Next Year's Global Banks Face Challenges... Rising Funding Costs and Need to Address Geopolitical Risks

Increase in Deposit Costs Leads to Decline in Banks' Net Interest Margin

The global banking industry must actively prepare for four major challenges next year: rising funding costs, changes in new technology trends, geopolitical and geoeconomic risks, and regulatory issues.

The International Financial Center recently stated in its report, "Four Key Points to Watch in the Global Banking Industry in 2024," that the banking industry will face a critical crossroads next year in terms of economic environment, new technologies, geopolitical changes, and regulatory policies.

In particular, while the outlook is that lending in major countries will slow down next year, there is growing consensus that rising deposit costs will inevitably lead to a decline in the global banking industry's net interest margin (NIM). In the case of U.S. regional banks, there is concern that the risk of customer outflow to large banks, digital specialized banks, and money market funds (MMFs) is relatively high, which could exacerbate difficulties in managing funding costs.

Banks are also expected to be highly alert to changes in new technology trends. Global banks recognize new technologies such as artificial intelligence (AI) as core elements of banking innovation and top investment priorities, but recently, caution has been increasing. There are signs that enthusiasm for metaverse technology, centered on British banks, is cooling down. The adoption of cloud and quantum computing technologies is expected to expand.

Furthermore, geopolitical tensions and geoeconomic divisions could damage inter-country credit, investment, and global payment systems, potentially causing increased funding costs for banks and greater risks in debt rollover (maturity extension). The report suggests that global banks may face various difficulties when pursuing overseas operations in regions vulnerable to geopolitical and geoeconomic risks.

Regulatory issues are also identified as challenges. While the final Basel III (bank capital strengthening measures) regulations are gaining momentum amid the fallout from the Silicon Valley Bank (SVB)-triggered banking sector instability, the need for regulations on increasing risk factors such as ESG (environmental, social, and governance) and virtual assets is also rising.

Researchers Lee Sang-won and Hwang Won-jung said, "Major country banks are generally skeptical about the strengthening of capital and ESG regulations, and although there is hope for reduced uncertainty regarding virtual asset legislation, some regulations are seen as restricting business, leading to a negative stance." They added, "The global banking industry, standing at a turning point, needs to proactively respond to the challenges related to the four key points to watch while also striving to discover latent opportunities."