When thinking about 2023, it is important to address the elephant(s) in the room: continued economic uncertainty, rising interest rates and a potential for recession. What does all of this mean for the banking sector, and what can banks do as they strategically plan for the year ahead? We sat down with Peter Torrente, KPMG U.S. National Sector Leader for Banking and Capital Markets, to get his insights on areas he says are top-of-mind for clients.
Question: Over the past few months, macro-economic developments and the prospects for a recession have consistently driven headlines. What could a potential downturn mean for the banking system?
Peter Torrente: There’s no denying economic uncertainty is top of mind for banking leaders. Data from our 2022 KPMG U.S. CEO Outlook Survey showed that 74% of banking respondents believe a recession would cause further disruption to their business, making it difficult to rebound from the pandemic. An additional 85% believe that there will be a recession in the next 12 months, and 59% think it will be mild and short.
Banking executives are clearly aware of the economic challenges facing the global and domestic economy and have to balance short-term headwinds against their longer-term objectives. One example of note that our survey brought to light is a stark dichotomy in how banking executives are presently thinking about talent: While 49% of banking CEOs are considering workforce reductions over the next six months in preparation for a potential recession, the other side of that coin is 86% expect their organization's headcount to increase over the next three years – which is consistent with banking CEO’s optimistic view of growth for that time period.
Additional macro-economic developments over the course of 2023, from the impact of a surge in consumer household debt to a potential uptick in unemployment, should be viewed in a similar vein: Banks who combat economic uncertainty with resiliency and an eye towards the long game will be best positioned for a potential downturn. Investments in people, technology and monetary infrastructure lay the foundation for years to come.
Question: Investments in innovation such as crypto infrastructure and the metaverse have gained steam. Do you foresee the landscape changing as we head into 2023?
Peter Torrente: We continue to see our clients invest in digitization, which will ultimately set up a foundation for the digital-forward future. In fact, in the same survey, banking respondents identified advancing digitization and connectivity across the business as their top operational priority to achieve their growth objectives over the next three years. I see this playing out in two main areas in 2023: payments and the metaverse.
In my lifetime, the pace of change in the payments space is unprecedented and points to new ways of doing things in an increasingly digital world. Big banks are undergoing payments platform modernization, including with payment hubs and payment platforms across electronic fund transfers via the Automated Clearing House (ACH) network, wire and real-time payments. Some social media platforms are even alluding to establishing their own platforms for payments in the future.
Shifting to the metaverse: Banks, like all sectors, are continuing to analyze how much capital they want to invest in the metaverse given its infancy. With macro-economic developments evolving rapidly, this may be a space where banks hit the pause button and reconsider as the technology advances and has more use cases for banking consumers.
Question: On the legislative side, what does a divided congress mean for regulation in the banking space?
Peter Torrente: It’s important to remember that despite changes on Capitol Hill, regulatory agency leadership remains, and regulators are relentlessly pursuing what they perceive to be ‘weak links’ within risk programs and coverage. Regulatory agencies in 2023 will likely continue executing against their broad and ambitious agendas, particularly on things like ESG, climate related and human capital discourses, crypto, and the EPA and jurisdictional authority. We are seeing regulators continue to drive consistency in what's being disclosed and how it's being disclosed.
I would be remiss if I didn’t mention crypto. In recent weeks, we’ve seen numerous headlines on the turmoil in the crypto market and the headlines have certainly raised question marks on the long-term viability of crypto. The conversation will not be slowing down in the coming weeks and months as we enter 2023. There may very well be a shift in how banks approach investments for building capabilities to custody digital assets and digital securities. In 2022, we saw traditional custody banks invest in the infrastructure around crypto, but that story remains to be told and will ultimately impact how bank leaders assess the volatility they are seeing in the crypto market.