The UK's Independent Commission on Banking gives proposals for how banks should ring-fence their businesses, but they have left some room for manoeuvre, and banks must take advantage of this by developing new strategies and looking at different ways to maintain a competitive edge.
The proposals by the UK's Independent Commission on Banking are likely to change investment banks’ business models in the country fundamentally. The biggest effect could be to increase their funding costs, which might force more UK companies to turn to bonds instead of loans. But plenty of questions remain unanswered.
From sovereign debt woes to political brinkmanship and the swathe of new regulations hitting banks, the events of 2011 have reverberated across markets and around the world. There have been a few bright spots, not least the growing confidence of local currency debt markets, but overall it has been a gloomy year. Most believe the fate of 2012 lies in the hands of European policy-makers.
The practical, regulatory, technical and operating considerations involved in setting up a ring-fence for retail operations in light of the UK's Independent Commission on Banking's recommendations are so numerous that banks must start making decisions now if they are to meet the 2019 deadline.
Amid calls for greater reporting transparency and more engagement with the lower end of the economic pyramid, Islamic finance is experiencing a revival. But for sharia-compliant institutions to take advantage of the trends emerging in the marketplace, several key events need to take place.
Confidence in the sovereign linker market has been shaken following the credit downgrade of Greece. Demand has soared on AAA rated bonds, but with demand vastly outweighing supply in this sector, investors are turning to the corporate market and direct infrastructure for protection against inflation.
Several emerging markets with large Muslim populations combine low bank penetration and a high return on assets with a relatively small market share for Islamic banking, and thus provide further opportunities for growth in the Islamic finance sector.
The most significant industry trend to date this year has been the resurgence of the Islamic bond (sukuk) market. After a brief setback in 2010, funds raised through global sukuk issues in 2011 stood at $44.7bn in September. But sukuk issuance is still dominated by sovereigns from Asian and Gulf markets and remains concentrated in certain sectors. Four industry experts look at what needs to be done to encourage participation from corporates and facilitate issuances in a wider range of currencies.
With no single interpretation of Islamic law, differences in rulings between scholars over whether products are sharia-compliant has led to a lack of standardisation in the industry. Resolving this issue is key to bringing about greater efficiency, transparency and cohesion – ultimately helping to raise the curtain for more Islamic business, says AAOIFI deputy secretary general Khairul Nizam.
Junk bonds have suffered badly since the start of June, with investors being quick to sell off what is one of the riskiest fixed-income asset classes. But bankers point to the market’s underlying strengths and insist it will only get bigger in the long term.