Banks have done well in the crisis – but future success depends on solving long-standing problems Guest contribution on Focus online
This time, it was not the banks that triggered the crisis. This time, they are instead needed to help us overcome the economic crisis caused by the COVID-19 pandemic. As lenders, banks and savings banks have rarely been in such high demand as they are today. In order for banks to remain fit for the future, however, they not only need to stay on top of their day-to-day business during the crisis, but also look towards the challenges of the future.
In recent years, the fundamental question has been repeatedly raised of whether bigtech firms, fintech companies or other innovative enterprises could not also take on the job of banks, so to speak. Now it is clear: no, they cannot – we need banks.
By ensuring the supply of credit to households and the real economy, banks and savings bank play a crucial role as their “financial backbone”. And lending is on the rise: April 2020 saw the highest number of loans granted to enterprises in the Eurosystem in eleven years.
At the outbreak of the COVID-19 crisis, banks initially focused on maintaining operations: supplying cash, keeping ATMs filled, and also staying available via telephone and the internet in the event of branch closures. They were successful in all of these tasks. And that was a significant achievement; after all, more than one-third of branches were closed for a time. Banks also managed to keep their own market and liquidity risks largely in check. In addition, according to the current data, banks appear to be well prepared for potential credit losses that may only materialise with a time lag after the crisis. However, this comes with the proviso that the coronavirus situation does not drastically deteriorate. One thing working in the banks’ favour is the fact that they have considerably reinforced their capital buffers over recent years in line with supervisory requirements. This means that, with respect to the German financial system as a whole, even credit losses in the order of €100 billion – as simulated in scenarios with highly adverse conditions – would only consume around half of the buffers that credit institutions have built up since the financial crisis.
The banking sector has therefore done well in the current crisis. This provides a good footing for the future – provided that the banks also tackle long-standing problems.
Even before the crisis, the question of how banks can be profitable in a time of low interest rates was asked. The business models of credit institutions need to work well with low interest rates over the longer term, too. However, the 2019 balance sheets reveal that not every institution is generating sound profits. Some need to make improvements and also place core components of their business models under scrutiny. Furthermore, the issue of consolidation will remain on the agenda, although this does not necessarily mean that branches have to be closed or institutions merged. Individual elements of the value-added chain could also be centralised and thereby made more efficient.
Efficiency can also be boosted in a number of ways using digital solutions. In order for this to succeed, banks must make use of ambitious technologies that go far beyond video conferences and enhanced online banking: artificial intelligence, tokenisation, cloud solutions. While some banks are marching ahead with digitalisation, others are letting innovation stagnate. The COVID-19 crisis on its own will not automatically give a boost to digitalisation – this requires initiative and new ideas, both now and after the crisis.
Banking supervisors intend to play a constructive role in these innovations. For example, they are supporting credit institutions by allowing “pooled audits” of institutions in cases of outsourcing to cloud providers. If German banks make use of cloud services from Silicon Valley, not every institution will need to make the trip to inspect the provider’s risk management set-up itself, but can do so in conjunction with experienced auditors from multiple banks and thereby save on costs.
The issue of sustainability also needs to stay on banks’ radars. Although the coronavirus pandemic has shifted focus away from the discussion on climate issues for now, this could change at any time – more quickly than expected, even. For banks, there are opportunities to be had in financing climate-friendly innovations. However, this can also harbour risks, for example from loans granted to non-sustainable sectors of the economy. For this reason, banks and savings banks should incorporate sustainability risks as a key aspect of their risk assessment.
If a bank wants to be fit for the future, it must therefore be capable of fighting on multiple fronts at the same time. Just keeping abreast of day-to-day operations during the crisis is not enough. Old challenges concerning profitability and consolidation are here to stay, as are ongoing issues such as digitalisation and sustainability, and new topics will emerge as the economy hopefully sees a strong recovery after the pandemic. It is crucial that banks take a proactive approach to tackling these future challenges. Then they will even have a chance to strengthen their role as the financial backbone of enterprises and households. They should not allow this opportunity to pass them by.