by Mr. Ekmel Çilingir, Chairman of the Supervisory Board at EMBank
The recent years have seen numerous banks, both in Europe and worldwide, restructure strategically to adapt to technology, new regulatory standards as well as economic and geostrategic conditions and market challenges. Before sharing my views with you over some examples of right-sizing efforts, let me examine what the term means, its pros and cons, its challenges and opportunities.
Right-Sizing in Banking
Right-sizing means realigning an organisation’s size and structure in a way that optimises its operation so that it can remain efficiently profitable under new or expected future conditions. It is a strategic move first and foremost: it involves comprehensive assessment, goal setting, planning, and implementation that adjusts the workforce, assets, and operational footprints to better match the current and future needs of a bank.
Downsizing typically occurs due to economic hardship, when a business cuts down its workforce and salary costs as a rapid reaction to reduced profitability, and more often, to losses. Unlike downsizing, right-sizing implies creating a lean, efficient business model proactively, even when it is prompted by larger forces. Leaner doesn’t necessarily mean smaller; the bank may grow through mergers and acquisitions (like regional banks or community banks do) or change its existing entities. It may or may not entail cutting expenses. While downsizing tends to be a one-time event, rightsizing is continuous and can take months or even years.
Nonetheless, a leaner organization typically operates with a smaller workforce, or on a new, more tech-savvy skillset. As a result of this nature, right-sizing often entails layoffs and risks the problems that comes with it.
Advantages & Setbacks of Right-Sizing:
There are prizes for a bank to not go on with business as usual but to pivot in this manner:
- Increased Efficiency: By trimming excess operations and focussing on core profitable areas, right-sizing helps institutions achieve higher efficiency. It not only loses dead weight but makes the bank more nimble for its future growth.
- Easier Regulatory Compliance: Right-sizing helps banks meet capital and liquidity requirements more easily, especially when new regulations come in demanding greater prudence.
- Better Risk Management: A streamlined structure allows banks to focus on areas where they have competitive advantages and/or are less exposed to volatile risks.
Some setbacks may undermine the resizing effort to a great extent, so must be addressed:
- Low Employee Morale: Reducing the workforce or closing/merging branches leads to reduced employee morale and loyalty, potentially affecting short-term performance.
- Negative Market Perception: Right-sizing might be perceived as a sign of weakness, denting a financial institution’s reputation or raising concerns among investors and clients. This worry is not to be dismissed. It’s why restructurings were avoided in the past even when market conditions called for it to the later detriment of many.
- Disruption of Services: For customers, right-sizing might result in reduced access to services, especially in smaller or rural markets where branch closures have a more significant impact on society. The bank might end up with unserviced, upset customers.
Challenges and Opportunities in Right-Sizing:
- Navigating Regulations: Banks must navigate increasingly complex and fragmented regulatory environments that are not uniform across different countries/regions.
- Balancing Short-term Costs with Long-term Gains: The initial costs of restructuring can be high, and achieving long-term savings and more efficiency may take time.
- Digital Transformation: Right-sizing often goes hand in hand with a stronger focus on digital channels, which enhance customer experience and reduce costs. In my view, not only channels but also core system renovations underway across EU banks require strategic decisions in which bank size must come into play. Digitalisation as part of right-sizing may bring new sources of income fast to banks, which would not only soften the impact of the big costs but also let the new, right-sized bank compete at another level in the new tech era.
Regulators focus more on banks’ technological platform providers nowadays, with new rules for operational resilience and cloud services vendors. Governments are concerned about big IT suppliers of the financial industry due to the ever-increasing risks of failure to the financial system because of higher concentration. Closer attention is paid to AI concerns as well. This may be good news in part for banks: when their vendors compete better, it would likely benefit banks with better products and deals.
- Sustainability Focus: Meanwhile, EU regulatory changes are also pushing banks towards incorporating environmental, social, and governance (ESG) into their operations, creating opportunities to align right-sizing with broader sustainability goals. Deglobalisation is also playing out in ESG. Regions are diverging in their prioritisation of the climate; this is a political choice that affects EU banks and companies alike. Generating sustainable, profitable growth in the EU economy will only be possible if its banks are properly incentivised and equipped to fund the type of growth EU bodies state they’d like to promote.
Right-Sizing Efforts in the Past
We cannot tell yet which right-sizing efforts in 2024 will emerge successful, but we can look to good balancing acts for a common thread. Two significant, dramatic cases come to mind:
Bank of America: After the 2008 crisis, its initial restructuring in 2008-2013 involved significant layoffs and asset divestitures. The bank sold off non-core units, such as its stake in China Construction Bank and the Merrill Lynch investment management business. It aggressively reduced its retail operation, closing 1,600 branches in a decade, and shifted towards digital banking. It laid off nearly 40,000 employees, reducing its headcount for a new business environment. It spent billions on settlements related to mortgage-backed securities and litigation costs, as well as the costs of operational reorganisation.
- Despite these heavy costs, Bank of America’s restructuring efforts paid off in the long run. By 2021, the bank’s share price had rebounded significantly, from as low as $2.53 in 2009 to over $40 by 2021.
- The bank improved its efficiency. Operating costs declined as it focused more on core financial services, reduced its risk, and embraced digital banking.
HSBC: HSBC started a cost-cutting program in 2011 that realigned on high-growth markets and reduced its exposure to underperforming regions. Their long-term approach ultimately paid off with higher profitability and market share. It goes on to this day.
HSBC announced a plan to cut 30,000 jobs globally by 2013, particularly in Europe and the US, while expanding its operations in Asia. The bank exited more than 20 markets and closed around 120 branches in the US in 9 years, with further closures announced for 2020-2023. It focused on its core, profitable businesses, reduced reliance on branches, and built digital channels. This effort was costly. The bank set aside USD 4.5 billion for restructuring in 2020-2022 alone, covering severance pay, technology investments, and branch closures.
- HSBC’s long-term focus on reigning in costs while expanding into Asia led to greater profitability. By 2021, the bank’s return on tangible equity had risen significantly.
- HSBC’s market share in Asia has grown as the bank has concentrated its resources on that region. By 2023, Asia accounted for around 50% of the bank’s total revenue, solidifying its strategic pivot.
What we see common in the examples that succeeded before are:
- Strategic Focus: Successful rightsizing requires a clear strategic focus, aligning operations and resources with long-term goals. We must set our sights on the future.
- Investment in Technology: Key driver of efficiency and cost savings in the long run
- Customer-centric Approach: It is even more essential during restructuring efforts.
- Gradual Implementation: Helps mitigate short-term disruptions and ensures a smooth transition. Moving ahead of time is important for doing it right.
- Effective Communication: Open and transparent communication with employees, customers, and stakeholders is crucial for building trust and support.
Right-Sizing of EU Banks:
Thankfully, European banks have started from a point of strength with improved profitability in 2023 as the new regulations push them to examine their operating models and right size.
- Deutsche Bank announced it continued streamlining of operations. The German banking giant is scaling back its operations in underperforming, “non-core” markets while focussing on core business segments, particularly investment banking and high-margin areas, in response to the stricter capital and liquidity requirements imposed by CRD6 in Europe.
- Similarly, BNP Paribas has recalibrated its international operations to align with stricter capital requirements, especially in corporate banking and high-risk lending sectors. After its €16.3 billion sale of US-based Bank of the West, it may continue investing, like its 2024 deal to take over Orange Bank SA’s customer portfolios in France and Spain.
- The Spanish multinational bank Santander, a significant player in Europe, has started restructuring its operations by reducing branch networks in non-core regions while increasing its investments in digital banking. The bank is restructuring to reduce operational risks and enhance compliance with new CRD6 capital buffers.
- Smaller regional banks across Europe, such as Banco BPM in Italy, are merging branches, scaling back their loan portfolios, and reducing non-core operations to better meet CRD6’s stringent capital adequacy requirements. Banco BPM has merged operations with other local banks, aiming to improve capital reserves and streamline services.
- After its acquisition by UBS, Credit Suisse is undergoing significant restructuring. UBS is integrating its assets, cutting down on redundancies, and focussing on maintaining regulatory compliance while managing the combined bank’s risk profile.
The case shows us that banks are much more vulnerable to bank runs in the age of social media and 24-hour electronic account access, which means that once a run begins, a bank’s ability to fulfil withdrawals is judged in hours rather than weeks. The sobering fact is that when Credit Suisse was resolved, it was meeting both solvency and liquidity needs. It is a lesson that right-sizing strategically and making structural changes ahead of time is the preferred protection of the bank’s viability, even when external checks are in place.
Non-EU Banks Operating in the European Union
There is a significant regulatory update on the scene for non-EU banks operating or planning to operate in the EU regarding cross-border banking. CRR3 and CRD6 proposals have been published in the Official Journal on June 19th, 2024, and entered into force as of July 9, 2024. Article 21c, a key provision of CRD6, means “no-cross-border services from non-EU banks to EU clients,” directing global institutions to examine their EU footprint and either consolidate their European business into one European entity or subsidise in a “right-sized” manner. In essence, it signals a serious shift in the EU’s approach to cross-border banking. This is the factor that triggered restructurings.
Key Points of Article 21c are:
- Cross-Border Core Banking Restriction: Starting from November 2026, non-EU banks will generally be prohibited from providing core banking services like lending and deposit-taking to EU-based clients on a cross-border basis.
- Exemptions: Certain exemptions apply, including for interbank and intragroup activities, as well as for business resulting from client “reverse solicitation” (where the client initiates the contact).
- Third-Country Branches (TCBs): New and existing TCBs will face stricter authorisation requirements, including on capital, liquidity, risk management, and governance.
- TCB Subsidiarization: Some TCBs may be required to restructure, hold additional capital, or even subsidiaries to address supervisory concerns.
In response to CRD6, several non-EU financial institutions, particularly from the US, UK, and Asia, have begun restructuring their European operations to comply.
- US-based financial institutions like JPMorgan and Goldman Sachs are evaluating their European strategies. These banks have historically relied on cross-border services to reach EU clients but are now planning to operate in fewer, more robust branches or subsidiaries within the EU. JPMorgan has been building up its EU-based subsidiaries, particularly in Frankfurt and Paris, to continue serving its European clients post-2026.
- UK banks, such as HSBC and Barclays, which have significant operations in the EU, are also preparing for a “right-sizing” of their European footprints. Barclays has been focussing on its Dublin subsidiary, while HSBC has been gradually relocating resources to Paris. HSBC goes on with its multi-year plan of reducing its presence in Western markets and shifting resources to Asia although it’s still Europe’s biggest bank at the end of 2023.
- In Asia, banks such as Standard Chartered and MUFG (Mitsubishi UFJ Financial Group) are engaged in restructuring efforts. These institutions are consolidating their European branches to better comply with the new EU rules and avoid disruptions of services to their EU clients. MUFG, for example, is bolstering its operations in Amsterdam to align with the new regulatory landscape. Standard Chartered is restructuring to focus more on emerging markets while cutting down its European and US operations, aligning itself with regulatory and market demands that favour more efficient and regionally focused operations.
Conclusion
Growth has been lagging in the EU area since 2008. The financial sector remains the key enabler of growth. Banks remain at the heart of the financial system, which can fuel productivity, encourage innovation, and serve market unification in the EU.
As of 2024, right-sizing efforts should be closely linked not only to regulatory pressures but more prominently, to a lasting quest for productivity and profitability. There is a more urgent need now for banks to optimise operational efficiency amid economic headwinds, rising interest rates, and inflation. Seismic shifts in technology are leading to changing expectations from customers, as well as new opportunities to modernise banking systems and software.
The financial institutions that will not bet on deferrals or scramble for ad-hoc solutions may rise proactively to the challenge, “right-size” their operations, and remain compliant while minimising disruptions to their business models and client services.
Resources for this article:
https://blogs.pwc.de/en/regulatory/article/243865/eu-publishes-crr3-and-crd6-in-official-journal/
https://www.deloitte.com/uk/en/Industries/financial-services/blogs/crd-is-now-final.html
https://practiceguides.chambers.com/practice-guides/banking-regulation-2024
