In the new report, Financing the Financials: Funding Trends in the New Economy, Celent examines current trends in funding process for the financial institutions. The report offers a structural framework to better understand the issues around funding and liquidity for financial institutions, with a particular emphasis on banks.
Because of the recent economic slowdown many firms required emergency funding to avert insolvency or fulfill immediate refinancing requirements. The firms are seeking value accretive transactions. Access to cheaper funding has emerged as a major competitive advantage, causing increased competition among banks for retail deposits.
The funding environment in the near future is likely to come with stricter limits, less negotiating power for borrowers and is likely to push institutions to look for alternative sources of capital. Reliance on short-term wholesale funding will be increasingly replaced by long-term financing that can provide a longer maturity horizon. As the traditional and fundamentally cheap funding source, deposits are likely to become a hot bed of competition again, albeit not without additional costs.
A diversified funding base and active, dynamic funding framework are essential for avoiding similar credit situations in the future. Soon we may begin to see more crowded teams of experts solely dedicated to capital management, more sophisticated risk and liquidity management tools, and higher management involvement in ultimate funding actions.
“The search for reliable, stable funding sources will continue to be a major agenda item for financial institutions,” says Ismail Colak, analyst at Securities & Investments group and co-author of the report, Celent.
“A lack of coherent, detailed capital management framework is a luxury few can afford today. Corporate and legal structures are likely to materially change in order to adapt to the new funding environment.”
L.D.