What do you believe to be the biggest threat to the success of the financial sector in your jurisdiction?
Banking & Finance (2nd edition)
The financial sector has to face and meet recent challenges created by new ways of digitalization and data processing technology within the field of banking operations and investment service providers (Financial Technology, “FinTech”). Especially traditional financial institutions have to be aware of their new digital competitors. Another important issue is rising standards of regulation, complexity and increasing costs for the institutes. With regard to the current interest rates, the “Compliance tool” proposed by the European Commission aiming at facilitating institutions' compliance with their Regulations and Directives may enable each institution to rapidly identify the relevant provisions with which they have to comply and improve the Cost-Income-Ratio.
Non-performing loans (‘’NPLs’’) and international competition from less regulated financial centres as well as the restoration of trust in local banks are the biggest threats. As the International Monetary Fund (‘’IMF’’) has recently noted, “a set of legislative reforms aimed at addressing the crisis legacy of NPLs has been approved, catalyzing the cleanup of bank balance sheets. Nevertheless, challenges remain. Risks have partially been transferred to the public sector as part of the bank clean-up strategy, but high debt will remain a burden on the private sector until NPLs, which constrain investor confidence and growth prospects, are resolved”. Moreover, the application of the most stringent regulatory obligations on banks in Cyprus has not only created significant and disproportionate operational hurdles and costs for every Cyprus based business but also to the banks themselves.
The most significant international threats to financial stability in Finland are related to the global securities markets, the sustainability of sovereign debt and problems related to the banking sector in the euro area as well as risks associated with the Swedish housing market, which may spread to Finland.
The tighter capital requirements, creation of larger risk buffers and asset quality review may continue to drive smaller banks to consider domestic and cross-border consolidation options, creating larger and possibly more stable entities at the expense of local presence. The Nordic banking environment is already largely concentrated and interconnected. Any substantial risks affecting the financial stability in one Nordic country are likely to rapidly affect the ability of all credit institutions in the Nordics to raise funding.
On a national level, some characteristics of the Finnish financial system point at an increase in structural systemic risks. In particular, the housing market forms a major risk concentration for Finnish credit institutions, made worse by the high indebtedness of Finnish households fueled by housing-related loans and rising levels of consumer credit. Further, the Finnish credit institution sector is significant in terms of intermediating financing - large in size and concentrated - and is dependent on international market financing.
Credit institutions are further facing the challenges of digitalisation and cyber security, forcing banks to adapt their business models to the changing digital environment and cyber crime and compete with innovative payment methods while at the same time preserving the access to basic banking services. Investments in fintech and ‘big data’ solutions are likely to present risks in an environment where there is no clear market leader or established operator.
Shadow banking operations, including investment funds and their managing companies, alternative credit providers and pier-to-pier lending mechanisms may also provide financing services at a lower cost and subject to more lenient regulatory requirements, consequently attracting some of the business that has traditionally been provided by credit institutions.
Finally, climate change will increase the financial sector's exposure to material risks such as economic loss caused by extreme weather, resulting in higher settlements of covered losses by insurance companies and growing credit risks due to material losses. The value and use of property as collateral will be affected by its geographical location and the regional impact of climate change.
The Blockchain, the e-money as the Bitcoins issues seems to be the biggest threats to the success of the financial sector in France.
In the recent times, we have witnessed a series of crucial changes in the Turkish foreign exchange legislation, aiming to keep Turkish markets unaffected from exchange rate fluctuations, these have also given rise to uncertainties and complications in the market practice. Accordingly, all these changes and amendments have given an impression to potential and existing market players that financial markets in Turkey may be open to any unexpected developments.
Furthermore, in efforts to regulate financial restructuring opportunity for Turkish companies which are in financial distress and which have entered into credit transactions with Turkish financial institutions, Turkish regulatory authorities have introduced the Regulation on Restructuring of Debts owed to Financial Sector (the “Financial Restructuring Regulation”). Enactment of the Financial Restructuring Regulation has been followed by the execution of the financial restructuring framework agreement (the “Framework Agreement”) dated September 11, 2018 between Turkish banks and other financial institutions. Additionally, a draft law on restructuring of debts owed to financial sector has been prepared by the BRSA and distributed by the Banks Association of Turkey to its members in September 2018; however, the relevant draft law has yet to be enacted.
As per the recent amendments to the Financial Restructuring Regulation, foreign credit institutions and international organizations are now able to become a party to the Framework Agreement provided that their participation in the financial restructuring process initiated by any of their respective debtors cannot be subject to approval quorum and consent of Turkish financial institutions. It should, however, be noted that there is not any mechanism under the current legislative framework which provides for a public announcement of debtors applying for financial restructuring opportunity. As such, even though foreign currency indebtedness of Turkish real sector is intended to be brought under control and ameliorated by way of debtor-friendly changes in laws and regulations, this might discourage potential participants of Turkish financial sector.
In conclusion, preventive measures taken by lawmakers and regulatory authorities in Turkey have helped to control the distress relating to the exchange rate fluctuations and beforehand averted any recessionary trend and instabilities in Turkish economy. However considering that recentness and significance of the above-mentioned legislative measures and changes, it is important not to discourage potential investors since the Turkish market is an attractive market for risk appetite investors.
Continuing trends of nationalisation may limit or impact Swiss bank's access to other markets. Defragmented regulation also resulting from such nationalisation – including in the implementation of international frameworks – may further increase the costs of doing business and may continue to drive some players out of the market.
It is difficult to predict and assess what will be the biggest threat. Since Slovak financial sector is more or less dependent and interlinked with the EU financial market, definitely one of the threats is hard Brexit. Furthermore, overwhelming regulatory and rigid environment might deter new entrants and start-ups seek-ing for alternative routes for financial sources which may lead in the long run to decrease of bank’s role and work.
In our view there are several challenges that the financial industry will have to face in the short to medium term in Germany. One issue could be the supply of appropriate talent, as the number of graduates will decline and jobs in the financial industry are not necessarily perceived to be the most attractive ones by graduates. Another challenge will be the regulatory environment which has the tendency to get more and more complex and will require the allocation of greater resources to safeguard compliance with all applicable rules. Another challenge for the financial sector could be the adoption of the existing business models to the current and future regulatory and technical environment. Whilst regulatory – in particular regulatory capital – requirements will make certain activities less profitable, certain newcomers are likely to test the incumbent credit institutions in the way that they offer services differently, which may result in higher customer acceptance and/or efficiency.
We think the biggest threat (and opportunity) is the advance of technology in the financial sector, which is enabled by the growth of the Fintech industry in the world and in Israel. The banks face a competition not only from the traditional financial sector players, but also from new (and less regulated) technology companies, with respect to services like money transferring, payments, and investment management.
Banks in Israel hold historic financial power because of their daily personal relationship with clients, including retail clients, and the comprehensive information they have about their clients. Since efficiency plans require the banks to close branches and release employees, this competitive advantage may be lost over time.
Increasingly, intense global competition fueled by financial services technology, which makes it harder for cities that are traditional financial centres to stand out from a crowded playing field.
The FSA has been keeping a close eye on the sustainability of the current business model of financial institutions, especially regional banks, given the aging and decreasing Japanese population, low and flat yield curves, and technological innovations and digitalisation. Financial institutions are urged to adjust their business models to the new environment, although there are no obvious issues regarding prudence in the financial sector as a whole at this time.
As in most other jurisdictions, the biggest threat to the success of the financial sector in Oman is the challenge faced by banks in ensuring stability across the sector as well as dealing with consumer protec-tion concerns. The CBO has set up a dedicated Financial Stability Unit for this purpose and undertakes close and regular reviews of all relevant factors relating to continued stability, scope for volatility, sys-temic risks and related matters on a regular and continuing basis. Cyber security threats are ever-present and have increased significantly in recent years and weigh in addition to risks caused by geopolitical fluctuations or overreliance on certain commodities. Oman has also taken a number of measures to address risks arising from money laundering and terrorism financing including setting up a separate anti-money laundering and terrorism financing unit, operating within the CBO. The CBO is constantly review-ing its approach to all challenges and risks and takes proactive measures to reduce these risks.
Adoption of excessive regulations targeted at larger financial institutions in more developed markets may threaten the success and growth of the Georgian financial sector.
In spite of being challenged by the rapid regulatory development in recent years and its small size, Liechtenstein has maintained a high-level of quality and flexibility when it comes to financial services and supervision. Qualified workforce is in high demand and in this regard Liechtenstein is competing with finan-cial centers all over the world. The ability to attract qualified workforce will be an important factor to remain competitive.
Macroeconomic risks such as trade wars, potential economic downturn in China, slowing growth of certain major Eurozone players like Germany and Italy and Brexit remain the major threats to Luxembourg's financial sector. At the internal plan, Luxembourg, an AAA-rated country, has shown important resilience during previous financial crisis thanks to a stable economic and political environment.
The biggest threat to the success of the financial sector in Portugal derives from excessive banking regulation. In comparison with the remaining European Member States, the financial sector in Portugal is relatively small. Hence, excess of regulation may hinder a proper fluidity of the domestic market and an adequate oversight may be at risk: furthermore, there is a risk that formal requirements may prevail over substantial matters.
There are no specific issues which are likely to threaten the success of the Maltese financial sector in Malta. There are, however, a number of challenges which Maltese institutions are likely to face over the coming months and years. Broadly speaking, EU regulation is typically targeted at relatively large and complex institutions, which do not necessarily reflect the nature of Maltese institutions. To this end, Maltese banks may struggle to keep up with the pace of change (due to lack of expert resources) and may also find compliance costs to be too onerous in comparison with their business model. This will continually pose as a threat since although the role of proportionality in banking regulation in this regard is important for the reduction of compliance costs for relatively small institutions, the universal and complete application of banking legislation may be jeopardized. This would in turn generate market distortions and unduly penalise the competitive position of certain entities without strong prudential justification.
Additionally, technology, particularly fintech initiatives, is another issue of concern to smaller institutions in particular. More specifically, all institutions, irrespective of their size and resources, are expected to invest in technology so as not to be driven out of the market and meet the ever-increasing demands of consumers and regulators. Those institutions that do not have the capacity to do so, may struggle.
A threat that any financial sector may face is the use of technology is such sectors. In this respect, QCB issued circular No. 4 of 2018 regarding Threats of Modern Technology on Banks, as Qatar is committed to enhance cyber security initiatives in the financial sector.
The legislative instability from other areas, such as tax and consumer protection, that creates a high degree of uncertainty, leads to the risk for banks to maintain an adequate profitability ratio in the long term.
These answers have been prepared by KPMG Legal Romania – TMO together with KPMG Risks Advisory.
The biggest threat to the success of Serbian financial sector is the potential impact of new world economic crises or other possible impacts of the global economic or political instability.
The ongoing uncertainties posed by the Brexit process and possible loss of passporting and potential loss of equivalence are seen as the greatest challenges for the sector to navigate as it simultaneously looks for new opportunities as a result. Whether this transpires will depend in large part on the nature of the exit and whether there is a transitional implementation period. The current draft withdrawal agreement would provide for an implementation period from 29 March 2019 until the end of December 2020 but at the time of writing this has still not received approval from the UK parliament.
Regulatory measures that inhibit the role of banks as providers of liquidity and emergency access to the central bank discount window risk introducing greater brittleness to the US financial system and to increase the cost of liquidity in ways that may ultimately increase the likelihood of future crises.
We believe that the capacity to manage the non-performing exposures of the Italian banks will play an essential role for the success of the financial sector.
Trade war between U.S. and China may have an impact on overall economic and financial sector of Thailand.
In 2019, bank liquidity gap continues to be the subject of public and expert disputes, as relevant questions (such as the size of the liquidity gap, the responsible for the formation and questionable management and supervision of the banks) remain unsolved. Moreover, the liquidity gap recovery was non-transparent and resulted in multiple banks being sold to the foreign investment funds. In our opinion non-transparent recovery of the liquidity gap and insufficient prosecution of the crimes related to the banking sector represent threats to the Slovenian banking sector in the future.