Persistence of low rates, transposition of Basel 3 rules, climate risks, growing threat from tech giants and increasingly sophisticated cyber-attacks.
The Five Challenges Facing Banks In 2020
Here are the top five challenges facing banking institutions in the coming months.
The Persistence Of Low Rates
Until last spring, many Eurozone banks were hoping that the European Central Bank (ECB) would raise interest rates for the first time in half a decade. But that was without taking into account the darkening of the global economic outlook. Last September, the ECB thus wiped out all hope by lowering its deposit interest rate from -0.4% to -0.5% in order to encourage banks to inject more liquidity into the economy.
In addition to the negative effects on banks of negative deposit rates, although partly offset by an ad hoc mechanism, this monetary policy also undermines the profitability of their lending activity by reducing the margin between the interest rate at which institutions banks lend and the one to which they refinance.
The consequences of this unique environment are already being felt. Some institutions, such as the Swiss private bank UBS, have decided to charge negative rates to their wealthiest customers. In France, BNP Paribas has recognized that this environment of long-term low interest rates will have an impact on its 2020 financial year.
“The” direction “[forecast] on 2019 doesn’t change, and on 2020, obviously, the rates will affect incomes. Will we have the option to remunerate everything? Definitely not,” concurred Thierry Labored, the executive local markets, when the quarterly outcomes were introduced on July 31.
For its part, the Credit Agricola group has just announced a € 600 million impairment of LCL’s goodwill in its accounts.
Basel 3 Transposition
The European Commission is due to present in 2020 a plan to transpose the Basel 3 agreement into European law. Concluded two years ago, it aims to introduce new global solvency rules, which notably plan to leave less latitude for banks in assessing the risks of their loan portfolios.
But this transposition worries European banks who fear being injured compared to their American counterparts. European banks fear that these new requirements will increase the cost of credit, lower investment and weaken the financial industry. In this perspective, the European Banking Federation went on the offensive by ordering an impact study from a Scandinavian firm, Copenhagen Economics, which concluded that there was a permanent negative effect of 0.4% on European GDP. An estimate discussed and even judged “not very serious”, by François Villeroy de Galhau, the governor of the Bank of France.
Resistance To Climate Risks
Last November, the Governor of the Banque de France announced that the institution would conduct, from 2020, an assessment of the resistance of major French banks and insurance companies to climate risks. Only the Netherlands and the United Kingdom have started to do so in the world.
In a report published last April, the Network of central banks and supervisors for the greening of the financial system concluded that “very clearly, climate risks are part of financial risks”.
For its part, in a note published on October 25, the Prudential Control and Resolution Authority (ACPR, backed by the Banque de France) had estimated that “climate change is still partially and heterogeneously integrated into the process of risk management of financial institutions”. It deplored information “insufficiently detailed to fully assess physical risk” while noting “more notable progress in the analysis of transition risk”.
The Growing Threat Of Gafa
All the tech giants have launched, in the last ten years or so, various and varied initiatives in the field of finance, without however having yet managed to really shake up the market. But this threat is becoming more and more pressing with the conclusion of new major strategic partnerships like Apple and Goldman Sachs last summer around the Apple Card, or even more recently Google and Citigroup.
Unlike neobanks or other Fintechs, the Gafa (Google, Amazon, Facebook and Apple) represent a real threat due to their strike force. They have a huge user base, and are therefore not faced with the costs of acquiring new customers, but are also masters in data collection and analysis. In a report published in early December, the Financial Stability Board (FSB), which brings together the work of regulators from the world’s largest economies, warns of the risks these actors represent for banks and financial stability.
The year 2020 will undoubtedly not mark the arrival of Gafa in the banking sector in France, but the establishments must nevertheless prepare for it “, estimates Julien Maldonato, partner advising financial industry of the cabinet Deloitte and specialist in questions of transformation digital.
One of the banks’ responses would consist in adopting an approach “of horizontal platforms giving access to an ecosystem of goods and services at the heart of which payments will be found”, suggests Julien Maldonato. To meet this challenge, banks must go even further in open banking, which is based on open data.
“It is critical, in 2020, to proceed with crafted by openness of the information and we ought to go to the primary large ventures of decommissioning, in other words the disengagement of certain financial programming, old of a few many years, “predicts the authority.
According to him, this movement will be accompanied by more offensive strategies to migrate information systems to the cloud, which allows “to gain agility, to be more efficient and less costly”.
According to Julien Madonato, the cloud is also a means of responding in real time to increasingly numerous and sophisticated computer attacks. “The hacks have reached such a level of professionalism that they are now piloted by real organizations and that one speaks from now on of financial crimes”.
But the example of the massive computer attack targeting Capital One, the third largest credit card issuer in the United States and client of Amazon Web Services, shows that the use of cloud computing is also increasing cyber risks.
More generally, the European Central Bank believes that “the digitization of financial services increases the vulnerability of banks in the face of cybercrime and operational IT deficiencies”. The European supervisor thus considers that cybercrime and computer incidents are among the three main risk factors that banks will have to face in 2020. Last May, the Minister of Economy Bruno Le Maire, and the boss of French cyber security, Guillaume Poupard, had called, within the framework of the G7 finance, for more coordination between the various banks to face the computer attacks of increasingly virulent and protect themselves from a systemic risk.