The effects of the financial crisis that unfolded between 2007 and 2008 uncovered systemic weaknesses in the global financial and banking system, including excessive lending and risk-taking without the support of adequate capital and liquidity buffers. Regulation and banking supervision have made progress in addressing these systemic flaws, with the aim of making banks more resilient and reducing the impact of bank failure on the economy and tax payers. A report by the Bank of International Settlements (BIS), produced by its Committee on the Global Financial System (CGFS), shows how banks are reacting to the new financial landscape, in which they are more resilient to risks but profitability has fallen below pre-crisis levels. The report – Structural changes in banking after the crisis – highlights some of the trends that are shaping the evolution of the banking sector:

• Changes in banking market capacity and structure: the crisis ended a period of strong growth in banking sector assets in many advanced economies.
• Shifts in bank business models: advanced economy banks have tended to re-orient their business away from trading and more complex activities, towards less capital-intensive activities, including commercial banking.
• Trends in bank performance: bank profitability (return on equity) has declined across countries and business model types from the historically high rates seen before the crisis. At least in part, this reflects lower leverage induced by the regulatory reforms.
• Bank resilience and risk-taking: banks globally have enhanced their resilience to future risks by substantially building up capital and liquidity buffers.
• Market sentiment and future bank profitability: despite a recovery in market- based indicators of investor sentiment towards larger institutions in recent years, equity investors remain sceptical towards some banks with low profitability.
• Banks have become more focused geographically in their international strategy and tend to intermediate more of their international claims locally.
• Direct connections between banks through lending and derivatives exposures have declined.
• Some European banking systems with relatively high capacity have made progress with consolidation.
• Lenders have become more risk-sensitive and more discriminating towards borrowers. In contrast to many advanced economies, bank lending has expanded strongly in EMEs, raising sustainability concerns.