Published: BRUSSELS, 4 January 2018
The idea for the EBI actually came up in connection with the establishment of the SSM in European banking supervision. In monetary policy, banking regulation, banking supervision and banking resolution the most important developments now happen on a European level. The ECB is the central bank for the Euro area, banking regulation is strongly driven by the EU Commission and the EBA, banking supervision is now organised by the SSM in Frankfurt and banking resolution by the SRB in Brussels. Certainly, national rules and national authorities still have a very important position in each of these fields, however the epicentre in many instances moved to the European level. Given this development in the public sector it seemed obvious that we should have something similar in the academic field. This was the idea of the European Banking Institute. A joint venture of European universities which perform joint research activities in the fields of banking regulation, banking supervision and banking resolution. The EBI is also active in other research fields, however banking-related research is clearly the core area of expertise. The main purpose of the EBI is to encourage cross-border research in this field and I think the EBI has already achieved a lot in this regards. A working paper series has been launched, the EBI has already organised a big variety of conferences all across Europe and most recently, and the EBI has launched its first European call for papers. Chosen papers will be presented at the next Global Conference of the EBI here in Frankfurt.
Correct, it is first and foremost an academic joint venture to support research in this field. However, the EBI also endeavours to encourage an exchange of ideas between academics and practitioners from regulators, supervisors and the private sector. This will help academics to better understand the practical angle of their research. By speaking with people in the public and private sector, academics shall get a better idea about current topics in the day-to-day work of practitioners. This enables them to identify topics that are worth researching on. One point is very important to mention in this regards. The EBI’s academic work is absolutely independent.
Suggestions by banking associations, by public authorities or advisers are suggestions only as researchers decide independently on their topics. Supporting Members act in a pure advisory function within the EBI in order to preserve the academic integrity of the EBI. From a research perspective, why is it important to establish a joint venture between academic institutions? I touched upon this topic already at the beginning of our interview. If you look at banking regulation in Europe these days, it is a mixture of mainly European rules but also many national laws and regulations. In order to build up comprehensive research capabilities in an Institute in this area, one needs to have a wide area of expertise in many different jurisdictions. Let me give you one example. Banking Union is one of the most important topics in the current European legislative agenda. One big question is how much harmonisation of laws and regulations is necessary in order to create a European banking market. This does not only affect the CRR and CRD but also other areas of law, e.g. insolvency laws, securities laws, corporate laws and others. In all of these areas, there are national differences between the legislation in Member States of the EU, even in CRR where you still find a lot of national options and discretions. This shows that comprehensive research in such a field requires expertise in, ideally, all EU jurisdictions. This was our starting point. We saw that a cooperation between national academic institutions was crucial to provide comprehensive research in this field. Finally, good ideas always need some form of institutional setting in order to preserve them. The EBI shall not be a short-term cooperation. In order to ensure this, an institutional set up was necessary. In this regards, let me mention Bart Joosen, Academic President of the EBI, Enrico Leone, Chancellor of the EBI, Marco Lamandini, Tobias Troeger, Blanaid Clarke, all Academic Vice-Presidents of the EBI and finally Eddy Wymeersch, who all helped tremendously to establish the EBI.
I think it is a big achievement that all our conferences so far have been in cooperation with European and national authorities.
Starting with the ECB at our first conference, we have afterwards worked together with Deutsche Bundesbank, Banca d’Italia, the Portuguese Central Bank, the Maltese FSA, the Estonian FSA and others. Besides our Global Conferences in Frankfurt, the EBI organises twice per year conferences in the EU country currently holding the EU presidency. Therefore, we organised research conferences on Malta in June and in November in Estonia. In both cases, the national supervisory authorities were very happy to work together with us. Secondly, we have established an Advisory Board where a regular dialogue between people working for regulators, supervisors and the banking industry takes place. Different topics are discussed amongst all participants and then also with the Academic Board. This starts with questions on the Single Rule Book to Brexit related topics. Another point we are currently planning is an exchange programme between academic PhD students and the supervisors, regulators and the industry. This exchange shall help to bring academic students closer to practitioners in public authorities and the industry in order to enhance the students’ practical understanding of their respective research topic. On the other side, it can also help public authorities and the industry to find new talents for a future recruitment.
Two channels of communication between the EBI and regulators and supervisors are via our conferences and via the Academic Board. In all our conference we try to ensure that research papers are discussed with practitioners from regulators, supervisors or the banking industry. This provides for a comprehensive discussion of each topic from many different angles. In the Advisory Board, we organise meetings every 2 to 3 months and discuss current topics on a regular basis. In more specialised task forces we focus on specific topics and include specialists from the academic institutions, the banking associations and the public sector. Our experience is very positive in this regard. In relation to academic research, every participating university is committed to publish research papers for the EBI’s working paper series. In this way we will build up a library of ideas for a future dialogue with public authorities and the banking industry. Last but certainly not least, we are currently in the process to build up our Board of Trustees.
This will consist of top level representatives from politics, public authorities and the banking industry. Even though the Board of Trustees will not be a working body, it shall help us to increase the dialogue between parties in the public institutions, academic institutions, the banking industry and others.
The EBI looks for a dialogue with many different market participants. FinTechs are one of them. Their business models affect the business models of banks in many different ways. Some FinTechs will compete with banks and other financial institutions and other FinTechs base their business model on cooperating with banks. In any case, from a research perspective there are many different and interesting topics worth looking into: How will the banking landscape change due to the emergence of FinTechs? What shall be a prudent regulatory approach towards FinTechs which ensures that FinTechs are not advantaged from regulatory perspective when doing the same business as a bank but on the other are not suffocated via overregulation? I can think of many other topics which are worth looking into. From the EBI perspective, our academics have already published research papers on FinTechs and we are currently preparing a conference in the TechQuartier in Frankfurt together with several FinTech companies.
There are many challenges banks are facing at the moment. Let me focus on a few. The key challenge for European banks is linked to the prolonged period of low profitability in the sector. While bank profitability has recovered somewhat recently, it remains at very low levels. Average Return on Equity for bigger European banks was around 4% in 2016. This level remains below their cost of capital which is estimated to be around 9%. Moreover, the high level of non-performing loans (NPL) has a significant impact on banks’ profitability, since this part of the assets is not generating revenues, on the contrary, necessary provisions are actually reducing the banks’ profits and, finally, it is also more expensive for banks from a capital perspective.
In consequence high NPL levels reduce a bank’s ability to grant credit to the real economy. This is clearly a risk for banks but also for the economy as a whole. However, banks can tackle this risk by addressing NPLs proactively. Research and practical experience clearly shows that this pays off. In consequence, a bank could turn this challenge into an opportunity. The Eurozone supervisor SSM has issued Guidance on the various areas where banks should address this problem. Amongst the reasons for such low profitability is the current low interest rate environment. Certainly, this poses an immense challenge for the European banking sector that to a great degree depends on interest rate income. Furthermore, in the last years, competition from the non-banking sector has increased substantially. In particular shadow-banks have increasingly moved into financial intermediation in the euro area since the financial crisis. Their share of financial assets increased from 42% in 2008 to 57% in 2015. More competitors want to have a piece of the cake. FinTechs are another challenge in this regards. This increases the margin pressure for the established market participants. In the low-interest environment this is likely to intensify competition for credit and deposit-like savings products. As a consequence, this could lead to a loss of market share and significant reduction in bank revenue.
What can a bank do to differentiate itself from its competitors? First and foremost, each bank should review its business model thoroughly and on a continuous basis. This constant review process is not only important for the big international banks but also for small local banks which play such an important role in financing the economy in many countries in Europe. The speed of changes in the banking sector has increased dramatically and no bank can automatically assume that the way they have performed their business in the past will make sense for them without any change in the future as well. The business environment has changed, banks need to adjust to these changes. Technological innovation and digitalisation is one way to adjust. Obviously, digitalisation initially poses a challenge for banks. It requires first of all a substantial amount of investment by banks. However, on the other side it also brings opportunities for banks. If properly applied, it could help banks to save costs in their operations and to acquire new clients, digital natives, who appreciate a modern way to provide banking services. The new technology of the distributed ledger (blockchain) is of a different nature and represents an opportunity, mostly for banks that have financial capacity to invest in it, and can establish a wide network of secure, less expensive account transactions and settlements.
Last but not least, many of the post-crisis regulatory measures (increased capital requirements, leverage ratios and newly established liquidity rules) have been implemented. Nevertheless, a few remaining initiatives for banks and especially for the nonbank sector still need to be finalized since the regulatory reforms are contributing to a shift of activity and the emergence of new players in the shadow-banking space, leading again to tougher competition in areas traditionally dominated by banks. New regulation was introduced in the aftermath of the financial crisis. Introducing new regulation and adjusting business models to new rules is a big challenge for banks, however, the idea behind these new rules is to make banks and the banking system more stable. This is good and important to bear in mind. In connection with these new rules, regulatory fragmentation is another challenge. Therefore, the core set of rules should apply across the globe. However, there is a strong case for proportionality in regulation. Smaller banks are generally less risky, therefore the cost and benefit of regulation need to be weighed up and applied in a proportionate way. To sum it all up. Banks are facing very big challenges these days. However if they adjust their business models and the way they perform their business fast and in a smart manner to the changing landscape, there will be new opportunities for banks. I disagree with Bill Gates who once said banking is necessary, banks are not. In Europe, banks will continue to play an important role in financing our economy. This applies to big cross-border banks and in no smaller way to small local banks.
The European Savings and Retail Banking Group (ESBG) announced in June 2017 that it became a Supporting Member of the European Banking Institute (EBI) to help develop cross-EU academic research on European banking regulation and supervision. By being a Supporting Member, ESBG representative serves on the EBI Advisory Board of the EBI.
Dr. Thomas Gstaedtner is President of the Supervisory Board of the European Banking Institute, a non-profit organisation based in Frankfurt. Professionally, Thomas Gstaedtner works as a Head of Division in the ECB in Frankfurt.