- Challenges for the banking system today
- Processes and trends in EU financial markets
- More active involvement of Romanian banks in the national effort to get the country out of the crisis and the successful implementation of the National Recovery and Resilience Plan
1. CHALLENGES FOR THE BANKING SYSTEM
- An opinion often expressed both among specialists and at the political level is that, despite the medical crisis doubled by the economic one, the banking system has strengthened, having a capitalization in accordance with current regulations, especially in the context in which it enjoyed and still enjoys a climate of support and assistance from the government and the central bank for businesses, households and banks.
- However, a “forward looking approach” on banking activity and balance sheets highlights important vulnerabilities: insufficient provisioning, low profitability, declining revenues and unsustainable changes in their structure, lack of objective adjustments needed in the business model. The initiatives are mostly focused mainly on cost reduction (staff reduction, closure of banking units), telework, reconfiguration of internal processes, digitization, etc.
- At the same time, there are new challenges caused by the inflation of assets due to excess liquidity, low interest rates, as well as the speculative climate in the world of digital assets.
- Based on these realities, it is imperative that banks urgently implement internal plans and strategies that strengthen risk management, meet compliance requirements, improve internal audit, ensure alignment with best practices in corporate governance, and increase the efficiency of the use of internal resources, primarily human resources (the main resource for a credit institution). All these efforts will contribute to increasing the capacity to implement sustainable structural transformations.
The banking activity will take place in an increasingly complex national and international context, characterized mainly by:
a. Strengthening the role of banks as the main financiers of companies and households by using capital market tools and platforms, in addition to traditional instruments and products
b. Spectacular developments in the corporate credit market through the development of the Next Generation EU and the completion of the projects of the Banking Union and the Capital Markets Union. This achieves, among other things, a broadening of the range of solutions, products, services and tools associated with financing processes.
c. The European Green Deal, a project financed with over 1 trillion Euros through Invest EU. Banks will enter a period of implementation and implementation of internal decisions to adjust the activity to reach targets with a time horizon of 2050 (experts could notice here a potential conflict between climate and environmental targets on the one hand and the required targets of shareholders and regulators regarding financial results and indicators)
d. The rapid transition to a new paradigm for the delivery of banking products and services in an increasingly digital economy, with a strong focus on the “client experience” area and in the context of fierce competition from technology players (fintechs)
e. Transformations in the European financial infrastructure. I am referring to the initiation of measures towards the use of digital currencies by central banks under the pressure of geopolitical changes and expectations for a more proactive monetary policy. Close cooperation is required between central banks, supervisors, regulators, commercial banks and non-bank financial players.
In short, we are witnessing a complex process of streamlining, consolidating, digitizing and reducing costs.
2. PROCESSES AND TRENDS AT THE LEVEL OF EU FINANCIAL MARKETS
At European level, the authorities have already set priorities for the transition to a digital and green economy. Taking into account their implications for the financial sector, amendments are proposed to the legal and regulatory framework leading to the strengthening of the banking and insurance sectors, the completion of Banking and Capital Markets projects, and the intensification of measures to combat money laundering. of money. The continued and consistent involvement of governments through economic and fiscal policies is required to create the conditions for a return to a sustainable and high-quality growth trend. Within the policy mix, central banks will play an important role, aiming both to protect and strengthen financial stability, as well as the potential for growth and modernization of the national economy, and to keep inflation within the parameters appropriate to the targets proposed for each stage.
In the context of the above-mentioned context, in which banking institutions are called upon to swiftly implement transition strategies and plans to achieve European targets for climate change and the business environment, the deepening of government-central bank-commercial bank collaboration is envisaged. to find solutions to mitigate systemic sustainability risks that may affect long-term financial stability.
EU-level banking authorities point out that many banks are vulnerable to objective adjustments in the European market, including:
- Impairment of assets and increase in non-performing loans, a process that requires capital increases and adjustment of liquidity buffers.
- Changes and new requirements regarding regulations related to crisis management, resolutions and bank liquidations. Some officials strongly recommend the transformation of bank subsidiaries into branches in the case of cross-border banking groups; this strategy would allow parent banks to decide whether or not to help their units in other countries in times of stress and crisis (but such a measure would have major consequences and challenges for countries currently hosting subsidiaries of foreign banking groups).
- Delays in completing the long-awaited European deposit guarantee project
- Continuing the process of bank consolidation in the face of increasingly complex and challenging competitive pressure
- The digitization process
Banks certainly need adequate lending capacity, and the process of building and developing lending capacity must be carried out firmly, but also with caution. Maintaining state support policies for businesses and households, phased out after the current pandemic, can support the recovery of the national economy. Let us not forget, however, that the challenges related to the pandemic will be replaced almost immediately by those generated by the implementation of the Basel III requirements and the Bank Recovery and Resolution Directive.
I believe that the FINAL TARGET OF STRUCTURAL CHANGES AND REFORM IN THE BANKING SYSTEM MUST BE AIMED AT INCREASING ITS CAPACITY TO FINANCE THE REAL ECONOMY AT A SUSTAINABLE LEVEL.
3. MORE ACTIVE INVOLVEMENT OF ROMANIAN BANKS IN THE NATIONAL EFFORT TO COME OUT OF THE CRISIS COUNTRY AND SUCCESSFUL IMPLEMENTATION OF THE NATIONAL RECOVERY AND RESILIENCE PLAN
There is a broad consensus on the idea that during the current pandemic and economic crisis the banking system was and will be part of the solutions. Despite all the challenges it has to face, I believe that the Romanian banking system must and can consolidate and develop its position in the direction of recovery and development of the national economy throughout this stage with a strong transformational character.
The continued involvement of the state, the government, through firm measures to support companies and households can and must be strengthened by the active involvement of banks. The key to success will be the construction of an effective and efficient public-private partnership that will get out of the deadlock viable companies with major potential to contribute to meeting Romania’s domestic needs and the supply of goods and services for export (one of the most important solutions). stopping the deterioration of the indicators specific to Romania’s foreign trade relations).
I expect a more sophisticated approach from banks in terms of solutions and financing offer, to increase the “classic” approach while using tools and solutions specific to the capital market (converting debt into shares, supporting companies for listing, issuing shares and bonds, financing private-equity and venture capital). In all these cases, success will be boosted by banks taking on a role underwriter . The difference in terms and conditions between financing for large and small companies, which is currently significant, must be reduced by concrete measures in favor of SMEs, which also benefit from the contribution of favorable government policies. More diversified and high-volume financing for this key sector of the economy is of critical importance and should not be long in coming.
I also believe that a stronger involvement of commercial banks is needed in order to support the policies of central banks in the fight against inflation and the specific phenomena of the foreign exchange market, in order to strengthen the climate of financial stability.
I am of the opinion that in the current and immediately following stage there is a need for an involvement and an effective role of the banks in the development of the Program. Next Generation EU by adopting a modern business model, aligned with a “customer-centric” philosophy. Next Generation EU cannot be a success story without the support of banks. Banks should be prepared to carry out financing in all their phases: pre-financing, bridge-loans, financing in the operational stages of projects, as well as investment loans.
Much has been written and discussed about the phenomenon of digitalization of the banking offer. I do not insist, but I remind you that we are witnessing a process by which financial services become “modular”: digital distribution platforms, new providers of financial services and products appear, alternative sources of capital are developing, the appetite for ” outsourcing ” is increasing.
As mentioned earlier, banks at European and national level need to build sufficient lending capacity. The process of building credit capacity must be carried out on two levels: the bank must be firmly committed in this direction, but at the same time exercise caution. Certainly Romania, like many other European countries, will maintain certain facilities for players in the economy for a while, but gradually they will be reduced or eliminated. Also with reference to the previous mentions, also at the level of the Romanian market, the challenges for banks will be amplified in relation to the implementation of the requirements. Basel III et al Bank Recovery and Resolution Directive. In all this context, it is necessary for banking regulations and supervision to maintain a sustainable balance between the process of increasing the resilience of the Romanian banking system and ensuring sufficient flexibility for banks to be actively involved in supporting the real economy.
The policy mix, mainly monetary and fiscal policy, needs a better correlation to ensure their efficiency and to be able to move as quickly as possible to the “new normal”, characterized by greater stability and predictability. I also consider here the coordination of these policies with the regulations and supervision of the financial markets.
Imbalances in the structure, form and source of financing for companies can create a major problem for them, especially in the case of those who suffer from a continuous deterioration of profitability, of financial indicators in general. For viable companies or of major local / national importance, a capital injection will be needed, accompanied by investments in R&D and digitization.. Equity financing it becomes essential in many scenarios and that is why the development of the capital market and the increasing capacity of banks to cooperate with players and to use the tools of this market become imperative. Thus, the premises of a much more diversified range of products and ways of financing companies and households appear. MAINTAINING THE EXCESSIVE DEPENDENCE OF FIRMS AND HOUSEHOLDS ON BANK FINANCING CONTRIBUTES TO INCREASING THE RISK OF PROCYCLING IN THE ECONOMIC SYSTEM, A PHENOMENON THAT HAS APPEARED IN A MISCELLANEOUS MEASURE.
The involvement of the banking market and the capital market in financing the real economy is a fundamental element in terms of the EFFICIENT USE OF ROMANIA’S FINANCIAL and HUMAN RESOURCES, while contributing to increasing the confidence of economic players in the financial system, in the process of saving and investing, in the context of the construction of the new ecosystem Forward-looking.
The efficient and productive use of the country’s financial resources, especially the savings made by households and companies, thus becomes a NATIONAL PRIORITY.
COMMERCIAL BANKS WITH MAINLY ROMANIAN CAPITAL, STATE OR PRIVATE CAPITAL, ARE FUNDAMENTAL INSTITUTIONS OF NATIONAL SOVEREIGNTY. THE IMPLEMENTATION OF SOME PROGRAMS FOR THE TRANSFORMATION OF THESE BANKS BECOMES A PRIORITY, FOCUSING ON MODERN STRATEGIES, BUSINESS PLANS AND BUSINESS MODELS, BASED ON BEST PRACTICES IN THE FIELD AND BY THE GOVERNMENT AND THE GOVERNMENT. We need to quickly regain the potential for national added value lost by knowingly or unknowingly ignoring national and international OPPORTUNITIES that have accompanied the challenges posed by the financial crisis and the pandemic crisis. We need banks owned mainly by Romanian capital that are stable and competitive, with an adequate capacity to finance the real economy, the National Recovery and Resilience Plan.
The pandemic has accelerated two important areas: sustainable financing and digitalisation. All the more so as we need a strong national financial system accompanied by a solid market infrastructure.
Commercial banks should not forget their long-term mission in a national market: MAINTAINING A SUSTAINABLE BALANCE BETWEEN THE REQUIREMENTS OF SHAREHOLDERS AND THE EXPECTATIONS OF THE COMPANY, THE LOCAL COMMUNITIES, THE ACCOUNTANT AND THE EMPLOYEE OF THE EMPLOYEE IT IS ABOUT THEIR INVOLVEMENT IN THE SUCCESSFUL IMPLEMENTATION OF THE NATIONAL PROJECT OF FINANCIAL INCLUSION AND IMPLEMENTATION OF THE MORAL PRINCIPLE OF ‘GIVING BACK’. ACHIEVING THE FINANCIAL INCLUSION AND INCREASING ROMANIA’S BANKING DEGREE (STILL AT A VERY LOW LEVEL) REPRESENTS ESSENTIAL REQUIREMENTS AND SOLUTIONS FOR THE CONTINUOUS EXISTENCE AND DEVELOPMENT OF SUMMARY BANKING.
I conclude by referring to the EU’s Sustainable Financing Strategy, which calls for stronger involvement of the national and European banking system to support the transition to a sustainable economy, which is unfortunately increasingly affected by change. climate and geopolitical. The following strategic directions are foreseen:
- Implement policies and instruments to finance transition plans to address the challenges posed by climate change and the environment for each national economy and the EU as a whole
- Access to sustainable financing for SMEs and households
- National and European support for the banking system in meeting the requirements of the European Green Deal, an initiative that can build on strong national economies with sustainable programs and policies
- Promoting European economic and financial cooperation
GLASGOW’S RECENT SUMMARY ON CLIMATE CHANGE WILL PROMOTE AND AMPLIFY THESE DIRECTIONS THROUGH NATIONAL AND INTERNATIONAL MANDATORY TARGETS AND COMMITMENTS.
Prof. Univ. Dr. Nicolae Dănilă
- Speech at the Conference “Building the Post-Pandemic World – The Path to a more sustainable, resilient and safe society”, Bucharest 1-12 November 2021