Dear Mr. Hofmann, as the President of the EACB, could you please give us your views on the future of the banking sector and its regulation. What will be the main challenges and opportunities for co-operatives banks?
The integration of the banking industry and financial markets has been progressing significantly in the past decade. This was possible due to huge regulatory efforts, which culminated for Eurozone banks in the creation of the Banking Union. However, this trend is not only European, as it is steered also at international level by the work of the Basel Committee and the FSB.
While, it is essential to preserve financial stability promoted by a strong set of common rules, we still would raise awareness on the one hand on the need to avoid overly strict and bureaucratic regulations and on the other the urgency to deeply reflect on proportionate solutions when designing new regulation. Indeed, at this time banking is the highest regulated sector of all. At a time when certain global reforms are reviewed and ultimately questioned in the USA, Europe should ask whether the regulation in place is efficient and whether the pace of implementation in the EU should be fine-tuned to avoid a globally uneven playing field.
The regulatory landscape is growing more complex than it has ever been and the interlinkages between various requirements make it more and more difficult to assess impacts and consequences. We are indeed witnessing a consolidation process in the banking sector especially among smaller institutions in many countries. It is alarming when mergers are not driven by the market, but mainly by the burden of compliance, even though banks are sound and profitable. When sound and sustainable business models are in place, regulators and supervisors should not interfere with “good political advice”, because they are not better bank managers. Finally, while the banking sector remains strongly under the spotlight of regulators, the challenge posed by the rise of shadow banking operators and fintechs should not be underestimated, to avoid distortions to competition and the build up of (systemic) risk in less regulated markets. Paving the way for new technologies must not mean putting established market participants at a disadvantage by giving newcomers undue regulatory advantages.
Co-operative banks are ready to take on the challenges of the constantly evolving regulatory and business environment, including digitalisation thanks to their proven ability to cope with varying frameworks, their competitive strength combined with a prudent business model and strong capital base, and the ties with their members/customers within the local economy. Co-operative banks are well positioned to effectively address customers’ needs now and in the future. At the 200th anniversary of Raiffeisen’s birthday, we are well equipped to weather a new century of change.
What is your take on the outcome of Basel III regulations released at the end of 2017?
In December, after a long and burdensome gestation the Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision reached the agreement for a final set of amendments to the Basel III capital framework. We appreciate that the regulatory agenda set up in the aftermath of the financial crisis has come to a conclusion with the revision of Basel III. The new standard once again modifies the capital requirements for banks with the imposition of an output floor regarding the capital impact of banks’ internal models and numerous changes to the Standardised Approach for credit risk. We believe that when the European transposition will come due, it should rediscuss this issue; one possible approach will be to restrict the application of this output floor to the highest level of consolidation for each banking group. As EACB we have taken a clear position and issued a press statement at end of the year.
At the same time, we welcomed the intention of the European Commission to submit the new framework to a thorough and detailed impact assessment and consultation by stakeholders. Indeed the European authorities have to check that these amendments will not have an undue impact on the financing of the European economy, growth and jobs, respect the diversity of business models (for instance the use of loan to income indicators in mortgage credit), and that it will not give a competitive advantage to other jurisdictions. Regulation is not a goal in itself, but has to serve the economy and its citizens.
Europe's co-operative banks are well capitalized and stable. As a consequence the institutions will be able to cope with the revised Basel III standards even if they do not really match European interests. However, we cannot totally exclude that the new rules may affect the lending of banks to the economy especially as a consequence of reduced risk sensitivity due to the output floors and the implementation of a new standardised approach.
Moreover, European legislators should not begin transposing the requirements into law unless there is clear evidence that the new rules, including for instance the stricter trading book requirements (Fundamental Review of the Trading Book rules), are being implemented in other major jurisdictions. It is indeed paramount to avoid serious distortions of competition.
2018 is the 200th Raiffeisen’s Anniversary, what kind of initiatives will be taken by Co-operative banks to celebrate it ? Why is Raiffeisen still relevant today?
All across Europe and even some non-European countries, this year co-operative banks will celebrate Friedrich Wilhelm Raiffeisen’s 200th Anniversary (1818-2018) through several events and initiatives. This will be an occasion to highlight the roots and values of co-operative banks and the co-operative movement more in general. Throughout the year, EACB Members will communicate on the messages of one of the founding fathers of co-operative banking, whose values such as sustainability in business model, self-help and the advancement of its co-operative members, are still modern. Raiffeisen’s simple but profound messages have indeed remained extremely important. In times of great technological advances, changing markets and clients’ preferences the basic principles of Raiffeisen are more relevant than ever. They provide valuable guidance to co-operatives and co-operative banks on how their business should be structured in order to promote members’ welfare. Above all, these basic values promote sound banking and contribute to the stability of the banking sector.
At EU level, the EACB will mark the year: a special publication on the Raiffeisen idea and the distinctive feature of co-operative banks will be released. Moreover, a webpage was created for gathering all their members initiatives. Raiffeisen’s Anniversary will also be celebrated with a special session on the occasion of the EACB Regulatory Debate on the 20th of March in Brussels.