but Deloitte said these efforts are often incremental, localized and fragmented

Only a tenth, or 11% of those surveyed, said their organization has fully modernized core systems that can easily integrate emerging digital technologies. The Deloitte Center for Financial Services conducted a global survey of 400 senior banking and capital markets (B&CM) executives in finance, operations, talent and technology.

Source: Deloitte.

Deloitte said banks should put the cloud at the heart of their business and deploy artificial intelligence at scale. “84% of those polled in our survey say their organizations have faced challenges adopting AI, more than with other technologies,” the report added.

AI models require a robust data infrastructure and most banks are lagging behind in this area. Additionally, Deloitte advised banks to use the next two years to determine where quantum computing may have the most disruptive influence and strategize accordingly. The report pointed out that Barclays, Citi and Wells Fargo have set up R&D teams and alliances with quantum vendors.

Climate change

Deloitte continued that climate change will have a profound impact on the activities of banks and that a new ecosystem is emerging, notably “carbontechs”.

“This is an area where banks could play a leading role in orchestrating partnerships through incubation, seed funding, capital raising and trading of carbon credits,” added the survey.

Next year, the big banks are also expected to establish tangible criteria to meet their emission reduction targets; consolidate their stress test and credit risk modeling procedures; step up efforts to help clients manage physical and transition risks; and improve their information on climate-related risks and opportunities.

Source: Deloitte.

Another priority should be to integrate climate risk into the bank’s operations and create new performance indicators to measure progress.

“Most banks are committed to directing capital flows towards green projects and reducing their portfolio’s exposure to carbon emissions,” Deloitte added. “But while many face increasing legal, regulatory and ethical pressure to end fossil fuel financing faster than their current trajectories, climate-friendly banks can also unlock new sources of value and growth opportunities for companies. income. “

The survey found that banking executives in nine major markets, 88% of those surveyed, expect bank revenues to improve in 2022. US and Canadian banks are expected to show faster profit growth than others. major markets, while many European banks may not see increased profitability until after 2022.


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