Journal 39: Cass-Capco Institute Paper Series on Risk

Innovate or adapt? Strategies for the next wave of digital banking. Innovation remains a buzzword in banking. But how realistic are genuinely innovative strategies? In more cautious times since the financial crisis, isn’t it wiser to adapt in an incremental way to new regulation, competition, and customer requirements? We believe both innovation and adaptation are required.

In this issue of the Capco Journal of Financial Transformation, we examine strategies open to banks in the next wave of post-crisis banking. We believe banks can steer a smart route combining innovation and adaptation in an increasingly industrialized financial environment, and we consider the implications for large financial institutions, corporates, and consumers.

We look at this from a number of perspectives. Firstly, Ogunc’s article discusses exactly how strategic flexibility can be a key component of growth. It’s a controversial approach, but one that definitely merits the reader’s attention.

Next, Brüner and Fischer examine how the collateralization process can be tailored to the buy side and custodians. This would open up the use of collateral guarantees to a wider market, thus improving the liquidity landscape in this liquidity strained era.

Omarini also presents us with a provocative piece where she suggests that regulators should also examine the corporate strategy and business model of institutions – not just measure market, credit, and liquidity risk.

But how do institutions adapt their strategies in a market where the barriers to entry are falling? In his article, De Munck explains how important it is for banks to take this course taking into account the rapid ascent of peer-to-peer and online direct lending models.

Of course shrinking barriers to entry are driven by digital finance and technology, among other factors. This leads us to the article by Gray and Disend, who provide a comprehensive overview of digital industrialization. This fast moving trend in financial services cannot be ignored in any sensible business strategy.

Knowledge management (KM) also plays a role here. Danese-Perrin describes how KM is a key component in the life of a healthy firm, especially large financial institutions. Knowledge management is vital because it increases a firm’s awareness of its own abilities, empowering employees with a variety of solutions that would not otherwise be available.

Finally, our technical section for this issue also covers the strategic question. Making strategic adaptive decisions involves forecasts of market key drivers. Sum’s article examines the relative importance of movements in price-to-earnings ratio, dividend yield, and aggregate Tobin’s q ratio in forecasting returns on the S&P 500.

Last but not least, Ruiz presents us with a discussion on wrong way risk in the context of valuation of counterparty credit risk. Banks have been updating their strategy for valuation, hedging, measurement, and capital related to counterparty credit risk. Ruiz’s timely contribution explains wrong way risk in lay terms and calls attention to this often neglected topic.

We hope you enjoy reading this edition of the Capco Journal of Financial Transformation. We also value your feedback to the articles and encourage submissions for issue 40, scheduled for publication later this year.

Journal Articles