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Banks need to find new business model to adapt to new era

15/01/2021 14:39

Banks need to find a new business model to adapt to the new era, Cyprus Central Bank Governor Constantinos Herodotou has said.

Herodotou, who was addressing the online 8th Banking Forum & FinTech Expo on Friday, referred to measures taken by the ECB to curb the impact of the pandemic on the eurozone banking system, the steps taken on a national level and of the prospects and challenges ahead.

Referring to the situation in Cyprus he said banks “continue to face challenges,” adding that we can look at those as structural and cyclical.

Structural challenges, the Central Bank Governor said, concern low profitability. Banks, he pointed out, “need to have better cost efficiency and technology adoption.” Fintech is a big challenge and with that we also need to think of Big Tech, he added.

On the cyclical challenges, Herodotou said they concern  the low interest rates which for the time are here to stay and the expected deterioration in asset quality.

“Overall, I think the banks will need to look at finding a new business model to adapt to the new era,” he stressed.

In his address, Herodotou spoke of the big difference the Covid crisis has with the global financial crisis of 2008 pointing out that two of the three pillars of the eurozone banking union have been completed which means that that there is a harmonised set of rules for the regulation of the banking sectors of the eurozone.

“A fundamental result of that is that the banking sector as a whole is much better prepared in dealing with the Covid crisis than it was when dealing with the global financial crisis of 2008,” he said.

He added that “we need to make sure that the banks are part of the solution, they are not impacted by the results of the pandemic in order to play their role as part of the solution.”

In terms of how Covid has affected the eurozone banking system, he spoke of two separate angles.

Challenges common across the eurozone and across all banks mainly focus on the increase on the credit risk for the banks, the impact and the challenge that generates on the already low profitability of the banks in the eurozone which places eurozone banks in a more difficult position compared to other jurisdictions, he said.

If we look at the banks themselves, he continued, in other words at their ability to react to these challenges, I think that we will see differences. These, according to Herodotou, reside firstly on the size of the banks. “The bigger banks are better placed to deal with these challenges than the small or medium sized banks,” he noted. He added that “the level of preparedness of the balance sheets of the banks, how much rationalization has happened since the global financial crisis, is also another differentiating factor, which also impacts their ability to access new capital.” He also referred to the level of technology adoption “given that all of us, whether as bank customers or consumers overall have been facing the necessity to use more and more technology in our daily lives.”

From a regulatory perspective, before Covid the ECB was the only game in town. When Covid happened, the ECB was the first game in town. In other words, he noted, the ECB “was the first to react.”

According to CBC Governor “regulatory flexibility was shown right at the outset.” There were measures, he pointed out, “such as temporary capital release for the banks and also monetary policy related measures such as the PEPP (pandemic emergency purchase programme) and the TLTRO (targeted longer-term refinancing operations).

“The results of those measures were evident in the markets right from the beginning,” he said.

The financial markets, he noted, were certainly in very high volatility when Covid appeared and before these measures. The spreads of sovereign bonds were very high making it difficult for member states to raise debt in order to implement their fiscal policies.

“When we introduced the PEPP the financial markets calmed down and the difference in the spreads was quite substantial,” he added.

He gave the example of the Cyprus sovereign bond, which as he said, pre- PEPP the spreads were around 2.2%, yesterday it was 0.2%.  “You can understand what kind of calmness came to the financial markets because of the ECB policies as well as the fiscal measures that the Commission decided,” he said.

All these regulatory measures, Herodotou continued, were designed to enable also the banks to absorb losses and contribute to the solution of the pandemic.

Herodotou also outlined the various steps the Cyprus Central Bank took at a local level to help the banking system deal with the pandemic.