Technological and climate challenges for banks

The adaptation to competition by financial technology companies in an environment of low profitability and risks associated with climate change are the challenges facing the eurozone banking system, Constantinos Herodotou, the Cyprus Central Bank Governor and ECB Governing Council member and Luis de Guindos, the ECB Vice President told a banking conference held in Nicosia.

“Climate change is the next challenge for the humanity for the next decade,” de Guindos said addressing virtually the 9th Banking Forum & FinTech Expo from Frankfurt, noting that Central Banks must make their own contribution in addressing climate change along with governments.

He noted that in terms of financial stability, banks may be confronted with transition and physical risks.

“And we have to make sure that banks are ready to deal with those situations,” he said.

De Guindos also noted that a climate stress test carried out by the ECB concluded hat "the sooner we act on this climate risks the better in the medium term."

With regard to the rising inflation as Europe is emerging from the 2020 pandemic downturn, de Guindos said inflation will start to decline in the beginning of next year, noting that “in the second half will start to decelerate even more and will converge to our target of 2%.”

He acknowledged that some persistent issues associated with supply side bottlenecks are the reason why the decline of the inflation rate “will not be as quick and as rapid as we forecasted some months ago and perhaps the convergence towards the 2% target will take a little bit longer.”

On his part, addressing the conference Herodotou said the banks should adapt to the new environment created by the rising competition by non-banks financial intermediaries and fintech companies, as the COVID pandemic highlighted the importance of technology even more.

“The euro area banking sector is undergoing a transformation, with higher competition from non-bank financial intermediaries and Fintech institutions,” Herodotou said, adding that the euro area’s financial structure has seen a movement from strong bank dominance towards a more balanced composition, with the development of non-bank lending diversifies the sources of finance available to businesses, providing competition to the banking sector.

“As a result, Credit institutions need to adapt to the unfolding competitive landscape, he added.

The CBC Governor moreover pointed that “the low profitability challenge that European banks face, exacerbates the need to adjust and acts as a catalyst for the already strong competition banks are experiencing from Fintech and the non-bank financial intermediation firms.”

“The banking system needs to adapt. Incumbent banks that work with dated technologies and overextended branch networks are likely to lose their competitive edge. Technological innovation is the way to increase efficiency as a result of new competitors entering the market and new generations being more reliant on technology,” Herodotou stressed.