A WINNING VARIATION FOR ROMANIA AND THE ROMANIAN BANKING SYSTEM: THE BUSINESS MODEL OF BANKS TO ADDRESS THE PUBLIC INTEREST OF THE HOST COUNTRY
Economic analysis is increasingly referring to one of the lessons of the financial crisis: the credit-based pre-crisis growth cycle and “selective” risk management, rising asset prices and stagnant productivity cannot be replicated or sustained. The almost generalized applied model has created unprecedented economic and financial changes, completed, among other things, by imbalances, inequalities and a young generation lacking the perspective of employment and transparency in the process of professional career development. I consider that sIt increasingly requires that policies on social security and raising living standards be effectively implemented and thus create the conditions for greater social, political and financial stability needed for sustainable and sustainable development. national and European. I call this state of the economy a MODEL OF SUSTAINABLE GROWTH THAT COMBINES SOCIAL STABILITY WITH ECONOMIC DYNAMISM. The real traction towards such development can be given by achieving a dynamic balance within a virtuous cycle between: consumption, investment and trade.
The European banking community has entered a period of risk aversion by reducing exposures, both those in stock and new ones. Restructuring the banking activity, by applying a business model characterized most of the time by an emphasis on non-credit activities and by reducing costs (dismissing some employees, especially with experience, but also with high salaries, as well as closing a large number territorial units) partially offset the requirements of the new capital and liquidity regulations. Shareholders’ profitability requirements were met to a lesser extent. All these changes occurred simultaneously with a risky counterpart reflected in the decrease in the quality of services and the way of satisfying the clients’ requirements and their protection. On various occasions (analysis, public appearances) banks highlight the factors that hinder their activity: stagnation of markets in which they operate, the impact of non-performing loans, structural challenges generated by interest rates and demographic development, increased volatility and decreased predictability and more recently fintech and technological revolution. All these trends and developments lead to increased expectations of increased risk and consequently the need for new periodic asset quality analysis (AQR) and new stress tests that will further generate capital increase requirements in the event of 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 crediting process, to finance the productive investments and to create 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. The supervised banks complain that the new regulations have complicated their existence, making the application of the requirements more and more difficult and costly. However, the large banking groups in the euro area with a presence in Romania had and still have a competitive advantage over small and medium-sized banks. That is why I call into question the need to apply more boldly the principle of proportionality in connection with the application of European and national regulations, especially those relating 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. Otherwise, the current situation will be perpetuated and amplified when bank customers, especially SMEs and individuals, have increasingly difficult access to obtain a loan, which in the medium term and will seriously affect the real economy and sustainable growth, as well as the existence of each bank on the local market. It is necessary that the competent institutions, all the factors of responsibility (and here I am referring primarily to the oversight and regulatory institutions, as well as the legislator) to do everything to remove the suspicion, which can sometimes turn into reality and which was mentioned by the former Governor of the Bank of England, Mervin King : regional banks, cross-border banking groups 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 the arms” of local taxpayers by the “mother” groups in case of situations that would call into question the continuity of their activity, relying on the fact that the authorities 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, BNR 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, will continue to provide customers with quality products and services, and exercise adequate protection. BANKS SUCCESSFULLY CREATES ADDED VALUE FOR ALL STAKEHOLDERS. WE NEED TO READ MORE SUCCESSFUL BANKS ON THE ROMANIAN MARKET. THE ROMANIAN MARKET NEEDS TRUE “MARKET MAKERS” WITH A LONG-TERM CONSTRUCTIVE ATTITUDE AGAINST THE NEEDS OF THE ROMANIAN ECONOMY AND LOCAL CLIENTS.
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, former CEO of Standard Chartered Bank and currently a 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.” 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 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 the short term and I am convinced that only companies -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 belonged to the group of supporting bankers as a banking strategy with a focus on increasing profits and shareholder earnings reflects “an old-school of thinking”. In the same issue of The Banker, Andy Maguire – COBC of HSBC mentions: “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 place particular 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 is necessary to apply the complex program of transformation of each institution, starting with and with changing the mentality of bankers. In the same direction, a change is needed in banking culture. I remember what Hugh Harper (EY) said: “The culture has to ensure that it reflects its purpose . Considering 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 some true professionals with remark: “It is 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 down territorial units and firing experienced bankers, banks can use these business “neighborhoods” for better financial education and for developing local entrepreneurship, so necessary in a country like Romania, where the phenomenon “Underbanking” is deepening, the emergence of new businesses is becoming rarer, more and more we are witnessing the disappearance of many companies and the loss of some jobs. Disparities , inequalities are deepening and risks of all kinds are increasing . In an economy that wants to have a sustainable growth, materialized through an effective convergence with the higher 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 involving new business models to ensure their continuity, stability, profitability and social mission, to encourage innovation and new technological solutions and also to apply customer protection and deepen financial inclusion. Economists know that a diversified economic structure requires a variety of financial structures. Banks with an activity that covers all or most of the territory of a country can guarantee and develop business relations between the business community in one locality and the business communities in other localities or other countries, creating the premises for the development of their own clients, increasing the sources. revenue for all stakeholders in local and national communities. The bank focuses locally while connecting with its customers at the national and European level.
If the previous period of the banking cycle was characterized by de-regulation, financial innovations, globalization and the credit boom, the new period in which we entered is largely defined by the term ” digitization ”. The winning banks will be those that will adapt to the new requirements and expectations of customers, which will increase process automation and streamline business, creating new products and services, and can achieve a low cost in the process of 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. A basic rule will have to be applied at all times: good risk management and benefits for stakeholders. 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 . Sub-banked Romania, in full process of development and convergence, needs inclusion and financial education , and in this sense we are called 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 market.
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 cooperation, of collaboration between the political, economic, financial levels (rather, we note with regret the lack of such an organization), in our way of communicating with society. The Romanian economy has its priorities that we need to know and finalize through programs. The perpetuation of unproductive debates creates a lot of mistrust, confusion, risks, unpredictability, volatility, developments that can benefit some “connoisseurs”, but society as a whole and we will all certainly lose . It is necessary to think more and with the speed characteristic of today’s modern society, to sit around the table and listen to the various opinions, to clarify where it is necessary and then to come on the market with eligible decisions and solutions for the current stage and perspective of Romania.
Team work at all institutional and inter-institutional levels it 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 decided and printed effectively at the international level.
Prof. Univ. Dr. Nicolae Danila
Academy of Romanian Scientists
02.04.2018