When JPMorgan Chase (JPM) announced last week that it plans to sell or spin off its commodities unit in response to growing regulatory pressure, it joined a crowd of banks backing away from noncore operations.
A new global survey shows just how large the exodus has become: 30 out of the 68 banks queried said that concerns about risk are forcing them to exit lines of business. Just 20 out of 69 said the same last year.
The Institute of International Finance and EY, formerly Ernst & Young, included these results in their fourth annual risk management report released on Tuesday. Their survey found that many banks are shedding some businesses in response to increased regulatory oversight.
"Banks are pulling out of peripheral activities and returning to their core," Patricia Jackson, EY's head of financial regulatory advice for Europe, the Middle East, India and Africa, said at a press briefing. She directed the study.
Economic pressures are behind such pullbacks, too; banks are realizing that "[y]ou can't afford to be the fifth-largest anymore" in peripheral businesses, she said.
Three quarters of 13 North American banks in this year's survey said they are exiting businesses in some geographical areas, up from one half of the group a year ago. Forty-nine out of 60 banks reported that they are evaluating their portfolios.
The pullback clears space for nonbank financial firms, such as insurance companies and private-equity firms, to lend in areas that banks are leaving.
"I think in the next ten years we'll see a huge shift toward core banking, and with it a rise in shadow banking," Rick Waugh, the chief executive of Scotiabank and vice chairman of the Institute of International Finance, said at the briefing.
The streamlining push is largely a response to Basel III requirements over how much capital banks must hold, according to the survey. But shareholder pressure can be decisive as well, Waugh said: about 47 of 62 banks in the survey reported that their shareholders have asked them to reduce cost and abandon less-profitable businesses.
This pressure means that, for secondary business lines, "if you can't get the return on capital, you have to exit the business," Waugh said.
While banks continue to focus on technology risk, as confirmed by a similar study released on Monday by Deloitte Touche Tohmatsu Limited, operational and reputational risk are moving higher up on the agenda, the EY study also found.
This year, 13 of 61 chief risk officers who responded said reputational risk was one of the areas requiring the most attention, up from four of 61 last year; 25 of 61 cited operational risk, up from 13 of 61 last year.
But banks still struggle to quantify reputational risk, Jackson said.
"How do you turn operational and reputational risk into risk models?" she said. "Models are taking in big losses, but without fully scoring these risks. It's not fully solved."
Moreover, boards and senior management are taking on a greater role in overseeing risk policies, the survey found. This year, 14 of 61 respondents reported that senior management is paying a lot more attention to risk, while just over half said that their boards had stepped up oversight in the past year.
But many banks are having trouble fully implementing their new risk policies. While 26 of 60 respondents said their companies have strong risk cultures, more than half said they still have more work to do. The survey found that 37 of 44 respondents have programs in place to assess risk culture.
The Institute of International Finance and EY conducted the survey in April.