Answer to Question #240345 in Management for Kiki

Question

What are the future challenges of a bank(40 marks)

Answer 1

The Federal Reserve's research over the last few years reveals that regional and local banks bear a disproportionate share of the regulatory burden. New restrictions may limit your ability to lend in the community or dramatically increase the price of doing so. Non-compliance will almost certainly result in severe financial penalties. Local banks are finding it difficult to keep up with the alphabet soup of regulatory acts and agencies enacted in the last five years, including the Bank Secrecy Act (BSA), Gramm-Leach-Bliley Act (GLBA), Dodd-Frank Wall Street Reform and Consumer Protection Act, Basel Accords (especially Basel III), and other legislation.

The rising demand for capital in banking operations is the most significant regulatory change across all legislation. In addition to other statutory and discretionary buffers that reduce a bank's working margin, Basel III regulations require banks to keep 4.5 percent of common stock in capital (up from 2 percent) and 6 percent of Tier I capital (up from 4 percent). When you add in the rising cost of procuring funds, as well as the growing trend of binding liquidity and additional leverage requirements, many regional banks are feeling pressed to the limit.

Weak loan demand and low interest rates result from a sluggish economy and a slow real estate market, both of which compress the Net Interest Margin (NIM). When additional capital is required on hand, the margin shrinks even further. Even as clients want new technologies, services, and products, community and regional banks must accomplish more with less. During a recession, however, the most important strategy for bank expansion is to meet consumer expectations for more investment and lending.

Banks, like any other business, must adapt to changes in the digital age. Even for consumers thousands of miles away, community banks are expected to embrace mobile banking as a delivery channel, whether through mobile apps or online banking. Other technological issues that local banks face include growing marketing channels such as social media, which need more time and attention. New technology platforms, such as cloud computing (and its budget consequences), often present a plethora of perplexing options and price models.

Community and regional banks aren't simply fighting against major lenders anymore: retail, technology, and telecommunications companies are advancing in banking and payment services by using their client base, influence, and financial expertise. Firms that made their fortunes as online startups are now lending to their largest commercial customers, and shadow banks are expanding their reach to include more corporate and institutional clients. New titans in the arena aren't the only ones posing a threat. Small firms seeking alternate sources of capital are increasingly turning to peer-to-peer lending, which may offer more advantageous terms and conditions to the borrower.