Session 1: The challenges and future of banking in the EU
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Transcript: English(auto-generated)
00:02
Okay. Thank you very much, Francesco, for the kind introduction and to you and to Omas for inviting me to chair this distinguished panel. For me, of course, it's nice to be here.
00:20
I consider the SRB a bit as our home also because, I mean, as it's said there, it's the European system of financial supervision, the SRB with the ESAs, and we have gone through quite difficult years since we started our work in 2011, and the commissioner yesterday mentioned some—Vice President Dombroski mentioned yesterday some adjustments to our structure,
00:44
so we have always been moving in the same direction. Since the SRB and the EBA have been established, I think that the focus on banking has been
01:00
on, let's say, more on short-term emergencies than on future long-term challenges. So I take the heading of this panel and the focus on future challenges as a signal that we are, to some extent, moving away from the hot emergencies of the crisis to look
01:21
a little bit to the future challenges and to longer-term structural issues. And that's, I think, a good thing. However, let's say the focus—I mean, the discussion should probably start from,
01:42
let's say, from the legacy. I mean, we are in a transition from a system which has been deeply shocked by a crisis, by a very difficult crisis, and is now moving ahead. And so the first thing is, how far have we gone in addressing the legacy issues?
02:03
Are we going in the right directions to overcome all the problems that we still have in the European banking sector? And then maybe trying to look ahead to the more, let's say, challenging issues of what will be the competitive environment, how to regain efficiency,
02:24
what will be the interaction between banks and new players, how technology can reshape the future of banking in Europe and worldwide. So with the view to quickly set the stage, I would say that when you talk about legacy,
02:42
of course, the mind of everybody goes to asset quality problems, which are still lingering on the European banking sector. Here, let's say, you know that we as UBA have been very vocal on the need to aggressively address the issue of non-performing loans,
03:04
and we have been complaining until recently of the relatively low speed in the adjustment. A graph that I used to always refer to is a comparison of the speed of adjustment in terms of the cycle of NPLs from the start of the crisis to the end of the crisis.
03:28
So how long does the NPL ratio take to go back to the pre-crisis level? And let's say, in a sense, there is this interesting graph that shows that in the U.S. the peak has been reached very fast
03:43
in two years after the crisis, and then there has been a relatively fast reduction. So in another three years, four years, let's say, the pre-crisis level has been reached. At the other end of the spectrum, you have Japan, which took almost nine years to reach the peak. So there was a problem identification that had been lingering in the system for a long while.
04:06
But then once the problem was identified and dealt with, there was a rather steep adjustment. And Europe, a little bit in between with four years to reach the peak, and then a very slow, let's say, reduction that was really projecting
04:22
a very long period of time to go back to pre-crisis level. Now, the good news is that if you look at the data more recently, the adjustment has taken more speed. We need to understand, of course, how much this is due to some idiosyncratic deals, and overall much is taking, let's say, more widespread grip in the system,
04:45
so how far we are going into addressing the problem. But this is good news, and we should take stock of it and discuss the direction. And of course the key question here is will we manage to complete the adjustment process
05:00
while still we have ample liquidity in the market and low interest rates, which is, of course, an important condition to support the adjustment. NPLs have been one of the greatest breaks on the profitability of banks, not the only one. Of course, low interest rates and other issues have also plugged,
05:21
high costs have also plugged the problem of profitability. Also in the area of profitability, we see positive signals. The second quarter results have been more positive. But again, the issue here is how structural these recovering profitability is and has enough restructuring being made to achieve longer-term viability
05:45
and the return on equity, which goes above the cost of equity, which has not been the case for a long while. The issue of low profitability, for instance, if you look at the recent data,
06:01
what you see is that one of the main drivers of the increase in profitability has been the reduction in provisioning, which is, of course, good news, reflecting also the improvement in asset quality. But let's say in terms of revenues and in terms of costs, let's say on average at the European level, you don't see much change.
06:23
So the issue is how we will move that. And what you see, and this links to the other topics, is that the banks which have achieved better results are those which have been more effective in cutting costs and in embracing new technologies to change the way in which their products are distributed.
06:44
So how much, let's say, also the technology challenge and effectively addressing it can help banks restoring their long-term profitability. This is linked also to a lot of work that the SRB itself has done
07:00
with a very interesting paper that has been published a couple of years ago, if I remember well, by the Advisory Scientific Committee of the SRB on overbanking. So do we still have an issue of overbanking in European banks? And if so, what can be done to address it?
07:21
And the issue of overbanking is linked with another topic, which I suppose also for our bankers around the table is very topical, which is fragmentation in the European banking market. So how far have we been successful in providing our banks
07:42
with an integrated domestic market in the European Union, an integrated single market in the European Union, which could be their domestic base for also, let's say, global expansion? I mean, sometimes I hear complaints, more than sometimes I must say,
08:03
from bankers saying that we have not done enough to remove the segmentations which have been introduced during the crisis to reinfence local systems, and we still have a lot of impediments
08:22
to a flow of liquidity and capital within the European Union. When we talk about higher debates on the future of the European Union, of the euro area, of the economic and monetary union,
08:41
we hear, for instance, President Macron talking about moving really to a setting in which the union is a single jurisdiction. How much are we a single jurisdiction in banking today? The banking union and the colleagues here at the ECB, 20 in the Board of the ECB, in the Supervisory Board of the ECB
09:04
is doing a lot in this respect, but how far have we gone in this direction? Finally, the issue of technologies, which I've been already alluding to, I mean, we know that sometimes the introduction of new technologies, this fintech vibe is used as a sort of imminent threat on the banks,
09:31
and it seems like a challenge from outside that could rearrange the adjustments in the European banking sector, but of course, let's say,
09:41
if you look at what is happening in the markets, you see a lot of collaboration between banks and new start-ups in the technology area, and it's more difficult to understand what is the interaction. But definitely, new technologies, let's say, impose to banks
10:01
to reflect on their own business model and on the way in which they distribute their products, but also the way in which they relate to their customers, because we will have, for instance, if I think to PSD2, which is a directive on which we have been working quite a lot recently, I mean, there will be a number of new players that will be able to directly access
10:23
the bank accounts of bank customers to provide a number of services, access to a lot of information on these customers, so how much the informational franchise that the banks have been constructing their, let's say, long-term relationship with customers will be, let's say,
10:44
challenged in these three. So there are, I threw on the table a number of issues. We have a very distinguished panel here. We have, to my left, Thorsten Beck, Professor of Banking and Finance at Cass Business School. Then we have Pentea Karainen, a member of the Supervisory Board of the ECB
11:03
and former member of the Board of the Bank of Finland. And then we have two prominent bankers, two group CFOs, respectively Heike Hylka from Nordea Group to the extreme right there and Jose Antonio Garcia-Cantara from Santander.
11:24
So let's start with short presentations, I would say around ten minutes, and then let's have an interactive discussion here and then open up to the public. So I would give the floor to Thorsten first, please, as you like.
11:54
Okay, well, thank you very much. Thank you for inviting me to this conference. I'm very happy to be here.
12:00
I have only a few slides. There are actually quite a lot of pictures in there, so don't get too much worried. What I would like to do, and I guess that comes with being an academic, I would first like to kind of take a step back and talk about financial systems in the most generic way and first try to kind of give us a reason why we're actually standing here or sitting here
12:23
talking about finance and banking, in the sense that although there is a lot of literature showing that finance matters for growth more in the middle than in high-income countries, there are certain nonlinearities, it is still important. It is important for the intermediation function, especially for SMEs.
12:44
It is important for long-term investment, R&D, and ultimately translating into higher growth. So that's something also including for high-income countries. Of course, it also helps growing faster out of the crisis. Now, what also has been shown, and that's actually also very relevant in the context of our discussion,
13:04
is that especially within currency unions, an integrated financial system can be good for dampening volatility, for enhancing growth. Integration comes with more competition, and there has been evidence, of course, on the country level, for example,
13:26
within the European Union, but another area, another region to look at is, of course, the United States, which is also a currency union which used to have a very fragmented financial system and has moved to a more integrated financial system, and there is, of course, with all the fragility risks and so on,
13:42
there is quite a lot of evidence that this has been good for the economy. Now, maybe you have noticed that I haven't really used the word banks or bankers yet. Why? Because when academics, especially academic theorists, which I'm not, start talking about financial intermediation,
14:03
they start in the most generic form that you can imagine, intermediation between savers and investors, and then try to compare their theoretical concepts with what they can observe in reality. And, of course, in reality, we don't just observe banks. We observe, or we have observed, over history, lots of different forms.
14:20
Now, we happen to have in Europe a bank financial system which is heavily focused on banks, but just to make the case, and of course I don't, at the risk of insulting some people in the room, including two people on the panel, which without any intention, as academic economists or as economists in general, we don't really care that much about bankers.
14:41
We care about them because they are in the banks and they are the financial system. But primarily we care about financial service provision, and it could be, of course, from banks as it is today, or it could be from alternative financing forms at the topic which I will come back to at the very end. Now, this has been already mentioned and, of course, I wanted to say that being here at an ESRB conference,
15:03
it's more than appropriate to quote some ESRB research, and they already refer to it. We've seen this rapid growth in banking, especially in the years leading up to the crisis, driven by the largest banks. And I think what's also important to point out is the kind of the regulatory and political approach behind that.
15:23
That's very important. And, of course, this all ended in blood and tears in 2008 when the European banks or global banks were basically turned national in their failure. Now, a lot of things have happened in between over the past nine years, much more than actually some of us would have expected in 2008.
15:41
There has been a move towards a currency union level regulatory framework. And, of course, the question is how successful has this been? And, of course, it is still early days, so it's really far too early to make a final judgment. But I think there are a couple of cases, even before the introduction of the banking union, that kind of can tell us how we can think about what has been done so far.
16:05
And I just want to point to four cases, Banco Espirito Santo, 2014. Well, it shows, on the one hand, the limitation of national supervision. Well, maybe not just national, but in general supervision, which missed basically the deterioration in the holding group.
16:24
But the bail-in worked actually reasonably well. And I've done some research actually also with somebody at the EBA, Roger de Lopez and one of my PhD students, where we show basically the overall credit supply, the aggregate credit supply effects have actually been negligible. There have been some real sector effects.
16:40
But, overall, this can be described as a very successful bank resolution. And, again, it was before the BRD, and it's in the spirit but not in the letter of the BRD in the sense that there wasn't a bail-in of 16%. And there was also taxpayer support, and there was also support from other banks. And the taxpayer support actually came in the form of an outstanding credit line from the IMF.
17:04
What does Greece 2015 tell us about the Eurozone banking system? Well, it shows us that the link between sovereign and banks is still there. And, of course, you can always argue that Greece is a special case, although you could also argue that, for example, you see similar but not as heavy problems in Italy, for example.
17:27
Banco Popular, I think there's very little not to like about it. I think there was really almost like a textbook bank resolution. I call it F10 for the banking union. Very well done, very swiftly, no taxpayer support.
17:41
As an academic, of course, I can't just let it go like this. I have to make one observation, and that it's a purely national solution. It's an observation, it's not a criticism, but I'm going to come back to this in a moment. Finally, Veneto Manca, Banco Populari di Vigenza, well, that, of course, has been heavily criticized, and rightly so, because the bail-in did not go all the way up to the 16% to avoid taxpayer support, which had to be brought in,
18:08
which basically didn't go around the letter, but around the spirit of the BROD. And, of course, also tells us, and that's actually the first thing I want to point out, that the legacy problems, and Andrea mentioned these already, are still there.
18:23
The legacy problem of an overhang of non-performing loans and of underperforming banks. It's not just about the NPLs, it's also about the banks. Now, of course, this kind of matches or mirrors an approach that has been seen, has been a problem in the Eurozone from the very beginning, not just on the banking level but on the fiscal level.
18:43
This kind of asymmetry between creditors being made whole and debtors having to pay no matter what. We've also seen, and of course Cyprus is again the most prominent example to a certain extent, Spain, that a pure solution on the national level has not always been possible, but then has also led, for example in the case of these two Italian banks I just mentioned,
19:02
to a delay, a protection in the resolution, which of course has made things worse. And of course Andrea already mentioned the Japan crisis, which is kind of the textbook example of how to prevent addressing, how to not address banking problems in time.
19:22
Now, this has led to calls, and I'll leave this for the next session, to kind of address this in a more systematic way, as actually several economists have kind of pointed to that to create some kind of asset management company, which have existed already on the national level but also might be good for on the Eurozone level,
19:41
including the EBA has picked up on that. The only point I want to make is it's not just about the NPL, it's also about the bank restructuring. Ultimately where we want to get to is from national banking systems, where a Spanish bank is resolved with the help of another Spanish bank, or an Italian bank is resolved with the help of another Italian bank,
20:01
to a Eurozone banking system, where one Eurozone bank maybe will be resolved with the help, with a merger of another Eurozone bank, not necessarily from the same country. Or when we're finally at a point where Deutsche Societe General or U.N. Credit are not considered any more German, French or Italian, but Eurozone banks, I think that's where we are really at a European banking system.
20:24
So enormous regulatory progress I would say, but I think this is just the underpinning for what we ultimately want, to inform the real banking union back to the single banking market, or not back to, but create a single banking market in the Eurozone.
20:43
Now a lot has been said about the banking union missing a part, and I would actually say yes, that is true. The funding mechanism is missing, which of course comes also together with this kind of illusion that people have, especially politicians, have appealed to, that there will be no more bailouts under no circumstances.
21:01
We all know that this is not true, and maybe it's also not healthy to kind of create this illusion. But ultimately, if you want to get to a Eurozone level banking system, I think we do need also the final pillar in there, which is some kind of funding mechanism, which I know is being built up. The question is, is it sufficient? The question is, is the funding, the public backstop,
21:22
which is somewhat there through the back door, whether it's actually sufficient or not? And of course the ultimate question is, is it really feasible to move to a new regulatory framework without cleaning up the legacy problem first? And I think the Italian case has shown that this is not possible, because as long as you don't know where this bail-in level actually sits,
21:41
you can't really move to a system where you can easily bail them in. My last slide, and I'm coming now back to kind of a theme that I started out with when I talked about finance. Yes, we should look beyond banks, and of course the capital market union agenda has been, or the idea of a capital market union has been on the agenda for quite some time.
22:04
Unlike the banking union, it's actually not relying necessarily on having all the components in place at the same time. They can come in at different points in time. And of course it's a much longer-term process because it especially applies also moving towards more, towards one jurisdiction, as Andrea just pointed out,
22:23
and it's also politically of course a very difficult part. But it's not just about public capital markets, it's also about other forms of private intermediaries, such as equity funds, venture capital funds, which are also underdeveloped in Europe, compared for example to the other side of the Atlantic.
22:42
And of course in this context, FinTech is important. My take on FinTech is very easy to prove in the pudding, and I mean this actually literally. As long as FinTech hasn't gone through the whole cycle until the very sweet or bitter end, I think it's too early to make a statement on that. But having said this, more competition in this context I would say is better.
23:02
But of course that implies, which I think is an important lesson for regulators, a certain flexibility in terms of how to define the regulatory perimeter. And we've seen this, a lot has been written about the US for example, money market funds which were outside the regulatory perimeter in 2008 and it had to be brought in overnight basically, which of course is something we want to avoid in this context.
23:24
Thank you. Thank you very much Torsten. I will now give the floor to Penti. Thank you Andrea.
23:40
First let me thank the organizers for inviting me in this panel and share some thoughts with you. I took up two areas. One is that the legacy problem in PLs and the other is bank profitability.
24:05
Could I have a remote controller? What I say now is probably in line with the paper I wrote
24:21
and that is in the website at your disposal. I'm not reading the paper line by line, just the main points there. And you know I learned this morning and will learn this morning what is like being between a hard place and rock or rock and hard place
24:47
and that is because I have prominent bankers here so I should be very careful what I say about bank profitability. Let me start with NPLs.
25:02
It is very true that we ended up with high piles of non-performing exposures with banks and there when looking into this slide you may notice that the problem is spread unevenly,
25:23
very unevenly. It is not something which is affecting all markets. The weighted average of non-performing exposures is around 6%.
25:42
However, there are banks or countries even with non-performing ratio assets, ratios to assets about 40% and in too many countries that is about 10%.
26:02
So what does this tell you or tell me? First is that there are banks who have been able to manage this issue quite well and either they have been very good in managing their loan portfolios in the run-up to their crisis
26:26
or alternatively they have been good in cleaning up this mess. Also in troubled economies we can see that there are banks who have managed quite well
26:46
so it is not something which you can blame only external factors. What is crucial to note that we are here with this problem now and we need to go forward and it is exactly what the chair said.
27:04
There is a slow progress in this respect to solving the problem and partly that is because of our low incentives. In the environment or low interest rate environment it is easy to keep bad assets in balance sheets
27:29
or take various arrangements and there is perhaps less incentives than perhaps 20 years ago. This is a big economical concern and that is not only on a macro level
27:47
where major NPL stock is hindering good banking business, prudent banking business and just using capacity to finance a real economy but it is also on a micro level when it is a bank's profitability
28:05
and it is also what is important that my own experience was from late 90s when I was a real bank. I am a central bank. At that time we saw that it may distract managers' time from something which is more important
28:25
and solutions where you create bad bank and good bank and very clear distinction have shown that it has importance. What I am saying also is that it is a very important reminder
28:46
that this problem is something banks own, the banking industry. Of course it is very important that we find ways how to facilitate the problem solving
29:01
and yesterday the ECB president took it up by saying that government should be playing a role in facilitating perhaps better insolvency procedures and various ways to this problem solving.
29:24
When thinking how to solve it, what is also important is perhaps to look at what is the root of the current situation and I already referred to that with this diversity of problem in various countries and in various banks.
29:48
There are studies made, good research made that it was unavoidable in some countries. I am now referring to Chingales and some other researchers
30:01
and they have good arguments that it was perhaps more macroeconomic slowdown rather than irresponsible credit boom created by banks. They may say that it is not banks' fault. They are right to some extent.
30:23
Personally that is not my reading having been a banker myself. Banking is with risks and you need to manage those and then prudent way of running banking is of course needed. And should we then accept that the public intervention will take care of cleaning the mess,
30:46
we will have long-term incentives and that problem easily arise. I don't want to be too aggressive here.
31:01
I am for all those solutions, initiatives which have been on the table but the problem I see there is that supposing that the bank knows that having this problem with bad assets, there is a public authority or governments providing solution,
31:26
I will wait and this may slow down solving this problem. And based on experience we had in Nordic countries and very severe banking crisis was that time is our essence.
31:45
You need to do actions swiftly. It was perhaps sort of survival of the fittest. It was not a very beautiful situation in the early 90s but banks had to act.
32:03
Well, let me go to the profitability. I know that NPLs are dealt in the next panel in detail and it simply for example will take care of complementing what I said. Now relating to banks' profitability, it is so that there is not only NPLs
32:30
but also revenue side in the normal course of business. Banks need to find ways to cut costs and increase revenues.
32:45
I recognize that recently it has been tough situation with very tight net interest rate margin
33:02
and it is leading to poor profitability in many cases. Now it looks that the improvement in terms of return on equity can be forecast. It was 4.4 two years ago. Last year it was 3.2 on the average on big financial institutions in Euro area
33:31
and they forecast that it could go up to 7.4. That is good. There is a modest increase and not perhaps meeting the required return on equity
33:44
but anyway good direction. It will continue to be a problem for banks anyway how to generate more profits
34:02
and one way is in this kind of environment where you have quite a tight core source of income to find some other revenues like commission and fee income. Then you need to cut costs and here as a former banker I take up a cost income ratio
34:27
which is widely used and it is revealing where we have inefficiencies running the bank but that is not perhaps without flaws. There are three flaws in cost income ratio for bankers practicing the business.
34:48
One is that it doesn't take into account risk. The second is that it may mistreat or treat not properly, correctly, investments in the future like marketing, development, R&D and those issues which create cost
35:06
and third is that it doesn't take into account what is the income like. Here we see and one German banker told me that you see the DE that is Germany and the one German banker said that should I be able to transfer my business into Italy
35:28
it would be twice as profitable as it is today and it is not exactly what you can see here but you can perhaps make a conclusion that in Italy net interest rate margin is bigger.
35:46
All this said, there are a lot of opportunities for bankers to improve cost efficiency and their new technology will give new tools and it is very, very different compared to what we saw in the 90s.
36:02
Now, for example, IT systems are in use based on volumes. At that time it was huge investments in hardware and all that stuff, fixed costs. Now you can run a bank starting it with no investments in IT.
36:23
So to conclude, banks must be bold in solving the bad asset problem and bold in investing in the future. Thank you.
36:42
My angle to this is probably actually starting to look at the challenging in cross-border banking operations in Europe. As you probably all have heard, we have recently decided to change the domicile of Nordea from Sweden to Finland
37:01
and the background for that is actually that Nordea's whole market is Nordic countries. Nordics looking as a whole is actually the 10th largest economy in the world. Nordics, however, consists of four different countries which are Finland, Sweden, Norway and Denmark.
37:23
To us this is, however, we consider Nordics as one market as there are historical and cultural loosens for understanding that actually the market environment, the business climate is pretty similar in all these four Nordic countries. The name actually stands for Nordic ideas and the current Nordea was actually established in 2001 when we combined all these four Nordic countries.
37:52
So Nordea as a bank is actually a teenager right now. We have been there since 2001 and we are a bit unique in the Nordic space in that sense that we are truly pan-Nordic player.
38:05
So we operate in one single Nordic market. The reason, the historical reasons for Nordics being a one single market is actually that if you go back a few centuries, actually almost all the Nordic countries in some day and age have been part of actually Sweden.
38:27
Then there have been changes over the years and there have been sort of wars fought between the countries at certain phases. But all Nordic countries actually share the same culture, the same values and to
38:43
a large extent also the same legal environment as well on a high level. And that provides then sort of a stable operating environment to operate in the Nordic space. But then when we look a bit deeper in the environment, we actually notice that
39:01
out of these four Nordic countries, three out of those countries are part of European Union. One out of those four countries is part of the Eurozone and thereby also part of the banking union. But all four Nordic countries, they are actually part of the European single market.
39:23
And if we start with the sort of basic ideas of the European single market and understanding that all the four Nordic countries are part of the European single market, it should actually not make any difference that where do we place our headquarters among these four Nordic countries. That is the sort of the idealistic view where we should actually be.
39:43
But then actually looking at the realities of life where we actually operate, we actually deal with four different Nordic countries having differing rules even among the three Nordic countries which are part of the European Union. So we share the same European Union legislation, but as there are also exemptions in place, then in real life
40:04
situations we see diverging rules affecting us in the Nordic space which we consider to be one single Nordic market. The downside of that is naturally then that okay, as different Nordic countries impose different type of rules to our
40:20
operations even in this same single market space, then we expose these rules also to our operation across the borders. We change our legal structure actually in the beginning of this year to one bank structure where we have a parent company in Sweden and we operate through branches in other Nordic countries.
40:42
We actually now aligned our legal structure with our operating model which has been in place since the establishment of Nordia in 2001. So since the beginning of Nordia, since the beginning of the history of Nordia, we have always operated as one bank, but we still had sort of differences in terms of what our legal structure was.
41:02
And now we have then aligned our legal structure with our operating model, operating in one single market, and then we actually emerge many of these issues when we noticed or actually sort of increased the problems with diverging set of rules in these different Nordic countries.
41:22
To us, it's important that we can operate as one bank, we can operate in a stable and predictable environment, and we can play with the same set of rules that provide us level playing field so that we can compete against our peers in a sort of orderly fashion.
41:42
It's actually the question about if you look at different rules, I would actually not focus that much on sort of looking at what exactly are the rules. I've always said that when you look at different rules sort of that you can have lengthy debates about that, what should the rules look like and what is better rules and should you change something or something like that.
42:04
But to me, it's actually the rules are like in a card game. When you are playing cards, it actually doesn't matter that much what are the rules. You can sort of figure out whatever rules, as long as you agree about the rules before you start to hand out the cards and each and every
42:22
player understands the rules in a similar manner and each and every player plays with the same set of rules, then you will have a great card game. If not, it will be a mess. And that is actually the point that it's not that important to look at that, okay, what are actually the rules,
42:41
as long as all play with the same set of rules and you can, through the entire card game, then expect that the rules are maintained the same. If there are changes sort of that, okay, then there has to be an orderly process as well for that. But that's not what we have seen. And that then naturally led to a situation where we were forced to review that where do we place our domicile.
43:08
And once again, I repeat that that's not something that you should be forced to do when you're operating in European single market. Sort of the basic freedom of establishment and the single European market should allow
43:23
you to sort of establish your headquarters wherever and it would not make any difference. But in our case, that made a difference. And that was the reason why we then made the decision that we want to play with the same set of rules. From our perspective, let's say in the wider media, it was probably debated
43:41
that it was a question about sort of selecting between Finland or Denmark. As we said that when we will be moving our headquarters, we will still stay within the Nordic countries naturally as that is our whole market. We excluded Norway due to the fact that it was not a member of the European Union, so we had then Finland and Denmark left. But it was actually not a decision or choice between Finland or Denmark. It was actually a choice between being part of banking union or not.
44:08
And that made it almost like a no-brainer then in the end when we are reviewing different alternatives. And that's why we decided that we will change the domicile and move our headquarters to Finland.
44:20
What happened during the process is actually then both the Danish and Swedish government actually also started to discuss about the potential of joining banking union as well. I personally think that that is the only way to go. And in the longer term, I would expect that actually all Nordic countries which are part of the European Union are also part of the banking union.
44:44
And that should be the only way to go to ensure that we have a level playing field among all the Nordic countries. Then looking at otherwise the things that are happening in the banking space otherwise, probably FinTech is the word, almost
45:04
sort of buzzword or hype word which is commonly used, which is a key part of banking in the future. But to us actually looking at FinTech, we get a lot of questions that are you afraid of FinTech, will FinTech take over your business, will it be a disaster for incumbent banks and all that.
45:25
To me this sounds like a discussion that we would have 20 years ago that someone would have asked that will the internet take over banking. And we can laugh at that right now, but occasionally the discussion about FinTech sort of has similarities to that. To us and me personally, FinTech is not a question about companies. I would
45:44
not talk about FinTech companies. It's a question about the technology, FinTech financial technology. And I would argue that that is part of each and every successful bank's business right now as of today. If not, then you don't have a viable business model going for the future.
46:00
But it's actually a question about also joining forces. I would not see FinTech, the FinTech companies, as a threat to incumbent banks. At least to us we consider FinTechs to be valuable partners to us. We must find ways to join forces. We are all the time exploring
46:22
new technologies. We are benefiting from a cooperation with several different FinTech companies. And there are a lot of interesting technologies, a lot of interesting ideas, which will sooner or later be actually part of the everyday business of each and every bank on a longer term. So I just embraced FinTechs right now. The challenge there as well is naturally
46:44
also that a lot of FinTech companies are actually now operating outside the regulated business. And then again, if we have a market where we have different players playing with different set of rules, we end up in trouble once again.
47:02
And that is probably the issue I would like to address, that if irrespective what is the legacy of different players in the market or what is the ownership structure or the exact business model, but if we are competing in the same market with the same services, we should also play with the same set of rules as well. Thank you.
47:24
Thank you very much. All right. Well, thank you very much. Thank you for the invitation to participate in the conference. I have a short presentation.
47:43
The drawback of speaking the last is that some of the topics have already been covered. So I will go quick and focus on a few key ideas. Well, clearly banks in Europe are not making their cost of equity. Cost of equity has
48:02
been relatively flat at 10 percent in the last seven, eight years, and it's not coming down. And this may be puzzling the regulators and the supervisors, but the reality is that despite the banks being more capitalized and having TLAC and MREL, et cetera, et cetera, cost of equity is at 10 percent and it's not coming down.
48:23
And on average, banks are not reaching this level. I would differentiate though between larger institutions and smaller institutions. Smaller banks will have it increasingly difficult to compete. Just the issue in complying with MREL, for instance, a very small bank may pay up
48:49
to five times, but will have to pay for a Tier 2, or obviously more than double what we have to pay for an 81. So the financial cost associated with complying with the regulatory
49:02
requirements are going to be significantly more demanding for smaller institutions. Or in terms of investments, just meeting all these technology or embracing of these new technologies will make it very dear for them. Just to give you an idea, we invest in new technologies, an amount which is more than the equity of 95 percent of European banks every year.
49:34
So for a small bank to reach the amount of investment that we are making is just outright impossible.
49:43
Two key ideas here. Structurally, we have to comply with significantly increased regulatory costs and it will take time before these requirements are passed on to clients.
50:03
So regulators have to get used to banks not making the cost of capital for a while. And I will talk about this later. Second, I put weak credit demand as a cyclical factor where we are not sure.
50:22
The key element why banks are not making their cost of equity is very, very weak credit demand. And we don't know if this is structural or cyclical. We just wish it's cyclical and eventually we will see more credit demand, but the fact is that credit demand today is very weak.
50:44
And we need policies that work on both the supply and the demand side of credit demand. Of credit, sorry. FinTechs. Totally agree with what has been said. So far, FinTechs have focused on payments, data analytics and lending.
51:04
Obviously, this is forcing us to enhance customer experience, cost efficiency, et cetera. Very limited impact on revenues and they face three main challenges. One is scalability. Lending has always been free.
51:22
Anyone can start lending with no regulatory requirements. But obviously, if you want to grow your lending, you need funding for that. And in order to make it stable, you need deposits. And that's regulated. And second, the question of maturity transformation. Who is going to do maturity transformation?
51:41
Key here is, as Heike said, we all need to have the same regulatory requirements. We need a level playing field to compete so that if taking deposit is regulated, it should be regulated for everybody. And I agree completely that the way to work forward is by collaborating with these companies, not competing with them.
52:10
But again, for instance, in our case, we're investing over two billion euros in technology every year.
52:20
New technology every year. Consolidation. In order to have a consolidated or a more integrated banking system, we need consolidation in Europe. Well, these are the trends. And if we judge how successful consolidation has been, it's been not very successful.
52:44
You see here in terms of number of transactions and in terms of the value of these transactions, and these ECCB numbers, how cross-border M&A has been in Europe. So if we judge by these, it's been not very successful.
53:04
And it's actually getting worse. Why is that? Well, the European banking system is very fragmented. And we've talked about that. And I think everybody has covered that. And I totally agree that banking union is not complete.
53:22
And I think there is a great opportunity to advance in the integration of banking in Europe to have really a single banking market. When we talk about data like NPLs, et cetera, et cetera, we are not really comparing apples and oranges.
53:42
We are comparing a country, which is the U.S., a country, which is Japan, and many different countries, which is Europe. We are not comparing a country with a country. So for many, many reasons, moving forward in terms of the banking union is great. Also, there are other factors like supervisory barriers and banking systems in Europe we just heard are reinfenced.
54:09
And unless we break that, for that we need lots of new – and I'll move forward here – we need some of the things that I say here.
54:20
We need to advance in integrating legally many different laws and also the banking union, capital markets union, et cetera. Another factor that is making it very difficult to integrate banks in Europe is ownership structure.
54:42
You can see here the ownership structure of European banks. Forty percent of European banks are non-privately owned. They are either cooperative banks or public sector banks. In terms of assets, in France, 55 percent of assets are cooperative banks or public sector banks.
55:01
In Germany, almost 50 percent. In the Netherlands, more than 50 percent. So when we talk about integrating, are we talking about two big banks merging or are we really talking about integrating banking systems? Also, having these very significant differences in ownership structures puts additional pressure on profitability.
55:29
Do cooperative or public banks have the same incentives as private banks to make their cost of equity? I mean, we've seen very low profitability in Germany. Germany has 1,600 banks and most of them are publicly owned.
55:44
Do they have the same incentives to reach cost of equity as the privately owned banks do? So these are questions that I think are important to reflect upon. Regulatory uncertainty.
56:01
Well, when we talk about TLAC, for instance, we've heard of many different figures in terms of the amount of MREL TLAC instruments that are still to be issued. If we look at the entire banking system in Europe, we've seen figures as high as 1
56:21
trillion euros of 81 tier 2 and senior non-preferred or holding senior debt to be issued. This is a huge amount of money. And the big banks will be able to meet our requirements. We are, you know, we and other European banks are accessing the market very easily.
56:41
But will all banks be able to meet these requirements and at what cost? Well, finally, just some conclusions again. Supply and demand policies to stimulate credit growth are absolutely key. We need to move forward in the banking union.
57:02
We need to finalize the banking union and enhance the single group book. I would recommend that we continuously assess the unintended consequences of all the regulatory requirements that have been implemented in the last few years. And we need a level playing field with a new entrance to preserve financial stability and protect customer needs.
57:29
Thank you very much. Okay. Thank you very much. I think we had quite a number of issues thrown on the table.
57:41
Let me try to maybe first have a round of discussions in the panel before opening to the floor to maybe put some questions, some additional questions, some more refined questions, let's say, on the table. I mean, the first one, the first theme that I perceive we have is one that Thorstein first raised but which relates to
58:07
many things that emerged also in discussion, which is this point, you know, of differences in the setting for exit from the market. So resolution and the like. So international in life, national in death and the like.
58:21
I mean, here I'm always a bit – I mean, this famous sentence from Mervyn King, although I think originally it was Tom Huertas who made it, but it has captured a lot of attention. But actually in Europe we had a lot of, you know, European funds which had been deployed by the
58:43
ESM in dealing with banking crisis in Ireland, for instance, in Spain, in Portugal, in Greece and the like. Nonetheless, let's say, we have the impression that the way in which this has been done has not been creating a common safety net, and we are still there.
59:02
And when I hear, for instance, the chairwoman of the Single Resolution Board, Elke Koenig, saying that resolution is for the few, not for the many, and noticing the fact that liquidation remains basically national to a large extent, I wonder whether we are in a place where we still have a framework for
59:23
exit from the market that is, let's say, the right one for a truly unified market. Because, again, and this links very much to the issue of cross-border banking, because whenever you talk amongst authorities about barriers to cross-border banking, the key concern of host authorities is if things go wrong, the bill will be on my account.
59:51
My taxpayers would have to foot the bill, my deposit guarantee scheme would have to foot the bill. So how can we, let's say, really move to a more integrated…
01:00:00
the, let's say, framework for crisis management. Here I would like to refer to a couple of papers which I always found very interesting by Daniel Gross, who showed how, let's say, the crisis in Nevada and Puerto Rico in the U.S. have been addressed and now they've been addressed in Ireland and Greece.
01:00:22
Noticing that there were a lot of similarities in the type of issue. In one case, more a sovereign problem, Puerto Rico, contaminating the banks, and in another case, more a banking issue, let's say, affecting the finances of the state. Very similar size, but in both cases in the U.S.,
01:00:44
having the FDIC entering into the banks, let's say, during the weekend, taking control of the banks, working them out, selling them to banks coming from other states, taking up the assets, and without basically the customers noticing how can we move maybe
01:01:01
to that setting is, I think, a key point and how much obstacles to cross-border banking should be addressed also through this channel. A second point which I think was emerging, which was interesting in my view, is this issue of, let's say,
01:01:22
or maybe let me say, staying on the cross-border banking issue. I hear and sympathize with this request from bankers to really deliver a truly homogeneous, let's say, set of rules, a really integrated framework for regulatory and supervisory framework for banks in the union and the like.
01:01:44
Here, however, we need to be realistic. I mean, we started with, for instance, negotiating all the packages of legislation that we have now in place, implementing the G20 reforms in a pre-banking union setting, and we still have a number of areas
01:02:04
in which we have different national implementations, different rules locally. There are areas which are not even banking regulations, which are insolvency laws and the like. So here, it would be important for me to understand whether you can give us a little bit more ideas
01:02:21
of priorities. I mean, which are the areas where, let's say, having greater homogeneity and rules would really help cross-border banking, help the integration of the market. And finally, I would say, there is this large, small bank's point that Jose especially raised.
01:02:41
I mean, here, I think we have a tension between two attitudes. So on the one hand, you have the point that is more and more raised in the debate that on the one hand, the regulatory reforms have generated a very complex environment, which for smaller banks is close to unmanageable in terms of compliance costs in particular.
01:03:04
And therefore, there is a strong push to move towards a setting like in the US, a sort of two-tier system, which would differentiate the requirements for large cross-border banks and small local players.
01:03:22
So the proportionality debate, which is very, very, very, very high. On the other hand, let's say, looking also at your discussion of ownership structures, there is sometimes the impression that very entrenched positions of local players, non-contestable in terms of ownership structures and the like, generates a problem in terms of entry,
01:03:45
across borders, competition, and real integration in the system. So which direction should we go? Should we crystallize these differences in regulation, or should we try to move away from these differences? These, I think, also is an interesting question.
01:04:04
Let me close on the FinTech point. I mean, the vibe that comes out from the first round of discussion is always very positive that FinTech is an opportunity.
01:04:20
It will be a steep challenge for new entrants, let's say, to scale up activities to the level of banks, and say, banks can cooperate with these entities so that there is a cooperation rather than competition mode
01:04:40
that could be maybe more important. Let's say, what are really the challenges? I mean, there will be winners and losers. Whenever you have a technological change, there are winners and losers. Where will be the losers here, and how can we try to prepare on the possible problems that the losers will face
01:05:06
if they don't move fast enough? Another point which we have not raised is the cost, and for instance, think of cyber risk. I mean, cyber risk is coming up in the list of priorities for a lot of banks.
01:05:22
Many of you are starting with penetration tests and the like. I mean, in this area, of course, this will mean that the cost will also come up to some extent, but banks deal with information to a large extent. So how can we, I mean, do we have an environment, should we do more in this area?
01:05:41
Also, as policymakers, to try to follow this path and to try to understand and push banks to prepare fast enough for the new challenges in this area. So let me open the floor to those of you who want to take up some of these themes
01:06:01
or others, as you like. Penti, please. Thank you. From Jose Antonio, I will take two issues, very important, to distinguish what is cyclical and what is structural in terms of analyzing bank profitability.
01:06:24
And it gives then perhaps a base for draw conclusions how to go forward. But that is very, very important. All we expect and hope that there will be a positive macroeconomic development,
01:06:43
but even in that case, structural inefficiencies do not disappear. And that is very good point. One point which relates to FinTech and perhaps also what is the role
01:07:01
of small banks and this regulation. And we had Semina, and their young engineer gave a speech with Bonitel and very new startup guy saying that, I'm just wondering why bankers
01:07:22
are complaining regulation. I'm an engineer. I don't know what is banking that much, but I made this startup, which was bought by a Spanish bank. But he made it and got a banking license.
01:07:41
There were difficult criteria to meet. But you know, when I met all those criteria, I got the entire global market for me. I was treated as incumbent banks. And it was like a sort of IT platform which gives global access.
01:08:01
And he was speaking for regulation, perhaps along the lines what Heike said, that when you know what the rules are, then you can play cards. Another point which Torsten and the chair took up, what is the exit from the market
01:08:22
and how to do it and how to do it in an orderly manner. We are in between two fires. We need to move swiftly and perhaps take risks. And then it could cause distortions.
01:08:41
One issue what I think is that, do we expect too much from authorities? And do authorities think that they can really manage banking business in a way they can take care of taking businesses out of the market.
01:09:00
And I think that we need to compare what is taking place in the US and what is taking place in Europe. And in the US, there's a special professional people, those who are taking care of that as consultants and doing it for FDIC and based on assignment.
01:09:24
So that is just the idea that whether we should leave that more in the hands of private markets and let the market forces to play.
01:09:40
Those two issues, just as remark, thanks. To you Haki, I think Torsten and then Jose, Torsten. Well, thank you very much. Just a few points to follow up. On the FinTech, I very much like, I forgot who it actually was, who mentioned that was either Jose Antonio or Haki
01:10:03
on that you have to distinguish between the FinTech as a technology and FinTech as a business segment. I think that's a very valid point. Now, I also take the point that it's about collaboration, not necessarily competition, but I guess that you can say about everything in the financial system. I mean, so this whole debate on whether market
01:10:20
or bank-based systems are better, I think we are kind of have moved beyond that and we need both and they work together quite a lot. I mean, a banking system cannot work without functioning capital markets. So I think it's more the question that through the disruption of FinTech, yes, there will be winners and losers.
01:10:40
I don't know who they will be, otherwise I probably would make a lot of money with that. But it could be winners, could be one bank or maybe some other institution. I mean, just comparing it to a setting that I know a little bit, a developing country, Kenya, where a telephone company actually is one
01:11:01
of the big winners of the FinTech revolution by offering mobile money services. And I guess the other question is, so there will be winners and losers. It's too early to say who it is. It could be one bank, it could be new entrants. And of course, the other question is also who will be regulated, to which extent will they stay inside or outside the regulatory parameters.
01:11:22
On the point of regulatory requirements, I guess there's always this trade-off between having simple rules, such as leverage ratio, for example, and having more complicated rules and complicated systems that kind of try to regulate according to risk. And there's a trade-off. And of course, many economists have pointed out
01:11:42
that maybe it's just better to go for higher capital requirements rather than to complicate the regulatory system further and further, to thousands of pages. Now, I wanna make the link in Jose Antonio's last two slides, because in the last slide you said the regular requirements are a burden. On the penultimate slide, you said,
01:12:01
well, we need more merchant acquisition. I think there might be a link here, actually, by forcing certain mergers through this process of regulatory reform. On the third one, the exit options, yeah, that's a very good question, whether they should be purely market-driven
01:12:21
or they should be actually more of an activist approach by the supervisors in terms of bank restructuring. I mean, that's partly the idea behind this kind of AMC, the asset management company that some of us have been proposing to kind of more actively drive this bank restructuring process that we need and that also can help reduce the overbanking.
01:12:44
Very final point I wanna make is, one thing is mergers, yes. The other thing is in complete kind of assimilation of banking systems, but I'm not quite sure whether we really wanna go there. I mean, it has been in the banking literature now
01:13:02
more and more points on diversity can also be good, because if everybody is diversified exactly the same way, we have a problem in the crisis because everybody's exposed to exactly the same risk. So having a certain degree of diversity, I think, can be very helpful. And I don't think it's necessarily a contradiction to having one single banking market.
01:13:21
Thank you, was that please? Yes. Yes, a few very quick comments on the fact that the popular resolution process was purely local. What I would say is the process is the same for everybody. The fact that Santander ended up buying Popular
01:13:42
doesn't mean that the resolution process was domestic. No, it was not. The process was open for everybody. Obviously, in these processes where you intervene an institution and in order to avoid volatility, et cetera,
01:14:02
you need to react very, very quickly. Domestic institutions have an edge. But the framework was common and was open for all banks, not just domestic banks. The fact that Santander bought it is nothing to do with the way the framework was set up.
01:14:22
In this case. Can I say, Jose Antonio, no, this is very interesting. And the point which I found interesting, for instance, and maybe Federico Signorini can confirm it, is that, for instance, also in the Italian case, what I understand is that there have been also foreign banks checking the books of the banks. Then eventually it was an Italian bank buying in the portfolio,
01:14:41
but it was open also to foreign institutions. So I also wonder whether the fact that you have more domestic consolidation is maybe natural in the first phase of the adjustment in a setting in which you have excess capacity. So basically, it is convenient for banks which have overlapping, let's say, distribution networks,
01:15:01
maybe to buy. So maybe you go through a first wave of consolidation which is mainly domestic, which reduces excess capacity, and then you have a second stage in which maybe you could have more cross-border. As we've seen, the number of cross-border M&A transactions
01:15:20
in the last few years has been almost nil. And it's interesting, if you read the research that was published yesterday around the potential interest of UniCredit to enter into talks with Commerce Bank, it's interesting because the reasons why analysts think that is possible
01:15:42
is all the reasons that we have stated make it impossible. In other words, that's what the analysts say, but UniCredit's Germany subsidiary has a 20% capital adequacy. They have not been able to repatriate the capital back to Italy. So one way of using that capital
01:16:03
is to put it to work locally. The second one, re-domiciling or having more activities in Germany relative to being perceived as an Italian bank will mean a significant drop in financial costs, et cetera, et cetera. So the reasons that analysts seem possible
01:16:23
or the analysts trying to find the reasons around going, trying to solve all these impediments that we are talking about. So the fact that in resolution you find mostly domestic banks participating
01:16:41
is because of these same problems. If I buy a bank in, if I'm a German bank or a French bank and I buy a bank in Spain, I will still have to have headquarters and everything there. I am not, if I have different activities in different regions in Spain,
01:17:01
I have one headquarters and regional headquarters which are very, very small. That's the way it should work in Europe. That's the way it works in the US. That's not the way it works today in Europe. MPLs, well, our experience, we bought Popular on the 7th of June and on the 7th of August, exactly two months later,
01:17:25
we disposed of 30 billion of non-performing loans in the largest non-performing loan sale in Europe. I'm not saying, this is not to say that Popular couldn't have done it, right? But it is very difficult for banks which are in stress,
01:17:43
which have limited capital to dispose of these assets very quickly. For us, it was almost immediate. For weaker banks, getting rid of non-performing loans takes time, takes more time.
01:18:00
Fintechs, but again, if we end up competing in the same regulatory framework, we feel fine. We don't feel threatened by competitors working with the same rules, right? So again, we invest a lot.
01:18:20
We embrace new technologies. We now use blockchain for many different purposes, some to improve our customers' experience when they send monies from Spain to Mexico, for instance. Now, after the earthquake in Mexico, the fact that we had this blockchain technology is allowing donations in Spain to fly to Mexico immediately.
01:18:41
Well, before, it would have taken a few days. It would have cost much more money. So clearly, we are enhancing customer experience, embracing these new technologies. At the same time, it is helping us cut costs quite significantly. So clearly, we are embracing these technologies. Now, in terms of competitors,
01:19:01
if we all compete with the same rules, we feel fine. We will have to do things better. They will force us to do things better. Competition is good, and we embrace competition. We like competition. Finally, there are very,
01:19:20
you asked about things that we would recommend that we try to put as priorities. Everything related to banking unions, single deposit insurance, et cetera, is, that's key, right? It's absolutely key. There are many other different regulations, mortgage laws, bankruptcy laws, employment laws.
01:19:42
If we are going to manage our people in Europe as we manage our people in Spain or as we manage our people in Brazil, we need exactly the same rules, labor rules, et cetera, et cetera. So it is very complex. But let's not put,
01:20:01
let's not put too ambitious goals in the near term. But for us, the key is to continue working on the banking union and the three, four pieces of the banking union. Thank you. Haki, before we open. Yeah, I agree with majority of the comments already presented, but I would also raise another angle in a way
01:20:22
that sort of what is similar and what is not. And as I said, I think that the rules should be the same, irrespective of sort of bank or country or whatever sort of that we play with the same set of rules. But at the same time, we have to accept that there are also differences sort of in terms of market, environment and banks.
01:20:40
And to me, sort of if we look at the systemic issues, I would say that the first line of defense for sort of having stability in the financial system is that you have profitable banks. And that is naturally not the case in a way that we have sort of evenly spread profitability across the Europe right now. And then sort of there's probably worth taking a look at that what are the historical reasons
01:21:01
or sort of cultural or whatever reasons, differences in the sort of local, legal frameworks and all those leading to a situation where we have such differing profitability among different banks. Then looking at another angle that, okay, I occasionally hear sort of complaints that why are for example,
01:21:20
the risk weights among different European banks so different and why do the Nordic banks have so low risk weight as an example. But if we look at the statistics for MPLs, low losses and all that, so we can see that there are huge differences. So we should accept that we should have same set of rules, we should have a risk-based metrics
01:21:42
for capital rules, for example, but then accepting that there are differences between different markets. And looking at that angle as an example, the discussion around Basel 4 is somehow sort of a bit weird in a way as we say that we have to have rules which are risk sensitive,
01:22:02
we have to have capital rules which are risk sensitive and at the same time, we are saying that we want to have output flaws. So if and when we hopefully can trust that we have a robust system, for example, reviewing the internal models through three exercises and all these, so why would we then need output flaws? It's sort of saying that as we don't trust
01:22:21
that the system works, then we have to have some other measures. So I would advocate that we have level playing field, same set of rules, but we also understand that where are differences and then work with those. Okay, thank you very much. So I see already hands raising in the floor.
01:22:41
So let me, I think that.