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Locally focused banks matter to people and economy

Locally focused banks matter to people and economy

​​​Statement by ESBG on latest IMF Global Financial Stability Report.

BRUSSELS, 20 April 2017

People across Europe who call their locally focused saving and retail banks home would likely take exception to the findings of an IMF report released today.
In its Global Financial Stability Report, it argues that too many banks in Europe suffer from low profitability and an overbanked market. They pinpoint as the culprit banks with regional focus or narrow mandate or those with “too many" branches and “low branch efficiency". They also warn that chronic low profitability by banks can stifle growth and could reignite systemic risks. We agree.
But there is more to this story. It's true that times are challenging, to say the least, for locally focused banks and the banking model they believe in. That said, savings and retail banks in Europe – who form part of the economy's financing backbone – continue to lend while staying profitable. This is happening thanks to €500 billion in loans to Europe's SMEs and by serving one-third of the retail banking market there.

Digging deeper, locally focused bank profits are being gnawed away on three main fronts. First, they ​face an avalanche of regulations since the financial crisis mismatched with the banking model that pose high compliance costs on them. If they suffer from low profitability, then it is also because of too much regulation they have to absorb for a crisis not triggered by them. Second, the low-interest rate environment, while substantially hurting savers, creates severe pressure on those who serve the real economy. Meanwhile, some countries and financial institutions still have to absorb losses that are remaining from the last financial crisis.
Despite criticism of the locally focused banking model, the IMF did rightly point out that savings and retail banks have a close-to-customer approach – in-person, online, or via mobile. A unique strength, this approach allows us to gather information via our 810,000 dedicated employees at 60,000 branches to help make better lending decisions.

Savings and retail banks thrive, can serve their customers even better when banking regulation policy, to a large extent meant for more complex banks, is rethought.

To do this, policymaking should be guided by principles of diversity, subsidiarity and proportionality. Why? Because a diverse banking landscape yields healthy competition, efficiency and a robust financial system more resistant to shocks. Customers win too, as a fuller range of services can be offered.
Anchored by subsidiarity, a diverse system also helps foster proximity: financial services tailored to needs of people on the ground. A more balanced approach to the costs and benefits of regulation – proportionality – would help too. If done right, banking regulation and supervision is more nimble and better adapted to banking model diversity, which includes savings and locally focused retail banks.
The 185 million Europeans who appreciate access to finance via our member institutions would profit greatly from that approach. 

Proportionality; SME finance; Diversity; Proximity