Drift in business models and emerging market risks for the banking sector

Amongst the recent strategic developments in the Belgian banking industry, their ongoing efforts to shift their business model from classical financial intermediation towards fee-based asset management activities, with a clear ESG focus, have witnessed a boost with the advent of the COVID-19 crisis. With such a fast speed of the strategic shift, we might lack the necessary hindsight to ascertain its implication in terms of the associated risks. In this paper, we focus on a classical dimension: market risk. The increasing dependence of bank income on the fluctuations of stock markets creates a significant equity risk, reinforced by the countercyclical behavior of individual investors. Furthermore, the overwhelming shift of flows to sustainable funds and companies might create some unanticipated problems, such as the incoherence of ratings or a potential overvaluation issue, for which we do not have decisive answers yet. The banking world should reinforce their level of maturity on these issues in order to design risk management systems that would match the quality of their interest risk management solutions