EBA欧洲银行-Adam-Farkas2720Speech-at-the-Deutsche-Bundesbank-Conference-Bank-business-models-Structural-changes-and-their-systemic-implications-20022018_7页_222kb

Summary of Speech on Bank Business Models - Structural Changes and Their Systemic Implications

Core Content

The speech delivered by the speaker at the Deutsche Bundesbank Conference on 20 February 2018 focuses on the evolution of bank business models in the European Union and the implications of these changes for financial stability and regulatory supervision. The key message is that banks must adapt their business models to remain viable and sustainable in the face of structural and macroeconomic challenges.

Main Viewpoints

• Supervisory Role: Supervisors should assess and challenge business models but not dictate them. Their role is to ensure that banks can manage risks and remain resilient, not to control their strategic direction.

• Challenges in EU Banking Sector:

  • Low Profitability: Despite some improvement in 2017, average Return on Equity (RoE) remains below the cost of equity (CoE).
  • High Non-Performing Loans (NPLs): NPL volumes have decreased significantly since 2014, but the ratio is still relatively high compared to global peers.
  • Overreliance on Central Bank Funding: Banks have been dependent on central bank support, which is not a sustainable model.

• Adaptation Factors:

  • Regulatory Developments: The Basel III reforms and the implementation of prudential rules provide clarity and help banks adjust their models.
  • Macroeconomic Conditions: A gradual improvement in the macroeconomic outlook supports business model adaptation.
  • Technological Innovation: The rise of financial technology (FinTech) is reshaping the banking landscape, especially in retail and payment services.

Key Information

Business Model Adaptation

• Strategic Focus: Banks must adjust their strategies to address low interest rates, balance sheet cleaning, and regulatory changes.
• Risk Appetite and Culture: Banks need to re-evaluate their risk appetite and develop a strong risk and business culture.
• Net Interest Margins (NIM): NIM has been declining since 2014, reaching a historical low in Q3 2017. Banks are now focusing on credit pricing rather than expecting further decreases in funding costs.
• Fee and Commission Income: Fee income has not grown as expected, remaining stable compared to 2014 but increasing slightly in 2017 due to higher trading income and lower cost of risk.

Efficiency and Overcapacity

• Efficiency Gaps: EU banks are less efficient compared to US banks, with cost-to-income ratios still above 60%.
• Branch Density: EU banks have higher branch density than their US counterparts, indicating potential for rationalisation and efficiency gains.
• M&A Activity: M&A activity in the EU banking sector has declined significantly since 2007, particularly in cross-border transactions. This is attributed to macroeconomic conditions and regulatory obstacles.

Technology and FinTech Impact

• Technological Trends: Big data, blockchain, cloud services, open banking, and machine learning are transforming banking operations and risk methodologies.
• FinTech Influence: FinTech firms are disrupting traditional banking, especially in payments, retail banking, and other financial services. They are seen as both a threat and an opportunity.
• Growth of FinTech: Investments in European FinTech companies increased in 2017, signaling rapid growth and potential future competition for banks.

Operational Risks

• Synergy Capture: The successful adaptation of business models depends on how banks operationalise changes, particularly in cost rationalisation and technology implementation.
• Risk Management: Banks must balance regulatory changes, competitiveness, and risk mitigation. Supervisors play a crucial role in identifying and managing these risks.

Conclusion

Adapting bank business models is essential for the long-term sustainability and efficiency of the EU banking sector. While banks bear the primary responsibility for this adaptation, the official sector must also support through regulatory harmonisation, the deepening of the Banking Union, and the development of the Capital Market Union (CMU). These efforts will help reduce fragmentation, improve efficiency, and enhance the competitiveness of EU banks in a rapidly evolving financial landscape.