Prof. Univ. Dr. Nicolae Dănilă
Academy of Romanian Scientists
Economic analysis increasingly points to one of the lessons of the financial crisis: the pre-crisis growth cycle based on credit and “selective” risk management, rising asset prices and stagnant productivity cannot be replicated or sustained. The almost generalised model applied has created unprecedented economic and financial mutations, resulting, among other things, in imbalances, inequalities and a young generation lacking job prospects and transparency in the process of career development. I believe that it is more and more necessary that policies on social security and increasing living standards are effectively put into practice and in this way create the conditions for greater social, political and financial stability necessary for sustainable and sustainable development at national and European level. I call this state of the economy a MODEL OF SUSTAINABLE GROWTH THAT COMBINES SOCIAL STABILITY WITH ECONOMIC DYNAMISM. The real pull towards such development can be given by achieving a dynamic balance in a virtuous cycle between: consumption, investment and trade.
The European banking community has entered a period of risk aversion by reducing both existing and new exposures. The restructuring of the banking business, by applying a business model mostly characterised by a focus on non-credit activities and cost cutting (laying off some employees, especially experienced but also highly paid ones, as well as closing a large number of territorial units) partially compensated for the new capital and liquidity requirements. Shareholders’ profitability requirements were met to a lesser extent. All these changes have occurred at the same time as a risky counterpart reflected in a decrease in the quality of services and in the way customer requirements and protection are met. On various occasions (analyses, public appearances) banks highlight the factors that hamper their activity: the stagnation of the markets in which they operate, the impact of non-performing loans, the structural challenges generated by interest rates and demographic development, increased volatility and decreased predictability and more recently fintech and the technological revolution. All these trends and developments lead to heightened expectations of increased risks and consequently the need for new periodic asset quality reviews (AQR) and new stress tests that will further generate capital increase requirements for a large number of banks.
In such a challenging climate, but, in my opinion, generating important opportunities, it is necessary, as an objective and imperative necessity, to resume the process of crediting, financing productive investments and creating new jobs. The world is moving fast and Romania can no longer afford to waste time. I remind you that the financing of the real economy is the basic function of any banking business model.
Central banks, supervisors and regulators have initiated some measures and have made efforts to restore the banks’ risk appetite and resume their normal activity. At the same time they have imposed and are imposing new regulations. Supervised banks complain that the new regulations have complicated their existence, making enforcement actions more difficult and costly. However, large euro area banking groups with a presence in
Romania had and has a competitive advantage over small and medium-sized banks. This is why I bring up the need to apply more courageously the principle of proportionality in relation to the application of European and national regulations, especially those related to capital and liquidity, depending on the business model and risk model developed by each local bank. This would eliminate the “one size fits all” monoculture model, which has proven to be unproductive and risky.Otherwise, the current situation where bank customers, especially SMEs and individuals, have increasingly difficult access to credit will be perpetuated and amplified, which will affect the medium and long term.
It is serious for the real economy and sustainable growth, as well as the existence of each bank in the local market. It is necessary that the competent institutions, all stakeholders (and here I refer primarily to supervisory and regulatory institutions, as well as
to the legislator) to do everything possible to remove the suspicion, which can sometimes turn into reality and which was mentioned by former Bank of England Governor Mervin King: regional banks, banking groups with cross border activities tend to apply the rule of being “international in life, but national in death”. In other words, there is a risk that some subsidiaries in our country will be “thrown into our arms”, the local taxpayers, by the “mother” groups in case of situations that would put in question the continuity of their activity, counting on the fact that local authorities will act accordingly to save them, to avoid the danger of contagion, by virtue of achieving the objective of financial stability (situation anticipated by me; see Danila, NBR website, 13.02.2013). I noticed that this topic is becoming topical on the agenda of European debates on the new configuration of financial markets and the application of the “risk sharing” principle.
Successful banks will survive and grow, paying taxes and fees, continuing to provide customers with quality products and services, and exercising adequate customer protection. SUCCESSFUL BANKS CREATE ADDED VALUE FOR ALL STAKEHOLDERS. WE NEED TO READ MORE SUCCESSFUL BANKS ON THE ROMANIAN MARKET. THE ROMANIAN MARKET NEEDS REAL “MARKET MAKERS” WITH A LONG-TERM CONSTRUCTIVE ATTITUDE TOWARDS THE NEEDS OF THE ROMANIAN ECONOMY AND LOCAL CUSTOMERS.
Efforts and measures are needed at the level of each bank and the banking system as a whole to avoid the specter of an existential crisis. Eliminating complications related to the structuring of banking products and the costs attached to them, a correct balance in the process of sharing risks between bank and customer would diminish the perception (often the reality) that banks do not work in the public interest, focusing mainly on maximizing shareholders’ profits and earnings. I recall the words of Peter Sands, ex-CEO of Standard Chartered Bank and currently professor at Harvard University: “The public is asking high-level questions about the value that banks add to society and the trade-off between private gain and public risk … There is a fundamental challenge to the banks, both in terms of the right to play within society but also in the ability to have a sustainable business model” (The Banker, January 2017). In the same issue of the famous trade publication, the former CEO of Barclays Bank adds:” The financial crisis of 2008 revealed how many banks were too aggressive, too self-serving and too focused on short term and I am convinced that only companies that consider the long-term impact of their actions on society will be able to build a sustainable business. In other words – there can be no choice between doing well financially and behaving responsibly in business ”. Personally, I have always been in the group of bankers who argue that a banking strategy with a focus on profit growth and shareholder returns reflects “an old-school of thinking”. In the same issue of The Banker, Andy Maguire – COO of HSBC said: “The banking industry needs to return to doing what it is supposed to be doing – serving real people, businesses and the economy, and win back the trust of society”. Recent decisions and action plan at EU level put a strong emphasis on “socially responsible investments” developing policies based on the rule that: “Investing with an eye to environmental or social issues, not just financial returns, has become mainstream in the past decade” ( The Economist, March 24th, 2018).
The progress of each bank requires more than change; it requires the implementation of a comprehensive programme of transformation of each institution, starting from and with the change of bankers’ mindset. In the same direction, a change is needed in the banking culture. I remember what Hugh Harper ( EY) said :” The culture has to ensure that it reflects its purpose . Whereas corporate strategy looks three to five years in the future, purpose is about why the bank is in a certain place in a country and its essence for perhaps the next 30 to 50 years”. I conclude by quoting some remarkable interventions of true professionals with the remark: “It’s important to acknowledge that financial institutions do not have a neutral or benign role in society. They have both the power and responsibility to allocate resources in ways that not only do not harm but also create positive outcomes” ( Tamara Vroom- CEO Vancity).
A normal banking activity plays a major role in a client’s life. Following an analysis of the current situation and more on its potential (either corporate or retail customer), the bank offers a wide range of solutions, services and products to make it easier for the customer to manage multiple aspects of his life, with beneficial results. for both partners and with the application of an adequate “mitigation” of the risks. Moreover, instead of closing territorial units and firing experienced bankers, banks can use these business “proximities” for better financial education and for the development of local entrepreneurship, so necessary in a country like Romania, where the phenomenon of “underbanking” is deepening, the emergence of new businesses is increasingly rare, more we are witnessing the disappearance of many companies and the loss of jobs. Disparities, inequalities and risks of all kinds are increasing. In an economy that wants to have sustainable growth, materialized by an effective convergence with the top level of European economies. The emergence and existence of a bank in a market is a long-term investment. The principle of business continuity is closely linked to the effective realization of the benefits for all stakeholders. The current local and international climate calls for banks to move to a “new normal” by engaging in new business models that ensure their continuity, stability, profitability and social mission, that encourage innovation and new technological solutions and at the same time apply customer protection and deepen financial inclusion. Economists know that a diversified economic structure requires a variety of financial structures. Banks with an activity covering all or most of the territory of a country can guarantee and develop business relationships between the business community of a locality and the business communities of other localities or other countries, creating the premises for the development of their own clients, increasing the sources of income for all stakeholders in local and national communities. The bank focuses locally while connecting with its customers at national and European level.
If the previous period of the banking cycle was characterised by de-regulation, financial innovation, globalisation and the credit boom, the new period we have entered is largely defined by the term “digitalisation”. The winning banks will be those that will adapt to new customer requirements and expectations, that will increase process automation and streamline their business, create new products and services, and achieve a lower cost in implementing new banking regulations. In this sense, the banks will make important investments in technology and innovation, which will ensure their competitive advantage in satisfying the clients’ requirements, in the conditions of increasing the activity and the local involvement and an adoption of the new regulatory requirements. One basic rule will have to be applied at all times: good risk management and stakeholder benefits. Let’s not forget the human capital in the banking environment. Its quality, the development of a healthy professional career are the factors that ensure the long-term competitive advantage of each bank. Under-banked Romania, in the process of development and convergence, needs inclusion and financial education, and in this regard we are called upon as a priority to create all the conditions for the implementation of these requirements through concrete programs, initiated by and directly involving the central bank, commercial banks, supervisors and regulators of the banking, capital and insurance markets.
Daily media, some public debates today are loaded with insufficiently analyzed topics on their impact, often supported by “cocky” opinions and arguments, directed by official and unofficial institutions and personalities. Most of them are important. But we are wrong in our way of working together, of collaboration between political, economic and financial levels (we regret the lack of such organization), in our way of communicating with society. The Romanian economy has its own priorities that we need to know and to finalize through programs. Perpetuating unproductive debates creates a lot of mistrust, confusion, risks, unpredictability, volatility, developments that may benefit some “insiders”, but society as a whole and all of us will surely lose. It is time to think more and with the speed characteristic of today’s modern society, to sit around the table and listen to the different opinions, to clarify where it is appropriate and then to come to the market with decisions and solutions eligible for the current and perspective stage of Romania.
Teamwork at all institutional and inter-institutional levels must become the rule before launching all kinds of ideas on the market. Romanian society is waiting for solutions and facts.
I anticipate that the topic of public interest will make its mark in the debates and programs at national level and in Romania. This is in fact one of the main directions that has been decided and effectively implemented internationally.