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1、 NewMonetaryOrderTHEThe State of Financial ServicesUnited StatesPerspectives Oliver Wyman1The New Monetary Order|US PerspectivesDear Reader,The global financial system transformed after the global financial crisis in response to a unique policy context that lasted roughly a dozen years,ending only r
2、ecently.Monetary policy targeted low or ultra-low interest rates across most of the world and central bank balance sheets expanded dramatically.A major program of regulatory reform added to the pressures for change.These forces reshaped the financial system in profound ways,affecting liquidity and f
3、unding structures,capital levels,the amount of interest rate risk in the system,and the growth of different forms of credit.The period also brought significant shifts in the roles of competitors in finance,with the growth of non-bank financial institutions,the rise of regional and domestic banks in
4、some parts of the world,and increasing challenges with cross-border and international banking.What does the future hold?Whether or not you believe the world has moved into a longer period of inflation taming,high interest rates,and lower liquidity,it is clear that“Low for Long”is over.This represent
5、s a major paradigm shift that will undoubtedly also reshape the financial system in the coming years.Do we understand the possible scenarios before us?Do we retain the expertise in the industry to manage through these scenarios after a dozen years of Low for Long?Who will the winners and losers be?I
6、n our State of Financial Services work this year on the New Monetary Order,we explore these questions.Our analyses will look at the dynamics of different regions and segments in a series of papers,and conclude with our global perspectives.Here is our US Perspectives paper on the New Monetary Order.W
7、e hope you enjoy the research.Sincerely,Ted Moynihan Managing Partner and Global Head of Financial Services Oliver Wyman2Executive SummaryThe dynamics of the financial sector shifted seismically when Low for Long monetary policy a roughly 12-year period marked by low interest rates around the world
8、abruptly ended in the second quarter of 2022 and moved toward what we call the New Monetary Order.To date,the transition to this New Monetary Order has been marked by central bank actions to combat inflation,primarily by rapidly raising interest rates and shrinking their balance sheets.The challenge
9、s this transition poses began to emerge in early 2023,1 when Silicon Valley Bank(SVB)and several other firms with business models too heavily reliant on accommodative monetary policy floundered,illustrating the risks of the New Monetary Order as well as the importance of financial institutions adapt
10、ing to this paradigm shift.A clear view of the future requires a nuanced understanding of the deep and broad effects of the Low for Long period on the financial sectors evolution.Accommodative monetary policy providing low interest rates and abundant liquidity affected not only the sectors structure
11、 and competitive dynamics,but also the views and behaviors of executives and other stakeholders.Human beings,and the organizations they create and manage,find it difficult to adjust to paradigm shifts,so it is not surprising that the financial system is adapting only slowly to the exit from Low for
12、Long.In addition to monetary policy,another important driver of evolution in this period has been the plethora of tougher banking regulations,with a particularly significant impact on global systemically important banks(GSIBs).In this paper,we analyze the effects of Low for Long on the financial sec
13、tor and draw out four key takeaways with forward-looking implications for the complex current environment and beyond.KEY TAKEAWAY 1Anemic private sector credit growthPrivate sector credit growth came to a halt during Low for Long compared with previous multidecade trends,falling from a 5%compounded
14、annual growth rate in real terms from 19602007 to a 0%growth rate from 20082021,despite historically low interest rates.Significant deleveraging by both households and businesses following the global financial crisis(GFC)shrank private sector borrowing.Between 2008 and 2012,US household debt decreas
15、ed by roughly$1.4 trillion,while credit to non-financial businesses dropped by more than$600 billion between 2008 and 2010.While growth recovered in consumer and business lending,it remained sluggish in residential real estate,and overall growth did not reach pre-crisis levels.In this low-growth env
16、ironment,in addition to extending duration(which created ALM 1 Douglas J.Elliott,The 2023 Key Policy Issues in Finance(Oliver Wyman Insights,February 2023).Oliver Wyman3problems;see key takeaway 3),lenders turned to additional options:Large banks focused on costs and scale to shore up returns,while
17、smaller banks and non-bank financial institutions(NBFIs)pushed into growth areas like riskier business lending.The New Monetary Order is subject to significantly higher and more volatile rates as well as substantial economic uncertainty,which will likely hinder any reversion of private sector credit
18、 growth to long-term trends.This will further increase competitive pressure as players fight over any high-growth segments.Moreover,without cheap funding to support riskier credit segments,some business models are likely to be severely challenged.Finally,there will likely be a renewed focus on sourc
19、es of fee income growth and cost optimization.KEY TAKEAWAY 2Market share dynamics shaped by the interest rate environment and relative regulatory pressureWhile credit growth has been lackluster,competition has been fierce.Low for Long was marked by significant shifts across segments between banks an
20、d non-banks(although little change in aggregate),as well as between GSIBs and non-GSIBs,largely driven by the relative intensity of regulatory pressure on these institutions.Non-bank financial institutions,significantly less intensely regulated than banks as a whole,sought higher yields and gained s
21、hare in riskier business lending.From 2007 to 2021,NBFI-held leveraged loans and high-yield bonds outstanding both more than doubled,while private debt assets under management increased by more than five times.This growth provided a financing opportunity for some banks,particularly GSIBs,whose lendi
22、ng exposure to NBFIs grew by a factor of more than 10 during Low for Long.On the other hand,consumer lending was a bright spot for banks,substantially offsetting the loss of market share elsewhere.Overall,the shares of private sector credit remained largely the same for banks and NBFIs.Non-GSIBs too
23、k share away from the US GSIBs in most credit asset classes,resulting in more than an eight percentage point loss in market share for GSIBs from 2009 to 2021,excluding loans to other financial companies.This market share loss declined to 3.5 percentage points when including loans to other financial
24、institutions,a big part of which was the tremendous growth in financing NBFIs.Large non-GSIBs,with more than$100 billion in assets,were particularly successful in consumer lending,gaining nine percentage points in market share while GSIBs lost eight points.Looking ahead,the regulatory pressure on al
25、l banks is increasing further relative to non-banks.At the same time,the regulatory gap between GSIBs and large non-GSIBs is likely to narrow,as many stringent regulations and supervisory requirements that previously applied only to the GSIBs will apply to large non-GSIBs as well.Both of these trend
26、s have the potential to create major shifts in the competitive dynamics of the financial sector in the years to come.Oliver Wyman4KEY TAKEAWAY 3Competition for high-quality depositsRunning a profitable bank with a strong risk-return profile under the New Monetary Order will hinge on optimizing asset
27、-liability management(ALM).A stable deposit base will be central to this task,albeit significantly trickier to achieve than it was under the stable rate environment of Low for Long.Dynamic,scenario-based ALM will be crucial to managing the uncertain and variable period ahead.Deposits are becoming a
28、battleground for banks,with deposit betas emerging as a major driver of earnings volatility.During Low for Long the banking system became more reliant on deposits as a source of funding.Deposits comprised 92%of bank liabilities in 2021,compared with 72%in 2008.With rapidly rising rates,this number h
29、as decreased to 88%as of the second quarter of 2023.Deposit movement is faster and stronger in some segments,with businesses serving more sophisticated customers experiencing elevated deposit betas.Combined with an uncertain interest rate environment,which exacerbates the volatility of depositor beh
30、avior,the ability to understand,acquire,and retain higher-quality deposits will be a key competitive differentiator.Institutions that do not adequately manage their deposit base and rely purely on cheap but unstable funding will struggle.On the asset side,regulatory shifts during Low for Long pushed
31、 banks to increase their securities holdings,while the interest rate environment prompted them to extend the duration of their investment portfolios in search of yield.This resulted in substantial unrealized losses in available for sale(AFS)and held to maturity(HTM)securities portfolios when rates r
32、ose,with unrealized AFS and HTM losses for FDIC-insured institutions peaking at$690 billion in the third quarter of 2022 and remaining at an elevated$558 billion in the second quarter of 2023.Unwinding the ALM failings of the past is a huge task ahead for the system,as bank CFOs and treasurers face
33、a difficult choice between cleaning up the balance sheet through rapid materialization of losses versus transitioning more slowly out of these positions with depressed earnings in the medium term.The uncertainty around the rate environment makes this decision even more difficult.KEY TAKEAWAY 4The va
34、lue of building optionality into balance sheets and business models due to the return of volatility and uncertaintyThe past two years have subjected firms to a range of different conditions,with some weathering the storm better than others.Firms that had strategies built around Low for Long conditio
35、ns suffered,as assumptions of continued low rates or stable financial conditions were proven unfounded.Oliver Wyman5Significant uncertainty around the interest rate environment,deposit betas,economic growth,and lending volumes,as well as other tectonic shifts such as climate,geopolitics,and digitiza
36、tion,is making it more challenging than ever to provide earnings guidance.Dealing with an uncertain environment requires the capability to rapidly map potential paths into a set of key factors,analyze them,and use the outcomes to develop contingency plans.Such plans should consider the potential for
37、 swift and sharp changes in the driving factors.Proactive risk management will be at a premium in the face of uncertainty in the years ahead,and firms should seek opportunities to invest in cheap optionality.This could take the form of hedging,strengthening,and diversifying workforce expertise.It co
38、uld also take the form of placing bets on a wider range of business initiatives,or prioritizing initiatives that could be successful under a variety of scenarios,acting as stabilizers.Building on these insights,we recommend scenario analysis as a way for financial institutions to prepare for the fut
39、ure.We end with a set of recommendations relevant to financial institutions and policymakers alike as the industry navigates the New Monetary Order.This paper focuses on the US experience.While many of these themes were present globally,experiences varied by country and region.As a result,we are rel
40、easing separate reports providing perspectives on the New Monetary Order for Europe and the UK,Asia,and Australia.Oliver Wyman6The New Monetary Order|US PerspectivesIntroductionSuccessful strategies in the financial sector must reflect the major paradigm shift triggered by the transition to what we
41、call the New Monetary Order.Business models and strategies well-adapted to Low for Long must transform to succeed in a very different environment.A clear vision of the future requires a nuanced understanding of the profound effects of the Low for Long period on the financial sectors evolution.Low in
42、terest rates and abundant liquidity affected not only the financial sectors structure and competitive dynamics,but also the views and behaviors of executives and other stakeholders.In this paper,we present a high-level overview of the historic impacts of these policies on private sector credit provi
43、sion in the US as well as structural changes to US banks balance sheets.We lay the groundwork for detailed scenario analysis of potential future states for the sector,with implications for winning and losing business strategies and for public policy.Substantial portions of this material were first p
44、resented at a roundtable we conducted with the Institute of International Finance(IIF).During the public portion of the event,Andrew Bailey,Governor of the Bank of England,and Pablo Hernandez de Cos,Governor of the Bank of Spain and Chair of the Basel Committee on Banking Supervision,led with remark
45、s.2 Participants at this“Chatham House Rule”event included central bank governors and deputy governors,chairs of major financial institutions,and influential academics.We begin with a historical analysis of the Low for Long era,defined as the period from the GFC until the 2022 Federal Reserve rate h
46、ikes.During this period,significant changes in monetary policy,central bank actions,and shifts in financial regulation occurred across all major financial markets,as shown in Exhibit 1.We will focus on the US for the remainder of this paper.We examine the impact of this period on financial intermedi
47、aries,including both banks and different types of NBFIs.We observe important changes in credit dynamics during Low for Long,both among banks and between banks and NBFIs,with implications for the financial sectors response to the New Monetary Order.2 Andrew Baileys speech is available at the Bank of
48、England,and Pablo Hernandez de Coss speech is available at BIS.Oliver Wyman7The New Monetary Order|US PerspectivesExhibit 1:Global trends across key financial system drivers2008 Q32021 Q4Monetarypolicy%of quarters withrates less than orequal to 0.5%71%64%84%100%10 xRepomarkets 2019Focus of paperSecu
49、rity marketsprogramme 2010Giltsmarket 2022FXintervention 20226x11x7xCentral bankB/S expansionEnhancedbank capitalEnhancedbank liquidityMarket interventions(Select examples only)FinancialregulationUSEUUKJapanSource:Federal Reserve,FRED,ECB,BoE,Bank of Japan,BIS,Oliver Wyman analysis Oliver Wyman8The
50、New Monetary Order|US Perspectiveskey drivers Of Low for LongTwo major forces drove much of the change in the financial sector from the peak of the GFC in 2008 until rapidly rising inflation in 2022.The first was the use of stimulative Low for Long monetary policy in response to the deep recession c
51、aused by the GFC.This created an environment of low interest rates and abundant liquidity,resulting in major shifts in the pricing of risk and relative attractiveness of investments.The second was a substantial tightening of financial sector regulation,especially for banks,particularly systemically
52、important ones.Tightened regulation increased banks resilience and,consequently,that of the broader financial system.However,higher capital and liquidity levels,and other changes,also came with higher costs,reducing banks profitability and changing their risk-taking incentives.Accommodative monetary
53、 policyPolicy rates,such as the federal funds rate in the US,were dropped to near zero(or even negative in some countries)during the GFC.Central bankers assured the markets that these rates would remain in place for extended periods,allowing lenders and borrowers to count on rate stability as they m
54、ade short-and medium-term decisions.Further,as policy rate cuts alone were not sufficiently stimulative,the Fed and other central banks began a policy of quantitative easing(QE).Under QE,they actively bought large quantities of government bonds and other high-credit-quality instruments,to directly c
55、ompress longer-term yields.Exhibit 2 illustrates how US monetary policy in Low for Long compared to historical patterns.Oliver Wyman9The New Monetary Order|US PerspectivesExhibit 2:Effective fed funds rate vs.inflationQuarterly,up to Q2,012141618HistoricalFederal funds rat
56、e(%)Inflation rate(%)19651991;High inflationHistorical Trend12007;High GDP growth20082021;GFCCovid2022Present;Post-CovidLow for LongSource:FRED,OECD,Oliver Wyman analysis.Federal funds rate values are quarterly averagesThe relationship between the federal funds rate and inflation followed
57、 a fairly consistent pattern between 1965 and 2008,largely due to the dynamics of Fed policy regarding inflation.However,the Low for Long period represents a substantial deviation from this historical pattern,as shown in the clustering of dark blue dots at the bottom of the chart.Similarly,Exhibit 3
58、 captures the rapid growth in the Feds balance sheet during Low for Long,in contrast to much slower growth historically.The average annual growth rate of nominal GDP,the money supply(M2),and the Fed balance sheet were all around 6%to 7%between 1960 and the second quarter of 2008.Following the global
59、 financial crisis,QE contributed to annual M2 growth of 8.4%,approximately double the 4.1%annual growth of nominal GDP.Similarly,the annual growth of the Fed balance sheet was 19.4%,almost five times that of nominal GDP.Oliver Wyman10The New Monetary Order|US PerspectivesExhibit 3:Fed balance sheet,
60、M2,and nominal GDPUS$trillion,quarterly,up to Q2,2023005200252468530Low for Long19602008 Q22008 Q32021CAGRCAGR6.1%19.4%3.2x7.1%8.4%1.2x7.2%4.1%0.6xFed balance sheet(left axis)M2(right axis)Nominal GDP(right axis)Source:FRED,Oliver Wyman analysisIn addition
61、 to QE-driven balance sheet expansion,the Fed periodically intervened on a very large scale to restore market liquidity.During the GFC,it provided unprecedented support to the financial system through a number of liquidity facilities,such as the Term Auction Facility(TAF),Commercial Paper Funding Fa
62、cility(CPFF),central bank liquidity swaps,and others.3In 2020,the economic downturn and uncertainty induced by the pandemic prompted another instance of significant liquidity intervention by the Fed,with an even wider range of support,including for high-yield bonds.More recently,following the failur
63、es of SVB and Signature Bank in March 2023,the Fed created the Bank Term Funding Program(BTFP)to provide short-term liquidity to banks that were facing significant deposit funding pressures.3 Douglas J.Elliott,Uncle Sam in Pinstripes:Evaluating US Federal Credit Programs(Washington,D.C.:Brookings In
64、stitution Press,2011).Oliver Wyman11The New Monetary Order|US PerspectivesExhibit 4:CET1 and HQLA-to-assets ratios for banks0020406080222451015CET1 ratio for banks%,Common Equity Tier 1 as a percentage of RWAs20021AverageAll banksBanks 750 billion1Average8.2%12.0%+3.8 pts7.1%11
65、.8%+4.7 ptsLow for Long003 04 05 06 07 08 09 116 17 18 High-Quality Liquid Assets(HQLA)-to-assets ratio%of assets,banks with total consolidated assets$250 billion2003200720102018AverageBanks 250 billionAverage3.6%16.8%+13.2 ptsLow for Long1.Bank Holding Companies with assets gr
66、eater than$750 billion Source:Federal Reserve,FDIC,Oliver Wyman analysisRising Bank Capital and Liquidity RatiosRegulators boosted capital requirements sharply after the GFC.In particular,the requirement for common equity underwent a substantial increase.The absolute increase was even more pronounce
67、d as risk weights were recalibrated upward for many assets,requiring still more common equity to achieve a given ratio.The impact on actual capital levels was less dramatic,although still sizable.Banks prior to the GFC generally had capital significantly greater than the regulatory minimums;they sub
68、stantially reduced this“management buffer”above required capital after the required levels rose so much.Further,regulators introduced new liquidity requirements in the form of the liquidity coverage ratio(LCR),net stable funding ratio(NSFR),and additional internal liquidity stress tests for larger b
69、anks.Both capital and liquidity requirements were set more stringently for GSIBs than for other banks.Exhibit 4 captures the shift in actual bank capital and liquidity ratios after the GFC.Oliver Wyman12The New Monetary Order|US PerspectivesImplications for policymakersThe analysis presented here ha
70、s significant ramifications for policy.Changes in monetary policy as well as banking regulation served as key drivers of competitive dynamics in private sector credit during Low for Long.Below,we discuss the effects of these drivers on both banks and non-banks.Changing monetary and regulatory policy
71、 will continue to shape the financial sector under the New Monetary Order.Monetary policy meaningfully reshaped financial institution balance sheets During Low for Long,near-zero interest rates and a rapidly expanding Fed balance sheet significantly impacted the makeup of banks balance sheets.Deposi
72、ts ballooned from 72%of total bank liabilities in 2008 to 92%in 2021,due to both supply and demand factors.Customers were flush with cash as central banks pushed up the money supply and these funds gravitated towards deposits,since near-zero rates made finding attractive,safe alternatives to deposit
73、s difficult.In parallel,strong regulatory pressure made banks shy away from taking on most short-term wholesale funding.On the asset side,weak loan demand and growing balance sheets pushed banks away from loans and toward securities,cash,and central bank reserves(as did regulations that forced banks
74、 to improve liquidity ratios by holding more securities that qualified as high quality liquid assets,or HQLA).Net loans as a percentage of total bank assets dropped from 59%in 2008 to 47%in 2021.The increased capital requirements are evidenced by the sharp rise in the common equity Tier 1(CET1)ratio
75、 for banks in the first half of Low for Long,with banks reorienting their capital structure toward higher-quality equity funding.Moreover,the largest US banks(with$750 billion or more in assets),facing more stringent capital requirements,raised their CET1 ratio by a higher amount(480 basis points)co
76、mpared with the average increase across all banks(380 basis points).The stricter liquidity requirements had a similar impact during Low for Long,with large banks($250 billion or more in assets4)raising their HQLA-to-assets ratio by 13 percentage points to almost five times pre-crisis levels.While no
77、t the sole factor,toughened financial regulation was instrumental in driving banks to maintain higher liquidity and capital levels.DEEP DIVE4 Banks with less than$250 billion in assets were not subject to tests that include HQLA.Oliver Wyman13The New Monetary Order|US PerspectivesRegulations helped
78、the banking system become more resilient Bank regulations especially capital and liquidity requirements also had strong positive effects on banking system resilience during this period,especially for GSIBs.Capital requirements,particularly the common equity requirements,were increased after the glob
79、al financial crisis,causing banks to hold significantly more CET1 capital.Banks holdings of CET1 as a percentage of risk-weighted assets increased from 8.2%on average from 20012007 to 12.0%from 20102021.Further,new liquidity requirements,introduced through various measures,pushed banks to shift thei
80、r holdings toward higher-quality assets.These stricter requirements made large banks(those with$250 billion or more in assets)raise their HQLA-to-assets ratio by 13 percentage points,to almost five times pre-crisis levels.Safety wasnt free.Policy levers also put pressure on banks bottom lines All of
81、 these policy levers interest rates,central bank balance sheet size,and financial regulation combined to lower bank profitability.The push toward banks holding safer investments and higher levels of equity,coupled with low interest rates and a plentiful money supply,drove a marked decrease in profit
82、 margins across the banking industry.Average return on equity for banks dropped from 12.7%between 20012007 to 9.5%between 20112021,and average net interest margin dropped from 3.6%to 3.2%in this same period.Therefore,though banks were undoubtedly made safer,this came at a cost to the banking industr
83、ys bottom line.Although not a focus of our analysis,higher regulatory burdens were passed through to customers to some extent as well,through higher prices and reduced availability of services.This partially explains the loss of market share by the GSIBs.Less regulated NBFIs took on more risk Under
84、Low for Long conditions,NBFIs unable to earn their target interest rates on safer holdings shifted toward holding riskier types of credit that could provide higher returns.High-yield bonds outstanding increased by 2.5 times,from$0.7 trillion in 2007 to$1.8 trillion in 2021,with many of these held by
85、 NBFIs.NBFIs also pushed further into private debt,as non-bank private debt assets under management increased by 5.4 times during this period.The probability of default on these riskier credits increased as interest rates rose,too.These losses could spill over to banks as well,since bank lending to
86、non-banks increased by$650 billion from 2010 to 2021.Oliver Wyman14The New Monetary Order|US PerspectivesImpact of Low for LongEvolution of bank balance sheets and profitabilityHighly expansionary monetary policy during Low for Long,with near-zero rates and a ballooning Fed balance sheet,substantial
87、ly altered bank balance sheets,as one would expect.This was amplified by changes in bank regulation spurred by the GFC.Exhibit 5 demonstrates that deposits crowded out almost all other non-equity funding sources,rising in the US from 72%of bank liabilities in 2008 to 92%in 2021.Monetary policy expan
88、ded the money supply and customers stayed with the safety and convenience of bank deposits,since near-zero rates limited attractive,safe alternatives.Regulatory pressure on banks to decrease reliance on short-term wholesale funding added further incentives for deposits to replace other liabilities.E
89、xhibit 5:Composition of total bank liabilities%of total2008 Q22021 Q42023 Q27292 28851482 3346DepositsFed fundsOther debtAll otherNote:Some figures may not add to 100%due to rounding Source:FDIC,Oliver Wyman analysis Oliver Wyman15The New Monetary Order|US PerspectivesOn the asset side,there was a s
90、trong movement away from loans and toward securities,reserves at the Fed,and cash equivalents,as depicted in Exhibit 6.The growth in bank balance sheets,driven by monetary policy,intersected with relatively weak loan demand.In addition,regulatory pressure pushed banks to improve their liquidity rati
91、os by owning securities that qualified as HQLA.The Fed also began paying a small amount of interest on reserves in 2008,which made excess reserves somewhat more attractive in an environment of ballooning bank balance sheets and few opportunities with an attractive risk-return tradeoff.Exhibit 6:Comp
92、osition of total bank assets%of total2008 Q22021 Q42023 Q2594726522322Net loansSecuritiesCash and central bank reservesAll otherNote:Some figures may not add to 100%due to rounding Source:FDIC,Oliver Wyman analysisLow for Long made it difficult to earn a good return by the traditional ban
93、k approach of taking credit risk to lend to solid borrowers.Many banks were attracted to earning a higher return by accepting interest rate risk on high-quality,longer-term securities.The prospect of rates remaining low for an extended period lured some banks into taking very high levels of interest
94、 rate risk,as exemplified by the demise of SVB.This incident is among several that occurred in March 2023 that highlight the importance of strong interest rate risk management capabilities for financial intermediaries.Exhibit 7 shows unrealized losses on AFS and HTM securities experienced by US bank
95、s between 2022 and 2023.The heavy unrealized losses that emerged on banks balance sheets in 2022 indicate challenges banks have had managing these risks coming out of the Low for Long period.Given that banks continue to play a critical role in maturity transformation and,therefore,in the management
96、of interest rate and duration risk,these areas may warrant increased regulatory scrutiny.Oliver Wyman16The New Monetary Order|US PerspectivesExhibit 7:Unrealized gains and losses on investment securitiesUS$billion,quarterly,up to Q2,2023Available-for-Sale securitiesHeld-to-Maturity securities-800-60
97、0-02Monetary paradigm shifted fast,exposinglargeinterest raterisk undertaken by banksSource:FDIC,Oliver Wyman analysisAs a consequence of substantially more stringent financial regulations,the ultra-low-rate environment,and the resulting balance sheet transformations during
98、Low for Long,banks experienced a sizable decline in profitability,as shown in Exhibit 8.As spreads were squeezed in the low-rate environment,bank net interest margin(NIM)experienced a corresponding decline.This drop in returns from lending,coupled with pressure to hold more equity,led to an even gre
99、ater decrease in return on equity(ROE)for banks during Low for Long.Exhibit 8:Bank ROE and NIM%,quarterly data annualized,up to Q2,0720112021AverageROENIMAverage12.7%9.5%-3.2 pts3.6%ROENIM3.2%-0.4 pts82002200620022Source:Federal Reserve Board Financial
100、 Accounts of the US(Z1 tables),Oliver Wyman analysis Oliver Wyman17The New Monetary Order|US PerspectivesEvolution Of the credit landscapeThe use of Low for Long monetary policy resulted from the deep recession following the GFC,after which came an extended period of suppressed economic growth and a
101、 slow labor market recovery.The Low for Long approach was intended to support economic recovery by making credit inexpensive and readily available to consumers and businesses,which in turn would bolster consumption.There was significant deleveraging by both households and businesses immediately foll
102、owing the GFC,with the latter happening more rapidly than the former.Between 2008 and 2012,US household debt decreased by about$1.4 trillion,driven by a combination of increased consumer defaults and lender charge-offs,paying down of current debts,and a reduction in new borrowing.5 Credit outstandin
103、g to non-financial corporations dropped rapidly between 2008 and 2010,but began rebounding in 2011.6 The overall effect of private sector deleveraging and recession followed by slow growth,partially offset by Low for Long policies,resulted in significantly lower private sector credit growth in the d
104、ecade following the GFC than in the previous five decades.Overall private sector credit growth would presumably have been even lower without the central bank actions intended to encourage borrowing.While we dont discuss public sector borrowing in this paper,it grew much faster than private sector bo
105、rrowing did.Exhibit 9:Private sector credit growth rate over time,in real terms%,Q2 1960Q2 19801990DotComGFCLow for LongCovid200020US RecessionPrivate sector credit growth rateEFFRCAGR3%5%0%6%Note:Real rate generated using FREDs seasonally adjusted quarterly GDP implic
106、it price deflator with an Index of 2017=100 Source:Federal Reserve Board Financial Accounts of the US(Z1 tables),FRED,Oliver Wyman analysis5 Meta Brown,Andrew Haughwout,Donghoon Lee,and Wilbert van der Klaauw,“The Financial Crisis at the Kitchen Table:Trends in Household Debt and Credit,”Current Iss
107、ues in Economics and Finance,Volume 19,Number 2(2013).6“Total Credit to Non-Financial Corporations,Adjusted for Breaks,for US(CRDQUSANABIS),”Federal Reserve Bank of St.Louis,data sourced from Bank for International Settlements,accessed August 2023.Oliver Wyman18The New Monetary Order|US Perspectives
108、Private sector credit grew at a compound annual real growth rate of 5.5%between 1960 and 2007 but slowed to 0.2%between 2008 and 2021.In nominal terms,US private sector credit increased from$33trillion in 2008 to$46 trillion in 2021.This period was marked by important shifts in credit provision betw
109、een banks and NBFIs and among different sized banks.These changes are discussed in more detail in the following sections.Market share shifts:Banks vs.NBFIsIn the decades before the GFC,there was a decline in banks share of private sector credit in the US.This decline started in the 1970s and continu
110、ed through the end of the 1990s and was driven in part by the rise of the government-sponsored enterprises(GSEs),among other factors.This trend stabilized in the 2000s,and during the Low for Long period the overall share of credit intermediation between banks and NBFIs remained relatively steady,as
111、Exhibit 10 shows.7Exhibit 10:Bank vs.NBFI share of total private sector credit%,annually,up to Q2,202323894908682787470010075Banks*NBFIs5025Low for Long534532343335*Data excludes bank lending to non-bank financial institutions Source:Federal Reserve Board Financial Accounts of the US(Z1 t
112、ables),Oliver Wyman analysis7 For the purposes of this paper,we are considering the following categories of institutions from the Fed Financial Accounts of the US(Z1 tables)to be NBFIs:liability-driven companies(comprising private and public pension funds,life insurance companies,and property-casual
113、ty insurance companies),investment vehicles(comprising closed-end funds,ETFs,issuers of asset-backed securities,MMFs,mutual funds,and real estate investment trusts),other NBFIs(comprising security brokers/dealers,retail captive finance companies,and mortgage companies),government(comprising federal
114、and municipal governments),GSEs(comprised of GSEs and agency and GSE-backed mortgage pools),and nonfinancial businesses,households and nonprofits(nonfinancial businesses comprises corporate and noncorporate farm businesses,nonfinancial corporate businesses,and nonfinancial noncorporate businesses.Ou
115、r categorization of banks as depository institutions also comes from the Z1 tables and includes private depository institutions,credit unions,and holding companies.Oliver Wyman19The New Monetary Order|US PerspectivesBanks retention of share in US private sector credit provision during Low for Long m
116、ay be surprising to some,given the global focus on the rising importance of NBFIs relative to banks in the financial sector,which has been central to the work of the Financial Stability Board(FSB)and other global bodies.Several factors may explain the counterintuitive result.First,we focus on the ul
117、timate holder of the credit risk rather than the originator.Second,analysis of market share shifts often include non-credit activities,such as equity or venture capital investments,or the shift of market risk-taking activities such as the trading and holding of securities to NBFIs,creating some meth
118、odological differences with our credit-focused analysis.Third,as explained below,there have been some major and well-publicized increases in non-bank market share in certain credit segments.Less attention has generally been paid to other areas where non-banks have contracted,such as consumer lending
119、.“NBFIs”comprise a large and diverse set of players that provide a wide array of financial services.For the purposes of this analysis,we focus on NBFIs that play a role in private sector credit provision.The table below presents an overview of key NBFI credit providers and their market dynamics,grou
120、ped by NFBI types that play similar roles in credit provision.Exhibit 11:Overview of NBFI typesCategoryNBFI typeDescriptionGovernment-sponsored enterprises(GSEs)GSEsGuarantee third-party loans and purchase loans in the secondary market;issue agency bondsAgency and GSE-backed mortgage poolsPool mortg
121、ages and,acting as a GSE or other government agency,back these poolsGovernmentFederal and municipal governmentsInvest and lend money through agencies,programs,and activities at a local,state,and federal levelLiability-driven companiesPension fundsInvest pension plan premiums to earn returns,acting a
122、s fiduciaries for clientsInsurance companiesPool insurance premium payments to purchase assets;manage assets to meet liquidity needs associated with liabilitiesOther non-bank financial institutionsSecurity brokers/dealersBuy and sell securities for a fee and/or hold some securities for resaleRetail
123、captive finance companiesPerform in-house financing for companies(such as car dealerships)and retail borrowersMortgage companiesOriginate loans to households/businesses for residential/commercial properties;often sell these loans in the secondary market Oliver Wyman20The New Monetary Order|US Perspe
124、ctivesCategoryNBFI typeDescriptionInvestment vehiclesIssuers of ABSPurchase pools of assets and issue debt securities based on themMutual fundsPool collections of assets to create investment portfoliosExchange-traded fundsPool collections of assets to create investment portfolios that are traded on
125、stock exchangesMoney market fundsAs a type of mutual fund,focus on investing in highly liquid,near-term instrumentsREITsOwn or finance income-producing real estate using pooled investor capitalClosed-end fundsAs a type of mutual fund,issue a fixed number of shares through a single IPONonfinancial bu
126、sinesses,households and nonprofitsNonfinancial corporate businessProduce goods/services in order to make a profit as a corporation,including as a corporate farmNonfinancial noncorporate businessProduce goods/services in order to make a profit as a partnership,LLC,sole proprietorship,individual with
127、rental income,or noncorporate farmHouseholdsInvest and lend money as a family unitNonprofitsInvest and lend money and purchase goods and services as not-for-profit organizations,such as private foundations,schools,hospitals,charitable organizations.Source:Bank of NY Mellon,Bloomberg,Business Insider
128、,Charles Schwab,CNBC,Crises Notes,DataLend,Deloitte,Federal Reserve Bank of Chicago,Federal Reserve Bank of St.Louis(FRED),Federal Reserve Bank of the US,F&I Magazine,FINRA,Forbes,Guggenheim,Insurance Information Institute,Investment Company Institute,Kiplinger,MRSC,Nareit,National Association of St
129、ate Retirement Administrators,OECD,Philanthropy Network,Rocket Mortgage,Stefan Ouma,Wall Street Journal,Western Asset,White House,University of Florida,USDAThe small change in bank versus NBFI share of total private sector credit in this period hides significant movements in segment-level credit pro
130、vision.Exhibit 12 reflects shifts in the consumer,residential mortgage,business,and commercial real estate(CRE)credit segments between 2008 and 2021.Multiple forces were at work in the different segments of the credit market,including the dramatic shrinkage of the market for asset-backed securities(
131、ABS),which deprived many competitors of their funding base,and the resulting gap in consumer lending being filled mostly by banks;the continued growth of the GSEs in single-and multifamily mortgage credit,in most cases accompanied by the increase in share of mortgage origination taken by NBFIs;and m
132、oves by insurers and pension funds into holding loans to businesses and,to some extent,CRE loans.Oliver Wyman21The New Monetary Order|US PerspectivesExhibit 12:US private sector credit by credit provider type and segmentUS$trillion,2008 and 2021BanksGSEsGovernmentLiability-driven companiesOther non-
133、bank financial institutionsNonfinancial businesses,households and nonprofitsInvestment vehiclesResidential real estate1(including single-and multi-family)Overall GSE share increased from42%to 61%,supported by increased standardization and growth of third-party mortgage originations.2 Investment vehi
134、cles lost much of their share,due in part to the demise of the residential ABS market.Bank share declined due to a combination of more stringent regulatory requirements3 and increased competition from third-party mortgage originators.Consumer lendingMarked shifts in share took place across non-resid
135、ential consumer credit providers duringLow for Long.Government lending increased substantially as the federal government increased student loan funding.Investment vehicles lost substantial share,driven by the decline of the ABS-based consumer credit business model.Banks gained share in consumer cred
136、it,going from 44%to 52%of the market,in part due to holding on to the loans previously securitized through the ABS channel.+15%34%42%17%2%1%1%28%61%2%3%4%1%2%2008202.2 TN15.1 TN+72%2.6 TN4.5 TN44%5%22%5%24%52%15%32%1%4%1.Residential loans include GSE-owned loans.A portion of these GSE loa
137、ns is then securitized into pools backing MBS2.While GSEs transfer part of the risk to other institutions through capital markets and reinsurance transactions,our analysis ignores that for several reasons including lack of data availability in Z1 tables and inability to consider other more ad hoc ri
138、sk transfer programs as part of the analysis3.For example,more conservative underwriting requirements applied to banks through the Dodd-Frank ActSource:Federal Reserve Board Financial Accounts of the US(Z1 tables),Oliver Wyman analysis.Note that private sector credit excludes Treasuries,municipal se
139、curities,rest of world lending,and central bank lending,and that some figures may not add to 100%due to rounding Oliver Wyman22The New Monetary Order|US PerspectivesBusiness lendingLiability-driven companies gained share,as insurance companies and pension funds significantly expanded their lending a
140、ctivity,often via investments in private debt funds.GSEs lost share due to a decrease in Federal Home Loan Bank(FHLB)advances as aresult of the trend described earlier of banks shifting to a greater reliance on deposits and away from wholesale funding.Investment vehicles gained share,as mutual funds
141、 and exchange-traded funds(ETFs)increased their credit provision.Other NBFIs lost share,due to the downsizing or exit(or conversion into banks)of many finance companies.Banks gained a small amount of share as other lenders contracted.Commercial real estate(excluding multi-family)Liability-driven com
142、panies gained share as life insurers expanded their activity in the CRE market.GSEs also gained share due to an increase in farm mortgages.Investment vehicles lost share as CMBS issuance contracted.Banks grew their CRE lending faster than the market as a whole.BanksGSEsGovernmentLiability-driven com
143、paniesOther non-bank financial institutionsNonfinancial businesses,households and nonprofitsInvestment vehicles+45%13.7 TN19.9 TN+36%2.7 TN3.6 TN2008202%11%21%15%9%15%3%31%9%27%4%22%4%3%56%12%24%2%1%2%3%58%14%18%5%3%2%1%Source:Federal Reserve Board Financial Accounts of the US(Z1 tables),
144、Oliver Wyman analysis.Note that private sector credit excludes Treasuries,municipal securities,rest of world lending,and central bank lending,and that some figures may not add to 100%due to rounding Oliver Wyman23The New Monetary Order|US PerspectivesRegulatory pressures played a role in reshaping t
145、he credit landscape following the GFC.As banks moved away from riskier types of credit provision,in part to avoid higher capital requirements,NBFIs role in the markets for high-yield bonds,leveraged loans,and private debt increased markedly.Exhibit 13 shows how NBFIs aggregate exposure to these risk
146、ier types of credit increased drastically in the decades following the GFC,as an example of the general trend of riskier NBFI lending.Exhibit 13:Trends in NBFI provision of riskier creditUS$trillionHigh-yield bonds outstandingNon-bank private debt AUM0.71.82.5xQ4 2007Pre-GFCpeakQ4 2021Post-GFCpeak0.
147、20.9Q4 2007Pre-GFCpeakQ4 2021Post-GFCpeakHigh-yield bonds outstandingDirect lending private debt AUM0.61.3Q4 2007Pre-GFCpeakQ4 2021Post-GFCpeak0.00.3Q4 2007Pre-GFCpeakQ4 2021Post-GFCpeak5.4x2.4x30 xSource:LCD,a part of PitchBook,Preqin Ltd and OW analysis Oliver Wyman24The New Monetary Order|US Pers
148、pectivesWhile banks decreased their direct participation in these higher-risk,higher-return portions of the credit market during Low for Long,they also increased lending to NBFIs during this period.This trend has the potential to expose banks to some of the credit risk taken by NBFIs engaged in risk
149、ier private sector lending.At the same time as these sub-sector shifts were taking place,the role of private debt defined broadly as debt financing provided to companies from funds,rather than banks or capital markets expanded rapidly in the US during Low for Long.While banks commercial and industri
150、al(C&I)loans grew by 74%between 2007 and 2021 to$2.5trillion,8 private debt AUM increased more than fivefold in that same period,to$856 billion(including dry powder).9 Within the private debt space,direct lending boomed,growing by roughly 30 x during this period to$331 billion.Monetary and regulator
151、y policy drove much of this movement.The low interest rate environment spurred investors searching for yield into the private debt markets.Furthermore,regulatory reform in the wake of the GFC acted as a tailwind to the direct lending business,as new capital rules made the riskier parts of banks comm
152、ercial lending businesses less attractive.Likewise for leveraged lending,regulatory guidance along with increased scrutiny in supervisory examinations diminished banks appetite to extend financing to these transactions.Finally,specific features of private debt also played a role.The faster time to c
153、lose,limited execution risk,and greater flexibility offered by direct lending compared to syndicated loans made such deals attractive to borrowers despite the higher interest rates typically associated with direct lending.Due to limited transparency and reporting,it is challenging to estimate the pr
154、ecise size and composition of private debt markets overall,and of direct lending specifically.SEC data indicate that public and private pension funds,other private funds and asset managers,insurance companies,and high-net-worth individuals are key participants in private debt funding.10As direct len
155、ding becomes larger and more embedded in the US and global financial system,policymakers are increasingly concerned about the potential risks associated with credit migrating outside the banking sector.The Feds May 2023 Financial Stability Report states that the risks posed by private debt funds to
156、financial stability appear limited now but could become important.The risks are inherently limited for a few reasons.First,private debt managers engage in“limited liquidity and maturity transformation,”meaning their funding is generally longer-dated and stable,and thus less susceptible to“runs.”Seco
157、nd,they are typically either unlevered or use only a modest amount of leverage,which limits their susceptibility to fire sales due to margin calls.11 Finally,private debt is almost exclusively the domain of sophisticated investors who can reasonably be expected to understand the risks they are takin
158、g.8“Commercial and Industrial Loans,All Commercial Banks(BUSLOANS),”Federal Reserve Bank of St.Louis,data sourced from Board of Governors of the Federal Reserve System(US),accessed August 2023.9“Assets Under Management(US$Billion):Manager Location:US,”Preqin,data sourced from Preqin,accessed October
159、 2023,data prepared for Oliver Wyman.10 Board of Governors of the Federal Reserve System,“Financial Stability Report May 2023,”The Federal Reserve Bank of the United States,accessed August 2023.11 Board of Governors of the Federal Reserve System,“Financial Stability Report May 2023.”Oliver Wyman25Th
160、e New Monetary Order|US PerspectivesThat said,the direct lending market is opaque,so little is known about the aggregate credit risk profile,concentration,and covenants of private debt portfolios.There are several potential sets of circumstances that could present novel risks to this relatively rece
161、nt segment in an economic downturn or higher interest rate environment.The situations outlined below are not intended in any way as predictions;rather,they illustrate some of the potential watchpoints for direct lending in a changing interest rate and economic environment.One possible situation is t
162、hat elevated interest rates or an economic slowdown could lead to greater-than-expected losses in direct lending,which in turn could impact end-investors.Given that such end-investors tend to be sophisticated,often institutional actors,in many cases resolution could likely be achieved directly betwe
163、en borrowers and end-investors.However,if such cases become common,they could cause investor interest in private markets to cool.A decline in investor interest in private markets could cause private debt managers to be unable to meet a wave of refinancing demand.In this case,companies not eligible f
164、or bank funding could struggle to obtain financing from alternative sources or be forced to accept more expensive(or less reliable)funding.Finally,while most available data indicate that leverage in the direct lending sector is low,it is possible leverage has been understated.If this were the case,a
165、 drop in asset prices could lead to collateral seizure,and the accompanying rapid sales could further exacerbate the decline in asset value.Market share shifts:GSIBs vs.non-GSIBsWithin the banking sector,there was a significant redistribution of private sector credit market share during Low for Long
166、.Driven in part by more stringent regulations,as well as elevated credit risk standards,GSIBs lost share to other banks across most credit segments.However,this share loss differs significantly depending on whether lending to other financial institutions is included or not.Exhibit 14 shows the decli
167、ne in GSIB share of loans from 37%in 2009 to 29%in 2021 across consumer,residential,C&I,and CRE lending.Oliver Wyman26The New Monetary Order|US PerspectivesExhibit 14:GSIB share of total bank loans,excluding loans to other financial institutions%,00019
168、2020202120222023GSIBsNon-GSIBs with assets$100 billionNon-GSIBs with assets between$50 and$100 billion01020304050Low for Long-8.4pts29.023.26.528.523.56.236.923.34.8Note:2023 values are as of Q2 2023,other values are from EOY Source:S&P Capital IQ,FDIC,Oliver Wyman analysis.Copyright 2023,S&P Global
169、 Market Intelligence.Reproduction of any information,data or material,including ratings(“Content”)in any form is prohibited except with the prior written permission of the relevant party.S&P and their content providers are not responsible for any errors obtained as a result of usage of such Content
170、and will not be liable for any damages in connection with the use of this contentThe amount,drivers,and beneficiaries of GSIB market share loss varied by credit segment.As Exhibit 15 shows,residential real estate was a main driver of GSIBs overall share loss to other banks,responsible for approximat
171、ely three-fifths of their share loss across sectors.GSIBs consistently decreased their credit provision in this area following the GFC,from approximately$1.4 trillion in 2009 to$1.1 trillion in 2021.In the fast-growing consumer segment,while GSIBs grew their lending from approximately$470 billion in
172、 2009 to$687 billion in 2021,large non-GSIBs12 grew even faster and ultimately took meaningful share over that time,as the collapse of the ABS market reduced competition from NBFIs.Commercial real estate and C&I loans contributed more modestly to GSIBs share loss.12 Defined as non-GSIBs with more th
173、an$100 billion in assets.Oliver Wyman27The New Monetary Order|US PerspectivesExhibit 15:GSIB share change by credit segmentPoints,20092021%contribution to totalGSIB share loss20%56%15%9%-1.7-4.81.2-0.7Direct contributionto GSIB share loss90-8-14-31-6-31-411ConsumerResidential(SF and MF)Commercialand
174、 industrialCRE(ex MF)and farmGSIBsNon-GSIBs withassets$100 billionNon-GSIBs withassets between$50and$100 billionSource:S&P Capital IQ for GSIB and large non-GSIB credit figures,FDIC for aggregate bank credit figures,Oliver Wyman analysisThe overall decline of GSIBs share of lending is reduced when“o
175、ther”loans including loans to other financial institutions(banks and NBFIs)are included in the analysis.As Exhibit 16 below demonstrates,GSIBs share of loans decreased by only 3.5 percentage points during Low for Long when including loans to other financial institutions(compared with 8.4 percentage
176、points when excluding other loans).It reflects the prevalence of GSIB lending to other financial institutions,which is discussed in more detail in the preceding section.Exhibit 16:GSIB share of total bank loans,including loans to other financial institutions%,001
177、62002020202030405038.2 23.44.734.723.35.934.023.36.2-3.5ptsLow for LongGSIBsNon-GSIBs with assets$100 billionNon-GSIBs with assets between$50 and$100 billionNote:2023 values are as of Q2 2023,other values are from EOY Source:S&P Capital IQ,FDIC,Oliver Wyman analysis Oliver Wyma
178、n28The New Monetary Order|US PerspectivesOur analysis indicates that in the US,banks increased the credit they extend to NBFIs by$650 billion during Low for Long,expanding more than tenfold from$56 billion in 2010 to$706 billion in 2021.GSIBs accounted for a majority of this expansion,growing their
179、loans to NBFIs from$44 billion in 2010 to$461 billion in 2021.While NBFIs directly expanded their exposure to riskier credit,banks also were indirectly involved in this activity,for example by providing lines of credit to NBFIs.As discussed in the previous section,banks are taking on some indirect e
180、xposure to NBFI credit activity,at least if credit losses become large enough to threaten the ability of NBFIs to repay their bank loans.This could increase banks vulnerability to interest rate volatility beyond what would be expected based on banks direct lending exposure.We expect these indirect e
181、xposures could be a growing focus for US regulators if the observed trend of increased bank lending to NBFIs continues.Exhibit 17:Bank lending to NBFIsUS$billion,Q1 2010Q4 20220222405001,000750250+650 billionSource:FDIC,Oliver Wyman analysis Oliver Wyman29The New Monetary Order|US Perspec
182、tivesLooking aheadScenario analysisAs we have shown,the Low for Long period characterized by years of historically low interest rates and abundant money supply had a profound effect on the financial sector.The transition into a New Monetary Order is likely to foster similarly significant effects thr
183、ough unwinding prevailing conditions and introducing new forces of change.Such a transition may be rough,as events this year in global banking demonstrated,and there will certainly be winners and losers.Our goal in this paper is not to predict the future,but rather to present a range of possible out
184、comes and to discuss them in a structured manner.We analyze four scenarios that are distinct and plausible;however,it is important to note that these are not the only possibilities.They serve to provide a starting point for further analysis within the broader framework.Primary driversChoosing the ri
185、ght scenario drivers is crucial to scenario analysis.We propose three primary drivers that will shape the evolution of the financial system,two of which demonstrated their importance during Low for Long:monetary policy and other central bank actions,including interest rates and central bank balance
186、sheets;financial services regulation,or the regulatory gap between banks and NBFIs and between GSIBs and other banks;and depositor behavior.Monetary policyCentral banks set short-term risk-free rates and substantially affect other interest rates.As we saw in Low for Long,interest rates strongly infl
187、uence financial institutions balance sheets,risk levels,and profitability.In addition,central banks have played an increasingly large role in credit markets through QE and quantitative tightening(QT).If a central bank is expected to perform QT,risk levels for both banks and NBFIs are affected,as wel
188、l as funding structures and investment strategies.Further,the degree of willingness of a central bank to intervene in credit markets during a liquidity crunch strongly influences the functioning of financial markets,as was the case in 2008 and 2009,and in 2022.Our conjecture.With respect to interest
189、 rates,a return to a“Low for Long”type environment is unlikely,although not impossible.We expect that over the medium term,rates will remain significantly higher than the near-zero rates of that earlier period,though it is unclear whether they will hold steady around current levels or undergo more v
190、olatility.We expect that Oliver Wyman30The New Monetary Order|US Perspectivescentral banks will generally aim to shrink their balance sheets,though market conditions will have a large effect on central banks ability to implement QT.Financial regulationAny reader will be aware that financial regulati
191、on heavily influences the shape and actions of the financial sector.For purposes of our scenario analysis,we focus primarily on the differential relative regulatory burdens on GSIBs,large non-GSIBs,and NBFIs in the US.Our conjecture.After the 2023 bank failures,tighter US bank regulations are likely
192、;however,this jump will not be as dramatic as what followed the GFC.We are already starting to see evidence of a substantial toughening of regulation for all US banks,with the biggest impacts on large non-GSIBs.We also believe it likely that global bodies will recommend toughening regulations for NB
193、FIs;whether or not governments will comply is less certain.Depositor behaviorThere is a consensus that depositors are substantially quicker to flee from a troubled bank than was historically true,as evidenced by the unprecedented pace of deposit outflows from SVB earlier this year.This trend has imp
194、lications for how banks think about deposit stability and potential behavior in stress,as well as cost of funds.In addition,rising interest rates can also drive changes in depositor behavior,with important implications for banks cost of funding.To date,the rise in interest rate levels has put less p
195、ressure than expected on bank funding costs,perhaps due to the parallel low rate of loan growth.However,the sensitivity of a banks deposit cost to interest rate changes(“deposit beta”)can vary significantly depending on depositor characteristics.Our conjecture.We believe that banks in the US will no
196、t be able to count on the degree of deposit stability they were accustomed to during Low for Long,or even before the GFC,because of depositor behavioral changes.Nor are regulators and supervisors likely to allow as much credit for presumed stability.This impact may be greatest for non-GSIB banks,whi
197、ch might not benefit from the same public perception of being“too big to fail”that GSIBs might.However,in the absence of further deposit runs,it is difficult to know the magnitude of these effects.In addition,we anticipate a change in bank strategy driven by deposits if rates remain elevated for an
198、extended period or the demand for loans accelerates.Banks currently reliant on sophisticated,high-beta depositors will have to either accept higher funding costs(and the associated slimmer margins)or re-evaluate their deposits strategy.This could lead to greater competition for certain customer type
199、s and drive elevated funding costs across the industry.In all cases,we believe it is crucial for banks to understand their depositors in more depth and detail than they might have been accustomed to doing.Oliver Wyman31The New Monetary Order|US PerspectivesSelected scenarios and potential outcomesWe
200、 discuss four example scenarios to illustrate paths for financial intermediation in the post-Low for Long period.The scenarios are developed with consideration of how each of the primary drivers would influence the outcomes,as illustrated in Exhibit 18.It is important to note that while these are pl
201、ausible scenarios that fit across this grid,they are not comprehensive.Exhibit 18:Characterization of scenarios based on key driversMonetary policyHigh ratesandliquiditywithdrawalChange in regulatory burdenLow ratesandabundantliquidityGSIB dominanceRisk managementtriumphCollective prosperityHigher b
202、urden on largenon-GSIBs and NBFIsHigher burden on banksbut not NBFIsDeposit stability legend:Non-bank ascendencyLowHigh New regulatory requirements disproportionately impact large non-GSIBs(and potentially non-banks)Bank profitability rises as funding costs do not increase alongside loan interest ra
203、tes Higher costs and lower availability of wholesale funding hurts non-banks GSIBs win share from other banks and non-banks Economic uncertainty and longer-term struggle with growth and inflation,resulting in a volatile environment Funding costs rise for both banks and non-banks due to low confidenc
204、e of depositors and funders Winners determined by robustness of ALM and risk management practices in the face of volatility and uncertainty Moderate,stable interest rates and inflation levels Competitive dynamics and resulting balance between banks and non-banks is largely unchanged Regulatory gap b
205、etween large non-GSIBs and non-banks widens Low depositor confidence raises bank funding costs Ready availability of low-cost wholesale funding helps non-banks Non-banks win share from banks,particularly from large non-GSIBs1423Source:Oliver Wyman analysis Oliver Wyman32The New Monetary Order|US Per
206、spectivesSCENARIO 1GSIB dominanceGSIBs gain market share in private sector credit,enhancing their position relative to both NBFIs and large non-GSIBs,and improve their profitability from the post-GFC lows.Interest rates stay above the depressed Low for Long levels and banks especially those with low
207、er deposit betas retain most of their deposit bases despite raising deposit rates less than lending rates,improving NIM.Central banks engage in QT,reducing the liquidity in the wholesale market and hurting NBFIs,who lose easy access to funding.Regulations are tightened for US banks,with a higher bur
208、den on large non-GSIBs compared to GSIBs.Regulations intensify disproportionately for NBFIs,which results in NBFI exits.The erosion in depositor confidence prompted by recent banking turmoil proves to be temporary,and trust in the banking system is restored.SCENARIO 2Non-bank ascendencyNBFIs gain ma
209、rket share as they become relatively more competitive than banks.Interest rates stabilize at a relatively low level over time,although well above zero,as central banks hit inflation targets.Central bank balance sheets come down from peaks but remain large and are used to ensure liquidity in specific
210、 financial markets.Regulatory constraints on pockets of the banking sector increase,especially for large non-GSIBs.Politicians choose not to follow through on NBFI regulations recommended by global bank regulators.Continuing depositor wariness combined with tough competition from money market funds
211、able to offer higher interest rates hurt bank funding costs and profitability as deposits become even less sticky and banks are forced to increase deposit rates.SCENARIO 3Risk management triumphVictory belongs to the entities,whether banks or NBFIs,that lead with superior risk management capabilitie
212、s in a period characterized by a highly volatile environment.Interest rates fluctuate in a wide range(though always higher than during Low for Long),as central banks and governments struggle to manage inflation,recession,and financial stability risks.Central bank balance sheet management is caught b
213、etween QT and QE in a volatile environment,with a low level of market confidence in policy actions.Tougher regulation and supervision are imposed across all intermediaries.Depositor and funder confidence vary by entity,with penalties for perceived riskiness.Oliver Wyman33The New Monetary Order|US Pe
214、rspectivesSCENARIO 4Collective prosperityInflation and recession risks are managed well,and problems for financial institutions are unusual.Interest rates come down to relatively low levels,but higher than in the Low for Long period,and then stabilize,as the fight with inflation is successful.Centra
215、l banks and governments manage the economy and recession risks well through a soft landing.Regulatory pressure modestly increases on both banks and NBFIs,but doesnt dramatically change the competitive balance between them,and without resulting in prohibitively high capital or liquidity costs for any
216、 segment of the credit market.Depositor confidence returns relatively quickly as the recent banking turmoil is short lived and the sector stabilizes.Scenario analysis can be very helpful in allowing policymakers to consider the consequences of their choices in a range of potential futures.Each of th
217、e scenarios presents a range of challenges and opportunities for policymakers.It is in the nature of public policy that most of their choices force them to weigh costs and benefits,as there are almost always trade-offs.Oliver Wyman34The New Monetary Order|US PerspectivesFacing the futureAnalysis of
218、the Low for Long period and the initial phase of the transition to the New Monetary Order reveals some key areas of focus for executives and regulators going forward.Use scenario analysis to explore a range of potential futures.The high-level scenarios we described earlier would subject firms to qui
219、te different conditions.Preparing for a range of possibilities is particularly important in this time of transition.Do not underestimate the importance of monetary policy.Given that the artificial stability of Low for Long itself followed a long period known as the Great Moderation,it became easy to
220、 forget that monetary policy can move aggressively and be important when doing so.We should come to terms with this uncertainty.Look for ways in which Low for Long habits became entrenched in business models.Root out assumptions of very low rates or of reliable stability in financial conditions and
221、associated decision-making.Focus on depositor and funder behavior.Both banks and NBFIs should consider their funding sources and if they will change behavior in the future,and have contingency plans for these potential changes.Focus on ALM and risk management.The current uncertainties,not to mention
222、 known changes in the environment,place a premium on diligent and proactive risk management.We anticipate that institutions with superior risk management capabilities will fare better in choppy waters.Expect regulatory and supervisory actions,especially in response to failed business models.This goe
223、s without saying in the US,where recent proposed rules aim in particular at increasing capital requirements and funding stability for large non-GSIBs.However,even in jurisdictions that currently appear relatively complacent about the recent turmoil,issues are likely to arise that cause them to expan
224、d their activities.Invest in cheap optionality.Protecting your business plans by investing in flexibility could pay big dividends,whether it be through outright hedging,ensuring that you have the right personnel for diverse conditions,or experimenting with business initiatives that are important onl
225、y under certain scenarios you currently view as less likely.Keep an eye out for opportunities as some competitors run into trouble.There is likely to be continued turmoil for some time as firms struggle with the transition into the New Monetary Order.Opportunities for acquisitions or room to expand
226、market share might arise suddenly.Oliver Wyman35The New Monetary Order|US PerspectivesGlossaryABSAsset-backed securities.Securitized finance pools of different types of assets,such as mortgage loans or credit card receivables.AFSAvailable for sale.Securities that an institution(usually a bank)holds
227、up for sale to the broader market.ALMAsset-liability management.This involves managing an institutions portfolio of assets and liabilities in order to be able to meet future payment needs.AUMAssets under management.The value of assets which a firm manages and can therefore invest.BTFPBank Term Fundi
228、ng Program.The program gives loans of up to one year in length to depository institutions pledging US treasuries,agency debt,and MBS and other qualifying assets as collateral.CET1Common equity tier 1.Capital of the highest regulatory quality.CMBSCommercial mortgage-backed securities.A type of ABS in
229、 which the assets securitized are commercial mortgages.CPFFCommercial Paper Funding Facility.A program set up by the Fed to enhance the liquidity of the commercial paper market by increasing available funding of term commercial paper to issuers and by providing greater assurance to investors and iss
230、uers that maturing commercial paper would be able to be rolled over by firms and municipalities.13CRECommercial real estate.Real estate that excludes single-and multi-family homes and is used for commercial purposes.Deposit betaThe sensitivity of a banks deposit cost to interest rate changes.ETFExch
231、ange traded fund.A type of mutual fund that is traded on stock exchanges.Federal funds rateThe effective interest rate set by the Fed that determines the risk-free rate of borrowing.FHLBFederal Home Loan Bank.A system of corporations that give lending institutions a liquidity resource to finance hou
232、sing and economic development activities.GSIBsGlobal systemically important banks.Banks whose failure could pose a threat to the international financial system,as determined by the Basel Committee on Banking Supervision,a group of international bank supervisors.HQLAHigh-quality liquid assets.Assets
233、that can be easily and immediately converted into cash at little to no loss in value.HTMHeld to maturity.Securities a bank expects to hold until maturity.LCRLiquidity coverage ratio.Requires banks to hold sufficient HQLA to meet the total net cash outflows over the next 30 calendar days.14Low for Lo
234、ngThe period from the peak of the global financial crisis in 2008 until the rapidly rising inflation in early 2022;this period was marked by consistently low Fed funds rates.M2A measure of the national money supply that includes all M1(currency and coins held by non-bank public,checkable deposits,an
235、d travelers checks)plus savings deposits,including money market deposit accounts,time deposits under$100,000,and shares in retail money market mutual funds.15MBSMortgage-backed securities.A securitized pool of mortgage loans.13 Federal Reserve Bank of New York,“Commercial Paper Funding Facility,”Fed
236、eral Reserve Bank of New York,accessed October 2023.14 Bank for International Settlements,“Liquidity Coverage Ratio(LCR)Executive Summary,”accessed October 2023.15 Federal Reserve Bank of St.Louis,“M2 Monetary Aggregate,”Federal Reserve Bank of St.Louis,accessed October 2023.Oliver Wyman36The New Mo
237、netary Order|US PerspectivesMoney market fundsMutual funds that invest in short-term,higher quality securities.Monetary policyFed decisions surrounding the Fed funds rate and the size of the Fed balance sheet.NBFIsNon-Banking Financial Iprising government-sponsored enterprises,governments,liability-
238、driven companies,non-financial businesses,households,nonprofits,and other types of funds and companies.See Exhibit 11 for more information.New Monetary OrderThe period after Low for Long,beginning in 2022,characterized by central bank actions to combat inflation,primarily by rapidly raising interest
239、 rates and shrinking balance sheets.NIMNet interest margin.A banks net interest revenue as a share of the average value of its interest-earning assets.NSFRNet stable funding ratio.Requires banks to have more available stable funding than required stable funding,where stable funding is capital and li
240、abilities that will remain with the institution for more than one year.16Private debtDebt financing provided to companies from funds,rather than banks or capital markets.Private sector creditCredit provided to private sector(that is,non-governmental)borrowers,including borrowing from banks and non-b
241、anks.QEQuantitative easing.When central banks purchase assets in order to expand their balance sheet size.QTQuantitative tightening.When central banks sell off assets in order to reduce the size of their balance sheet.Regional banksBanks which were formerly regional but now have grown in size to be
242、greater than$50 billion in assets as of YE 2021 and may have a national footprint.Along with other institutional or specialized banks,these banks make up the large non-GSIBs category.REITReal estate investment trust.An entity that invests in and manages a portfolio of real estate holdings.ROEReturn
243、on equity.The value of a companys(in our case,a banks)profits divided by the equity invested in the company.TAFTerm Auction Facility.Set up during the global financial crisis,the TAF helped the Fed meet the demands of term funding directly,providing liquidity in the market.17The Great ModerationFrom
244、 the mid-1980s to 2007,a period of macroeconomic stability,with low and stable inflation and consistent economic growth.18Too big to failThe idea that certain banks cannot be allowed to fail because they are so large that their failure would cause instability in the global economy.16 Bank for Intern
245、ational Settlements,“Net Stable Funding Ratio(NSFR)Executive Summary,”accessed October 2023.17 Board of Governors of the Federal Reserve System,“Term Auction facility(TAF),”Board of Governors of the Federal Reserve System,accessed October 2023.18 Craig S.Hakkio,“The Great Moderation,”Federal Reserve
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252、es even if advised of the possibility of such damages.The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities.This report may not be sold without the written consent ofOliver Wyman.AUTHORSDouglas ElliottPartnerUmit KayaPartnerCONTRIBUTORSTed MoynihanGlobal Head of Financial ServicesHannah VazquezPrincipalTil SchuermannPartnerSalman AsafEngagement ManagerOliver Wyman A business of Marsh McLennan