Panel
The Road Ahead in Finance: Regulation, Disruption and Human Capital
Milken InstituteTimothy O'Hara, Emanuel Friedman, Paul Hamill, Timothy Massad, Stephen Schwarzman, Darryl White, Tim O'Hara, Steve Schwarzman, Tim Massad, Manny Friedman
- Regulatory frameworks are expected to undergo constant changes and expansion for six to seven years post-crisis, as regulators struggle to keep pace with rapid global market shifts, including volatile commodity prices like iron ore doubling or tripling.
- The CFTC is projected to have completed most basic G20 derivatives reform and Dodd-Frank requirements, leaving only a few pieces such as a final capital rule, while future efforts will focus on international harmonization, fine-tuning rules to target specific risks, and avoiding undue burdens on commercial hedgers.
- Bank regulators have established essential capital, liquidity, and stress test elements, though significant work remains on resolution planning, with the CFTC expected to see other entities fill gaps left by constrained traditional dealers.
- Industry profitability is anticipated to face regulatory drag of approximately 2% beyond the 9% ROE seen in 2015, with global wholesale capital markets revenue currently shrinking at a rate of minus 2% and future growth remaining uncertain for the next one to two years.
- Returns on equity are forecast to remain below pre-crisis highs, with expectations of a range between 13% and 15% against a cost of capital that is 4% to 5% lower, though some foresee a difficult path to reaching 10% or seeing a world where ROE hits 20%.
- A market revolution is underway driven by internet expansion, central clearing, and the CFTC's impartial access standard, which may encourage new entrants and liquidity providers while fixed income markets lag due to incumbent resistance to shifting from older business models to technology-based approaches.
- Distributed ledger technology applications are likely to be delayed regarding the movement of money, with immediate prospects focused on immutable data records and smart contracts, while reporting and information standardization efforts are expected to pave the way for future blockchain innovations.
- Future industry success is predicted to depend on returning to basics such as supremely good client service, adapting to a new reality where technology and regulation dominate, and the belief that firms failing to "figure it out" will eventually exit the market.
- The regulatory environment is creating non-business opportunities for firms to acquire fine businesses with no risk, though excessive rule pyramiding is anticipated to interfere with normal economic activity and harm society, potentially limiting the U.S. economy to 2% growth which is viewed as below potential.
- The industry faces an intense war for talent against Silicon Valley firms and non-finance roles, exacerbated by a deep interest gap where 51% of people aged 18 to 29 oppose capitalism, leading to perceptions of finance professionals as "wolves" and necessitating overinvestment in human capital relative to regulation and technology.
- Attracting top talent requires clear cultural leadership, with values needing to be communicated constantly rather than annually, younger employees needing to be made aware of severe consequences like jail time for misconduct, and firms needing to demonstrate a "North Star" of revolutionizing markets to compete with tech sector allure.
- Corporate culture and values can be effectively imposed in smaller firms but are described as extremely difficult to enforce in larger organizations, with the long-term industry winner expected to be the firm that successfully attracts the brightest and best personnel.