“Globally banks are set to take a large financial hit from the COVID-19 crisis, both in credit losses and in several years’ worth of weaker earnings that are expected to follow. After a decade of strengthening balance sheets, however, the industry looks sufficiently robust to sustain the economic shock and expected credit losses.

Banks have worked hard to maintain their operations and to support their customers during the lockdowns thus far, and they are partnering with governments to protect the economy. Some goodwill, in short supply for years, is being replenished.

We therefore look at whether this is a moment that could bring about more far-reaching and much needed changes to the industry.

The universal bank model – with retail and commercial banking, a transaction bank network, and capital markets presence – will be sustainable only for a handful of players. Beyond this small number of banks, more creative participation decisions will be needed.

The biggest mistake we can make is to go back to our former business model; what I have learnt is we can do the same (or even more) with much less – CEO of a Leading Global Bank

The shock of operating through the lockdown and sense of change now provides a window to “build back better.” We see banks already building on what were emergency changes, including around customer engagement, applying new “minimum thinking” to the operating model, accelerating digitalization efforts to meet specific customer needs and back-office efficiencies, growing awareness of resilience and cyber risks, and taking new approaches to fraud and broader operational risks.

Banks on their own will not deliver the banking system needs. This will take collective endeavor: from management and shareholders, but also employee groups, regulators, and policymakers. Individual bank transformation programs will not be successful without broad stakeholder support, and broader reforms are also necessary outside of individual institutions.

The Banking System needed is:

Source: Oliver & Wyman Research

Banks would fast-track transformation plans to drive greater efficiency and consolidation and set out an ambitious role in the social and environmental challenges of the next 20 to 30 years. Policymakers would engage with institutions to agree on any transition period required, create a more efficient, regulatory system eliminating costly overlaps and automating compliance, and ensure proportionality of oversight based on riskiness of activities. Work on integrating banking and capital markets would move forward at far greater speed with committed milestones.

Making this will take leadership from the highest levels to overcome the inertia inevitable in countries with more than required banking institutions, national regulators, regulators, central banks, and fragmented political responsibility.