Banks’ resilience and strength have increased

Banks “have significantly strengthened their capital and liquidity buffers,” since the financial crisis while also shoring up their funding structures, the CGFS says in a news release.

These changes have been driven by regulatory reforms, it suggests. “A stronger banking sector now generally supports the flow of credit to the real economy, although conditions vary across the globe,” it adds.

In addition to the changes in banks’ balance sheets, many of the banks that were directly affected by the crisis have shifted their business mix away from complex and risky trading activities, the report observes, and have pulled back their international operations.

Conversely, banks that were less severely impacted by the crisis, including Canada’s, have stepped up their international activities, the report notes. “U.S. banks and banks from advanced economies that were less affected by the financial crisis – such as major banks from Australia, Canada and Japan – have expanded their international presence to varying degrees,” the report says.

Thanks, in part, to these strategic shifts, bank profits have declined — but this isn’t the only reason for the decline in bank earnings. “Banks in Australia, Canada and emerging market economies performed better during the crisis, yet their rates of return have also slowed over recent years,” the report says. “From a business model perspective, RoE has fallen across all types in the post-crisis period.”

“Longer-term profitability challenges could also signal overcapacity and the need for further structural adjustment supported by robust bank resolution frameworks,” the report says. “Looking forward, bank supervisors point to scope for further improving risk management. Central banks must also remain alert to evolving system-wide risks.”