In his speech of Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, will focus on regulatory topics in Europe that are of special interest to Brazil as well, namely the finalisation of global post-crisis regulation and the regulatory challenges to be met in a digital financial world.
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2. Finalising global post-crisis regulation
Regarding banking regulation after the global financial crisis, we reached a remarkable milestone not too long ago. In December of last year, the Basel Committee on Banking Supervision finalised Basel III – the global minimum standard that imposes limits on the risks that internationally active banks can take. The body had worked since the onset of the financial crisis to find a global solution to the problems that led to the crisis.
However, good rules are of little value if they’re not implemented properly. Therefore, what counts in the end is taking the next step and mastering the implementation of Basel III. And we should not blind ourselves to the fact that we will continue to experience headwinds here: from those who go against internationally agreed policies and rules, from those who think banking and the economy would profit from a looser grip, and from those in the financial sector who claim that they’ve been treated unfairly and that they’ll have a hard time coping with the standards.
In Europe and in Germany, some have been expressing opinions along the lines of that third argument in particular. While I can see that regulatory reforms are burdensome for the European banking sector, especially in an already burdensome environment for banking – I’m thinking here of the low overall profitability, for example, or the assembly of the banking union – those different challenges, though they happen to coincide, should not be lumped together. They do not count as arguments against robust global minimum standards.
Standards of the final Basel III package
The standards of the final Basel III package are, overall, manageable for institutions in Europe and in Germany, and even more so given the generous implementation period. For example, what is known as the output floor – a very distinctive feature of the finalisation package – will not come fully into force until 2027. Moreover, let me stress how valuable a global compromise on banking standards is. Back in 1974, it was a German bank named Herstatt Bank, which had been engaging in forex speculation far above its risk capacity and at the expense of their international counterparties, which invoked the Basel Committee and finally led to Basel I in 1988 and Basel II in 2004. We need to keep in mind that each of these sets of rules was originally designed to level the playing field for internationally active banks across the globe. And to prevent a regulatory race to the bottom among jurisdictions.
But the global financial crisis proved beyond question that the international framework still contained major weaknesses. Banks in Europe – and, to my knowledge, across the globe – have never opposed this reasoning in general. But they must also accept that it is not a shared theory that will make global banking more reliable in the future, but a workable global compromise.
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In Europe, we are currently busy fine-tuning our regulatory framework by providing some additional relief for small, low-risk institutions. Importantly, capital and liquidity requirements will remain untouched. But we are aiming to reduce disclosure requirements, simplify reporting, and exempt some institutions from recovery and resolution planning, amongst other things.
So what’s the global state of play in matters of banking regulation? One major step forward – the finalisation of Basel III – has already been taken. The next, equally important step lies directly ahead of us – full implementation of these rules. During implementation, we should bear in mind that Basel standards are minimum, not maximum standards. Nevertheless, they are designed for the global players, and simpler rules are called for where small and regional institutions are concerned. Importantly, this principle of proportionality must not be mistaken for a loophole that allows lax implementation or even deregulation.
3. … and setting the route for digitalisation
As regards the road towards a more resilient global financial system after the financial crisis, we’re in the driving seat – and what’s more, we also know the general direction in which we’re headed. But where digitalisation is concerned, this is not the case: we still cannot know for certain where the digitalisation of the financial sector will lead us, even though we are currently right in the middle of it. And for those of us in the driving seat of banking regulation and supervision, this makes us feel uneasy. Let me elaborate on that.
It is not that we are unable to cope with changes and uncertainty per se. In fact, change and sectoral adjustments have been constants in the banking sector in Germany and in Europe. Market environment, customer habits and technologies in banks have been evolving constantly. In Germany today, in the middle of a low-interest-rate environment, many are adjusting their business models. Since the early 1990s, the total number of banks and savings banks in Germany has more than halved. For regulators and supervisors, those changes in the business environment mostly haven’t challenged the way we work. With regard to the digitalisation of the banking sector, we should likewise not get nervous about innovations and new competitors, as they are welcome as part of a healthy market environment.
Of greater concern for us is that the digitalisation of the banking sector may possibly change the gameplay as well. Consider, for example, the speed of transformation. In a digital world, it is likely to increase. For instance, customer fluctuation is expected to rise, as competitors are available at their fingertips. Worldwide rivalry is likely to increase through online competition. Time to market has become crucial for some business, which is again likely to influence product development. All of these dynamics may well feed into the risk landscape. There are numerous consequences that are worth pondering from a stability perspective – think, for instance, of the threat of a rapid disruption of business models, or systemic operational risks.
Now I am well aware that the whole digitalisation trend has produced a host of buzzwords and metaphysical theories, some of which might never materialise. No major disruption has occurred to date. If you look at the German banking sector, there are segments such as internet payments where new market entrants have taken incumbent banks by surprise. But these developments have had limited effects outside of those segments. Also, while new market entrants initially took an aggressive approach towards incumbents, different forms of cooperation are usual today – we observe a blend of competition and cooperation as well as a widening of services. An abundance of new business ideas have turned up, from white label banking to digital ecosystem strategies. So, as a preliminary summary of digitalisation, I can say that, as of today, digital revolution fantasies have waned.
What is more, if we look at regulation, earlier narratives about the end of banks have ceased. Not long ago, the so-called fintechs were presented as opponents to classical banks. Today, some fintechs have even acquired a banking licence, meaning that they have to fulfil exactly the same requirements as other, age-old institutions.
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But as with the Basel minimum standards for banks, we need to take the long-term perspective when assessing the reason for rules for the digital financial sector. Because with digital innovations, as with the traditional risks of banking, we all have to unite in ensuring that digital innovation now will not be the origin of the next crisis. This should motivate us even more to keep in touch.
You can read the full version of the on the website of BIS.
Source: https://www.bis.org/
