What are the challenges facing traditional banks and savings banks owing to regulatory reforms and new technological developments, and how do they deal with them? A two-day research conference, which the Bundesbank hosted together with the Halle Institute for Economic Research (IWH) and the Centre for Economic Policy Research (CEPR), sought to rise to the exciting challenge of shining a light on the future of financial intermediation. The ten most compelling current research papers, selected from roughly 100 submissions by the Economic Advisory Council, were presented to around 60 international conference participants from the fields of academia, banking and financial supervision.

© Marcus Kaufhold

© Marcus Kaufhold

© Marcus Kaufhold

© Marcus Kaufhold

© Marcus Kaufhold

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Identifying and preventing systemic risk

Hyun Song Shin, Head of Research at the Bank for International Settlements (BIS), gave a keynote speech in which he discussed the difficulty of scaling back the ever increasing leverage ratio of many financial systems. He appealed to supervisory authorities to monitor not only the degree of leverage at individual banks but also that of the entire system, especially the exposure to foreign lenders and financial intermediaries. Mr Shin pointed to key policy measures that would boost resilience to crises amid mounting systemic risks: increasing capital requirements, restricting the remuneration of bank managers and establishing a resolution fund.

Distributing the costs of regulatory measures

Policy measures and issues of distribution arising in this connection formed the central theme of several presentations, which noted the following points. Capital requirements enhance banks' resilience to crises, but could entail economic costs that would also potentially burden depositors. When setting up remuneration systems for management, it should be ensured that they work to counter excessive risk-taking. In the event of a crisis, a resolution fund should put the onus on banks, ensuring that taxpayers do not have to shoulder all the costs of the crisis.

Financial market intermediation under changing market conditions

Policymakers and banking supervisors are faced with the challenge of responding appropriately to changes in the banking and financial sector. Luc Laeven, Director-General of the DG Research at the European Central Bank, notably pointed out in his presentation that not all credit booms trigger a financial crisis. The crucial factor here, he said, is whether the increased lending is accompanied by growing economic productivity or if it arises because of overvaluations and speculation. Moreover, other conference presentations addressed the changed competitive landscape in the banking and financial sector as a result of new technological and institutional developments. Examples cited were the increase in peer-to-peer lending online, the shift to non-regulated forms of financial intermediation, and the creation of new credit registers.

New approaches should be scrutinised

Joachim Wuermeling, member of the Bundesbank's Executive Board, where he is responsible for the Directorates General Information Technology and Markets, drew parallels between monetary policy and banking supervision in his dinner speech. In both areas, he remarked, it is important to be able to react swiftly and appropriately to changing conditions. While new approaches such as unconventional monetary policy or banking regulation reforms should facilitate this, they should also have to undergo critical analysis in the spheres of research and practice.

In his concluding remarks, Emanuel Mönch, Head of the Bundesbank's Research Centre, confirmed that the conference had played an important role in this analysis, but noted that more research is necessary to foster a better understanding of developments in the area of financial intermediation. This statement met with broad agreement among the conference participants, with Mr Mönch asserting that the conference topic "The future of financial intermediation – Opportunities and challenges posed by regulatory reforms and new technologies" will remain high up on the research agendas of central banks and academic institutions.