“The pressure on banks will be even greater” Interview im Handelsblatt

29.01.2020 | Joachim Wuermeling DE

Mr Wuermeling, former Foreign Minister Sigmar Gabriel’s move to Deutsche Bank’s supervisory board has ruffled feathers, with one of the criticisms being his lack of financial expertise. What are your thoughts on the matter?

I won’t get involved in the debate on whether an ex-politician should switch to a bank’s oversight body. Financial supervisors ensure that all of the regulations were followed during the appointments procedure – as was the case here. In general, it is a good thing when oversight bodies are diversified. People with different backgrounds and qualifications should be represented on a supervisory board.

Felix Hufeld, the head of the Federal Financial Supervisory Authority (BaFin), accused German banks back in September 2019 of complaining too much and shying away from necessary reforms. Has this wake-up call had an effect?

There has been a lot of movement over the past five months. The two private big banks have launched very ambitious restructuring programmes, and the public banks sector is deliberating on the merger of Helaba and DekaBank. It is important that this momentum is maintained, as the pressure is mounting rather than easing.

What is your view of the discussions between Deka and Helaba on a possible merger?

We always consider it to be beneficial whenever institutions look into a more efficient set-up. However, the decision is ultimately down to the owners, not the supervisors. This very serious discussion between savings banks is a sign that the sector has understood the signals and is not simply hoping for interest rates to go up again and new competitors to disappear.

Commerzbank and Deutsche Bank are lagging far behind their European and international competitors when it comes to market capitalisation and results. Are the restructuring programmes they have launched enough to reduce this gap?

Both institutions will have to go through a deep trough first as part of the restructuring process. That said, I am confident that the banks’ plans will work out and that things will pick up again. During that process, we will keep a strict eye on compliance with supervisory requirements and call for adjustments if necessary.

What does the situation look like for small and medium-sized banks?

We are noticing that many German banks have done their homework and are making painful and unpopular decisions. They are passing negative interest rates on to their customers. They have raised fees and are closing branches. They are merging with other institutions. These are all economically sound yet extremely unpopular measures, some of which have to be carried out despite considerable resistance – whether from within the bank, from customers or from the general public.

As a banking supervisor, do you think it’s a positive thing that more and more banks are passing negative interest rates on to their customers? 

Banks are becoming more willing to pass on negative interest rates, which can make good business sense as a way of stabilising or increasing earnings. On the other hand, by doing so, banks risk losing customers to competitor banks. In the end, it is a business policy decision that each bank has to make on its own, rather than a decision for banking supervisors.

What is the outlook for German banks in 2020?

The pressure on banks will be even greater in 2020. The headwinds from negative rates will not ease up, and, owing to the economic downturn, banks will be less successful than in previous years at offsetting falling earnings by expanding their lending activities and reducing risk provisioning.

Do we need consolidation to fix the problems at German banks?

For me, the term consolidation does not just mean mergers but also branch closures, collaborations, pooling activities and outsourcing. The toolbox is quite big – and it is being used more and more. First and foremost, this means that banks are reducing their costs.

Is that enough to make a noticeable increase in the low profitability of most banks? As things stand currently, very few banks earn enough to cover their capital costs.

The underlying problem is that Germany has a surplus supply of deposits relative to its credit demand. This has resulted in lower interest rates on loans and lower prices for other banking services. This imbalance cannot be resolved through consolidation. There will still be a deposit surplus even if banks exit the market.

Many managers and experts say that Germany has too many banks – is that a false diagnosis, then?

There is more to it than just the number of banks. German institutions have made some progress in recent years and they are more efficient than their reputation would suggest. In France, the average bank branch serves a population of around 1,835, while in Germany it covers almost 3,000 people. By European standards, this puts Germany somewhere in the middle. The same is true if you look at the ratio of bank employees to population.

Why then do the banks here in Germany earn so little?

It’s not so much a cost problem as a profitability problem that German banks have. Banks in the United States achieve an average interest margin of roughly 2.5%, while in Germany this figure stands at around 1%. The margin is somewhat higher in other European countries, but that may be because banks in those countries fund loans with higher risks.

What can be done to counter the discrepancy between too many deposits and too little demand for credit?

The process of digitalisation and the target of reducing CO2 could bring about a significant transformation in Germany’s economy in the years ahead, which would require a considerable amount of financing. This could result in a better balance between deposits and loans. Banks should not count on this, however. They need to adapt their business models to the current underlying conditions.

It was recently announced that the ECB is looking into the institutional protection schemes of public banks. Is it calling the scheme into question in general?

We are not calling into question the institutional protection schemes, but because these protection schemes evolved over time, they are too complex in certain areas. Some instances have shown us that the institutional protection schemes work, but there is definitely a need for further improvement.

Does this mean that savings banks and Landesbanken should reduce the number of different liability funds that they have from 13 to one?

So far, the scheme has worked, even in periods of crisis. Our task now is to simplify structures and to facilitate faster decision-making. And to safeguard stability at the national level.

Institutional protection schemes come with certain privileges. When members lend money to each other it doesn’t need to be backed with equity, for instance. Without reforms, are these benefits in jeopardy?

The privileges depend on there being a deposit guarantee scheme in place which is fit for purpose. And the process will serve to make sure that it remains so in future, too.

Payment services at hundreds of German banks were paralysed early this year when hackers attacked FinanzInformatik, a service provider to the savings banks, and the direct bank DKB. Does that worry you?

These days it’s unfortunately relatively easy to carry out high-volume attacks that inflict major damage – you can readily get hold of the necessary tools on the web. We expect big banks and data centres to be able to fend off such basic attacks. The important thing is to build up a certain level of baseline protection. As a general rule, a high proportion of IT slip-ups at banks could be prevented if banks adhered to the minimum security standards.

Are the banks not aware of how serious things are?

Banks now have a far greater awareness of IT risks than they used to. But digitalisation has meant that the appeal of banks as a target for cyber attacks has grown by at least the same extent. It’s a constant battle with the hackers, who are also upping their game. That’s why IT security is going to remain a focal point of inspections for European banking supervision in 2020.

How great is the risk that bigtech players, those large internet companies, are going to wrest even more profits from banks in the years to come?

Competition from bigtech companies is mounting. They’re tricky competitors because they aren’t necessarily setting out to make money through banking activities. Banking is simply an add-on to their core business, intended to attract more people to their platform. And more visitors mean more revenue.

What are the possible ramifications of this?

For me, the jury’s still out as to whether retail banking with private customers will be purely platform-based in future or whether banks will have a place here in the long term.

Would it be a problem if bigtech firms were to take over retail banking?

If that were to happen, we’d need to look at whether our existing prudential instruments are sufficient to safeguard the stability of the financial system. Ultimately, the question arises as to whether these internet giants would also take on the role of financial intermediary, acting as a link between demand for capital and its supply. So far, they aren’t – but it’s something we’re keeping a close eye on.

Everybody’s talking about sustainability. What role is it going to play in banking in future?

We expect banks to take greater account of sustainability criteria in future. This is something that the SSM, the European Banking Authority and the Basel Committee on Banking Supervision, among others, have addressed. BaFin has also applied itself to the topic, publishing a guidance notice. But the notice doesn’t establish any binding rules for risk management. And Germany should only do that once some international – or at least European – standards have been laid down.

Why the hesitation?

Because we can see that awareness of the topic is growing even without binding rules. And because, at the same time, there’s so much movement in the area that it’s too early to create binding provisions that would then have to be adjusted not far down the line.

Ought banks to only provide financing to “green” companies in future?

Of course not. Banking supervisors aren’t going to start telling banks what kind of lending they can and can’t do. Somebody asked me recently whether a conventional farmer can still get a loan for a new tractor. Of course! And if a bank grants financing to coal extraction operations, we aren’t going to interfere either. We simply want to encourage institutions to think seriously about climate change-related risk and the reorganisation of the economy that it entails. What business they enter into in the future is a matter for the management, not a decision for banking supervisors.

And in practice, what will that mean for banks?

When assessing the creditworthiness of their customers, they’re going to have to consider whether their business is exposed to particular risk as a result of climate change or the associated transformation of the economy. This means that, sooner or later, enterprises with a high level of climate risk will have to reckon with less favourable credit conditions. Because when the risks are higher, banks also need to put aside more equity to cover them.

How easy is it to measure climate-related risk?

I’m keen to stress that climate-related risk does not constitute a risk category in its own right – rather, we’re talking here about forms of credit, market, liquidity or operational risk.

There are currently no convincing methods for measuring it. We don’t have the historical data and the situation can shift as a result of political decisions, which are hard to predict. All in all, climate risk is not very amenable to calculation – which presents banks as well as financial supervisory authorities with major challenges. But we’re putting a lot of energy into working on this.

The ECB has hinted that there could be a separate stress test for climate change. What’s being planned?

At this stage, it’s still mainly a case of looking at how a stress test can sensibly be devised. A conceivable approach would see banks determining how certain climate scenarios would impact on the risk of default on their loans. This wouldn’t be about examining banks’ general climate footprint – the amount of CO2 emissions that they are funding – but, rather, the level of risk on their books. But the right methods for doing this still need to be developed.

That doesn’t sound as though a green stress test is on the cards anytime soon?

We don’t want to rush into anything. We want to hold off on such a test until it can deliver robust results. But purely the fact that we included the issue of climate risk as part of the low interest rate survey among German banks is a signal. I fully expect that by the time the next survey comes around significantly more credit institutions will report that the topic is on their agenda. And, little by little, a meaningful supervisory methodology will take shape.

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