Executive Summary
The U. S. financial system is going through profound changes. In the early 1980s, interest rates began to
fall and bond prices began to rise, causing financial services firms to shift behavior to capitalize on this
trend. Balance sheets became more levered and complicated, and income streams were enhanced by
new, untested loan products. In addition, regulatory control waned as belief grew that adaptive “market
forces” were better than static regulation.
In 2007, the financial system began to unravel due to excessive leverage, credit risk and overall business
complexity. This led to the “Great Recession,” as lending and liquidity quickly dried up around the
globe. Bankruptcies and forced mergers ensued, lending was significantly curtailed and companies and
consumers reigned in spending as their trust in the system plummeted. The subsequent response by
Central Banks around the world was unprecedented.
We believe the financial sector has now stabilized. Regulatory controls have been modernized, while
leverage, risk and complexity within the system have been significantly reduced. Companies are
experiencing increased loan demand and better lending revenues and are showing a renewed attention
to costs and operational efficiency.
As we look forward, we see a potentially more stable profit picture developing for these firms. And,
a rising interest rates environment has historically translated to increased revenue for banks and
financial institutions.
In short, we believe the financial sector is ripe with opportunity