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    Deloitte Center or Financial Services

    Banking and Securities Outlook 2012A year of resolution and revolution

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    1 Rappaport, Liz, and Fitzpatrick, Dan, Pain Spreads to Biggest Banks, The Wall Street Journal, October 19, 2011,http://online.wsj.com/article/SB10001424052970204479504576638653920110530.html

    2 Table 1, S&P/Case-Shiller Home Price Indices, S&P/Case-Shiller Home Price Indices 2010, A Year In Review,http://www.standardandpoors.com/ servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+ lename%3DSPCaseShillerYearinReview_Jan2011.pd &blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpd &blobkey=id&blobheadername1=content-type&blobwhere=1243833778031&blobheadervalue3=UTF-8

    A year of resolutionand revolution

    Banking and Securities Outlook 2012 A year o resolution and revolution 1

    In the words o The Wall Street Journal , the U.S. bankingand securities industry aces a grim new realitycharacterized by slow economic growth that tampsdown loan demand, low interest rates that pressureinvestment returns, volatile markets that inhibit risk-takingand tighter regulation that adds to bulging costs not tomention a rising wave o populist, anti-bank sentiment.1

    Numbers help tell the story:

    From the second quarter of 2010 to the third quarter of2011, credit de ault swap spreads (Figure 1), whichrepresent the annualized cost or protection againstissuer de ault, increased rom three to ve times orsovereign debt issued by the so-called PIIGS Portugal, Ireland, Italy, Greece, and Spain refectingthe di cult economic picture in Europe.

    Back in the United States, the Standard & Poor's (S&P)/ Case-Shiller National U.S. Home Price Index (Figure 2),which tracks the value o single- amily housing,

    plummeted by nearly one-third, rom its peak in thesecond quarter of 2006 to its trough in the rst quartero 2009, and remains well below its historical high.2

    Figure 1: CDS - PIIGS vs. German 10-year yield spread

    Basis points

    May-100

    500

    1000

    1500

    2000

    2500

    Spain ItalyIreland PortugalGreece

    Aug-10 Nov-10 Jan-11 Apr-11 Jul-11 Oct-11

    Source: Bloomberg

    Figure 2: S&P Case-Shiller index for U.S. home price values

    207

    141 139

    Jul-11Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-09 Jan-09 Jan-10

    Source: Standard & Poors

    100

    150

    200

    250

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    3 The Bureau o Labor Statistics de nes underemployment as unemployed people who are looking or work, unemployed people who havestopped looking or work, and part-time workers who would like to be employed ull-time. http://data.bls.gov/cgi-bin srgate

    4 Ibid5 Table 15.6Total Government Surpluses or De cits (-) in Absolute Amounts and as Percentages o GDP: 19482010, The White House O ce

    o Management and Budget, http://www.whitehouse.gov/omb/budget/Historicals

    2

    In addition, as 2011 was drawing to a close, bothunemployment 3 and under-employment remained abovehistorical norms (Figure 3).4

    Perhaps most telling, the U.S. federal de cit (Figure jumped rom $290 billion in 2007 to $1,490 trillion in2010 an extraordinary change in a relatively shortperiod o time.5

    As the U.S. banking and securities industry looks ahead to2012, it aces a number o challenges that these macroissues will likely infuence, either directly or indirectly, inthe months ahead. These challenges include:

    Managing fallout from the European sovereign debt cri Finding ways to grow pro ts and contain costs in a w

    economy Coping with political gridlock and the 2012 election c Adapting to a new era of regulatory evolution Understanding social activism

    Some o these challenges, such as the European sovereigndebt crisis and U.S. political gridlock, may move closer toresolution in the coming months; at the same time, a newwave o social activism, led by such e orts as Occupy WalStreet and Bank Trans er Day, may signal the beginning oa revolution o sorts as consumers use social mediachannels to respond to government and business.

    Resolution and revolution the year 2012 will likelyhave a little o both or the banking and securities industry.

    Figure 3: U.S. unemployment and under-employment rates

    Percent

    Jan-06

    7.9%

    4.4%

    10.1% 8.6%

    17.4%15.6%

    Apr-07 Oct-07 Oct-08 Jan-10 Jan-10 Oct-11

    Source: Bureau of Labor Statistics

    0

    5

    10

    15

    20

    Under-employment Unemployment

    1990

    .24

    - 1.65

    1996 20162000 2006 2010

    Figure 4: U.S. federal budget decit/surplus

    USD trillionEstimate

    Source: White House Ofce of Management and Budget

    -2.0

    -1.5

    -1.0

    -0.5

    0.0

    0.5

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    The outlook or mergers and acquisitions (M&A) in banking

    Although the number of bank and thrift mergers and acquisitions has beendeclining since 2007, there could be more activity in 2012 i economic conditionsremain stable and especially i they improve.

    Divestitures and acquisitions may gently accelerate amid fallout from the Eurozonenvironment, regulatory concerns, and economic pressures.

    Large banks particularly those that are above or near the 10 percent depositcap may look to expand abroad. The emerging markets in Asia, wi th their largeand growing middle classes, stand out among the most attractive markets.

    Regional banks may be able to increase their domestic footprint as smaller banksopt to be acquired, rather than cope with additional and more costly regulatoryburdens.

    Figure 5: U.S. banks and thrifts M&A activity

    1990 2010

    153107.5%

    20001995 2005

    Number of deals and averageprice/tangible book (%) Total deal value ($M)

    Source: SNL Financial,http://www.snl.com/InteractiveX/article.aspx?CDID=A-12260286-13360&KPLT=2

    Data as of Nov 13, 2011. Only includes deals where the target is based in the U.S.Reects data at deal announcement event. Terminated deals are included. Excludesgovt. assisted deals.

    100

    200

    300

    400

    500

    600

    0

    50,000

    100,000

    150,000

    200,000

    250,000

    300,000

    Average price/tangible book (%)Total deal value ($M)

    Number of deals

    Banking and Securities Outlook 2012 A year o resolution and revolution 3

    Managing allout rom the European sovereigndebt crisisHeadwinds rom the European sovereign debt crisis arelikely to continue to bu et the U.S. banking and securitiesindustry in 2012. The problems that Greece, Italy, and othermembers o the Eurozone are experiencing took a long timeto develop and will likely take a long time to resolve.

    Looking ahead, U.S. banks can be expected to take severalsteps to mitigate problems rom the Eurozone crisis. Thesesteps may include:

    Conducting more frequent stress tests to assess capitallevels. This likely means thinking beyond credit risk to anequal weighting of operational, market, and liquidity risks.

    Raising capital: For many banks, the ef cient use andallocation o capital will likely be a priority.

    Planning for a loss of con dence by limitingcounterparty exposures.

    Scenario planning: Focusing on accessibility of globalliquidity facility issues.

    For some o the larger U.S. banks, weakness in Europemay present opportunities or expansion throughgovernment-assisted acquisitions of European nancialinstitutions. This path might be attractive or some o thelarger U.S. banks that are above or near the 10 percentdomestic deposit cap as de ned by the 1994 Riegle-NealInterstate Banking and Branching E ciency Act.

    Finding ways to grow profts and contain costs in aweak economyGrowing pro ts and containing costs usually rank high oncorporate agendas in good times; in 2012, they are likelyto be at the center o managements bullseye.

    The backlog o loan modi cations and oreclosures willlikely continue to dampen economic recovery as it worksits way through the banking system. Moreover, manyeconomists agree that consumer spending is unlikely torecover until more o the unemployed and underemployed

    nd ull-time work.

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    6 "The Next Decade in Global Wealth Among Millionaire Households, Deloitte Center or Financial Services, May 2011,http://www.deloitte.com/us/globalwealth .

    4

    The problems with the U.S. housing market are leadingmany banks to consider structural changes to theirbusiness models and seek alternative sources o income.These may include:

    Upgrading fee schedules, which will likely need to beaccompanied by an extensive and ongoing e ort toeducate the public on the need or such service charges.

    The days o imposing ees by at are gone.

    Placing a renewed emphasis on wealth-managementservices, especially in emerging markets, where wealthcontrolled by so-called millionaire households in 25 othe largest global economies are orecast to grow rom$92 trillion in 2011 to $202 trillion in 2020. 6

    Using analytics to assess customer and channelpro tability and identi y more targeted cross-sellingopportunities. Banks could learn a lot rom onlineretailers, many o whom suggest complementaryproducts based upon customer purchasing history

    rather than o ering customers generic products.

    In addition to seeking out new sources o income, banksmay also need to continue to identi y opportunities tocontain costs throughout their global and domesticorganizations.

    Thanks in part to the recent economic environment, thereis no more low-hanging ruit or cost cutting.Underper orming people and businesses are already gone.Retooling e orts will likely be structural and may call ornear-term investments to achieve long-term cost savings.

    Branch networks could be prime targets or costreduction, as the Internet and mobile banking channelsgrow in popularity and Generation Y becomes a greater

    actor in the marketplace.

    Additionally, more banks likely will need to considero shoring as a generational strategy to move beyondtodays e ciency needs and think strategically aboutwhere they locate resources or the uture.

    Coping with political gridlock and the 2012election cycleWhat can be said about the U.S. political landscape in

    2012 that was not already said in 2011?

    The political stalemate surrounding U.S. debt-ceilingnegotiations in August 2011, and the subsequent failurethe Joint Select Committee on De cit Reduction (a.k.a. theCongressional Supercommittee comprising sixDemocrats and six Republicans) to identi y ways to reducethe U.S. debt by $1.2 trillion by Thanksgiving 2011, didlittle to remove uncertainty rom the marketplace.

    With the political climate unlikely to change in Washington,D.C., the banking and securities industry can expect more othe same in 2012. And that will likely be compounded by

    the exigencies o a presidential election year.

    With so much ocus on creating jobs, it is unlikely thatederal leaders will address the issues acing the housing

    market, including the uture role o government-sponsoredentities in the housing industry, until a ter the elections.

    Meanwhile, banking and securities executives can beexpected to continue to talk to their Congressionalrepresentatives, both directly and through industry tradeassociations, to encourage them to work more cooperativelywith members o the opposing party or the bene t o boththe country and the nancial services industry.

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    7 Brush, Silla, "Volcker Rule Will Cos t Banks $1 Billion, U.S. Government Says," Bloomberg News, Oct 28, 2011,http://www.bloomberg.com/news/2011-10-28/volcker-rule-to-cost-banks-1b-u-s-government.html#

    Banking and Securities Outlook 2012 A year o resolution and revolution 5

    Adapting to a new era o regulatory evolutionThe last ew years have ushered in a new era o nancialservices regulation, led prominently by the Dodd-FrankWall Street Re orm and Consumer Protection Act(Dodd-Frank) and Basel III, the global regulatory standardson bank capital adequacy and liquidity agreed upon by themembers o the Basel Committee on Banking Supervision.

    Although no new major nancial services legislation isanticipated in 2012 (it is, a ter all, a presidential electionyear), the banking and securities industry likely will be

    ocused on implementing many o the undamentalprovisions o Dodd-Frank:

    Volcker Rule: Several years ago, ormer Federal ReserveBoard Chairman Paul Volcker issued a three-page proposalto reign in proprietary trading by banks and securities

    rms. That modest proposal became part o Dodd-Frankand resulted in nearly 300 pages o proposed guidanceand questions. With the July 21 effective date looming,

    nancial institutions should assess the potential impact o

    the Volcker Rule, have the ability to implement a tieredprogrammatic compliance regime, and look at theirquantitative metrics. It is estimated that the Volcker Rulemay wind up costing the industry more than $1 billion orcompliance, in rastructure, and capital.7

    Living wills: Many o the largest banking entities have beenspending signi cant time and resources developing plans tomeet Dodd-Franks requirement for living wills blueprintsthat ederal regulators can use or recovery or resolution.Some observers believe that the requirement to produceliving wills may be something o a Trojan Horse thatgives regulators access to companies innermost plans anddata. The rst living wills are due July 1, 2012.

    Consumer Financial Protection Bureau (CFPB): This newagency, which opened its doors on the rst anniversary othe enactment o Dodd-Frank, is expected to become amajor orce in nancial regulation in 2012. CFPB examinerswill take the lead on many consumer issues, and the

    agency is expected to revamp many o the disclosures thatbanks and securities rms use daily.

    O fce o Financial Research (OFR): Another new ederalagency, the O ce o Financial Research, has been taskedwith the responsibility o collecting and analyzing manybillions o bytes o nancial in ormation rom the bankingand securities industry. To comply with these burgeoning

    requests, nancial institutions may need to considerupgrading their core in rastructure to meet the OFRsdemands or greater volumes and types o data.

    Understanding social activismThe revolution in 2012 is likely to come via socialactivism, as consumers employ social media channels toorganize and promote points o view against two o thelarger institutions in li e government and big business.

    Businesses in general, and the banking and securitiesindustry speci cally, likely need to pay attention to socialactivists. While the messages such groups o er may

    appear ragmented, they have begun to resonate. Thequestion remains, how should banks respond when, forexample, large numbers o people protest against ees ormove their accounts across the street to another nancialservices provider?

    Banks cant be expected to provide their services or ree,nor can they be expected to orgive all debt whenborrowers nd that they cant repay what they owe. Theissue is thorny, to say the least, but it likely will require acombination o communication, education, and patienceto help people understand why certain ees are necessaryand why loans must be repaid.

    In 2012, the banking and securities industry can take astep toward bridging the gap that emerged betweencertain consumers and certain businesses in 2011 byendeavoring to comprehend the concerns that are makingheadlines around the world.

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    As used in this document, Deloitte means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/ us/about or a detailed description o the legal structure o Deloitte LLP and its subsidiaries. Certain servicesmay not be available to attest clients under the rules and regulations o public accounting.

    6

    Revolution, resolutionevolution?In developing an outlook, one needs to remember an outlook is just that conjectureabout what may lie ahead or an industry. Invariably, those orecasts are wrong the nal

    actor is whether by a little or a lot. The 2012 permutations or the scope o revolutionand resolution in the banking and securities industry are anyones guess.

    Acknowledging that changes to the industry in 2012 are more likely to be evolutionaryrather than revolutionary, Deloitte has committed to provide additional refections on

    these issues in the coming months. As we move into 2012, we plan to continue ouroutlook with more in-depth views on regulatory re orm, growth in the current economicenvironment, technology and data, mergers and acquisitions, and innovation. We look

    orward to sharing them with you.

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    Industry leadershipBob ContriVice ChairU.S. Banking & Securities LeaderDeloitte LLP+1 212 436 [email protected]

    Deloitte Center or Financial ServicesAdam SchneiderExecutive DirectorPrincipalDeloitte Consulting LLP+1 212 436 [email protected]

    Larry AlbinDeborah BaileyForrest DansonLisa DeGrei LauterbachFrances DonaldTrevor GeeMitchell GlassmanJohn Graetz

    Hugh GuylerMichael JamrozBrian JohnstonJe KottkampCarol LarsonKim OlsonJim ReichbachTom Rollauer

    Brian ShnidermanSabeth SiddiqueAlok SinhaKenny SmithMichael ShepardPeter Spenser

    The Center wishes to thank the ollowing Deloitte pro essionals or their contributions to this report:

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    Insights. Research. Connections.

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