Adapting in a Post-Global
Financial Crisis Environment
A host of macroeconomic and regulatory changes stemming from the global financial crisis (GFC) continue to impact the finance industry, together with ongoing disruptions from technology advances.
In a recent keynote speech at the European Financial Forum, State Street President and Chief Executive Officer Ron O’Hanley shared his perspective on the top five disruptors to our industry’s current and future operating model.
1. The Great Deflation
While central banks have kept interest rates low and injected unprecedented amounts of liquidity into the markets since the global financial crisis, more than 10 years on the global economy has yet to reach escape velocity and is starting to show signs of slowing again. Modest moves toward higher rates and balance sheet normalization seemed to prove too much for a fragile economy, and the Fed’s recent policy pause suggests markets and investors are in for a lower-for-even-longer rate environment. This has important implications for where and how investors will be taking on risk as they continue to search for yield.
2. The Great (Bank) De-Risking
The silver lining to the global financial crisis is that the banking system is now more resilient thanks to post-crisis regulatory requirements that banks hold higher capital ratios and the de-risking of bank balance sheets. A systemic failure of the banking system is now far less likely. On the other hand this de-risking has driven up scale requirements for banks: higher capital ratios mean more business volume is required to get an adequate return on the capital. Moreover that risk has not disappeared; it has been redistributed and more broadly dispersed largely through the asset management industry to a broader group of risk-takers or investors than just a few banks. What we don’t yet know is whether systemic risk has truly decreased or just taken on a different form.
3. The Great Cost Disruptor
In the wake of the financial crisis, investors finally woke up to the fact that costs matter. That was a function of the lower-for-longer yield environment on the one hand, and rising costs of business on the other, due to higher outlays for technology and regulatory compliance. The only way for investors to guarantee a higher return is to lower the fee paid, paving the way for the fee compression we are seeing throughout the investment management industry.
4. The Great Data Disruptor
The more investors understand the systematic drivers of investment returns, the easier it is to deploy data, technology, and automation to capture them. The edge that stock pickers once had in an era of information asymmetries is yielding to the edge gained by investors who can deploy technology to analyze the vast troves of data generated in the era of the internet of things. In the battle between person and machine, the machine is increasingly winning, as data quality and technology improve. And, while person costs typically rise over time, technology unit costs typically decline, giving the machine a structural advantage. Increasingly we believe data mastery will be a defining component of investment success and will separate the winners from the losers.
5. The Great Value Driver Disruptor
One of the biggest disruptors to the investment industry is the structural shift in the value drivers that determine a company’s long-term performance. This shift in the nature of company value coincides with the recognition since the GFC that while the liabilities of the asset owners, or investors, are inherently long term, the asset managers often operate with a short-term horizon. Shifting investor focus from the short term to the long term crystallizes the relevance of environmental, social and governance issues for long-term value creation. Long-term focus also helps companies and investors clarify the connections between a company’s success in value creation and the broader range of stakeholders beyond shareholders alone: employees, customers and communities.
The views expressed in this material are the views of Ron O’Hanley through the period ended 3/7/2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements.