Environmental Forces: Economic Instability, Low Interest Rates, Change in Demographics, Continuing Regulatory Changes and Digital Evolution

Bogie Ozdemir

In this chapter, we will discuss some of the environmental forces, exogenous to financial institutions (FIs) that are, simply put, outside of their control. We will start with the uniqueness of the global financial crisis, continuing economic instability and increasingly ineffective monetary stimulus, structural changes in the economy and the pressure they create for both institutions and the general public. We will then discuss how demographic changes and regulatory requirements compound the situation. For the first time in human history, the old dependency ratio is exceeding the youth dependency ratio. Supporting the youth is seen as an investment, whereas supporting the old is an expenditure. While Japan, which witnessed this phenomenon first, was the canary in the coal mine, these demographic changes will become a significant burden on the economies of developing countries. Worst of all, this is a new experience with unknown consequences.

Next, we will talk about continuing regulatory changes. While their intention is to protect depositors and policyholders and reduce systemic risk, they may end up killing the patient during the process. Increased capital requirements will