What do you believe to be the biggest threat to the success of the financial sector ?
Banking & Finance
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.
As current concerns, banks are dealing with steadily low interest rates, already dried-up reserves and considerable regulatory costs triggered by MiFID 2, PSD 2, IFRS 9 and GDPR. In the long run, the financial sector also faces strong competition and pressure to invest in new technologies as well as extensive business development since alternative financial sources, channels and intermediaries are springing up. New products and digitalization, however, do not promise immediate and appreciable growth in return.
The macroeconomic environment and more stringent regulation on the financial market are believed to be the two core sources of influence of the financial sector in Latvia. The market participants will have to adapt to continuously evolving circumstances and environment to keep their profitability.
The anticipation for future is favourable – the financial sector will continue to grow, adapt to changes and provide innovative solutions. The transformation from classical banking services paves the way for crucial changes in the financial sector and the banks are forced to explore possibilities of beginning to provide innovative services.
In other words, the biggest threat to success is at the same time the biggest opportunity for success – the technological transformation of financial services. The market participants in the highly competitive sector with remarkable success in implementation of new technology and using it for their benefit will strive; whereas, the rather conservative competitors are expected to stagnate.
We see the following challenges and threats of the Lithuanian financial sector:
- Lack of resources to supervise of FinTech players and regulatory sandbox regime.
- A large (excessive) number of potential specialised banks to be established in Lithuania may result to systemic risk and/or affect country reputation.
- Stability and reputational risks associated with a growing number of ICO and (extremely) high optimism level in virtual currencies.
- A tough competition from other FinTech Hubs in Nordics and Baltic region;
- Overestimated expectations as to Fintech start-ups.
It is difficult to say what the biggest threat is but technology is one of the factors which needs to be considered. On the one hand it offers opportunities to do old things better and to introduce new products, services and ways of working. But on the other hand it also creates risks for firms whose business models will be challenged, and risks for consumers where its use is not well understood or controlled.
The biggest threat for the financial sector success is the unpredictability and continuous changing legislative framework, retroactive law application and poor fiscal policy.
The key regulatory challenges are as follows:
Basel III implementation
Indian banks are required to fully comply with the Basel III Capital Regulations (Basel Regulations) by 31 March 2019. Most of the public sector banks will need additional capital infusion to meet the higher capital requirements, which will consequently reduce the return on equity. As a result, government support will be required, which may exert significant pressure on the government’s fiscal position.
The RBI has currently granted approximately 10 small finance bank licenses and approximately 7 payments bank licenses. While the RBI has set up the mechanism for the use of these licenses, the current provision of these services seems to be falling short of catering to the unbanked sectors that include rural areas and other underdeveloped and unorganised sectors. Further reorientation of regulatory and supervisory resources is likely needed to widen access to these systems, in light of the wider objective of financial inclusion.
The quantity of net non-performing assets (NPAs) of Indian banks has been increasing significantly. The RBI has over the years taken tremendous measures both regulatory and structural in order to tackle this issue. However, the rise in NPAs continues to be one of the most fundamental threats to the banking sector (see question 24 above for a brief on the measures being taken).
Priority sector lending and NPAs
The RBI requires banks to provide mandatory credit to certain weaker sections of society and sets out targets for the same. In the past, banks have struggled to meet these targets. These sectors often yield low profits, and heavy lending to such sectors adversely affects profitability of banks.
Separately, the agricultural sector (one of the main sectors for priority lending) has a high amount of NPAs. The new measures introduced by the RBI to reduce stressed assets, as mentioned above, do not take into account agricultural NPAs.
Challenges due to the shift to a cashless economy
The shift to a cashless economy has brought with it a specific set of issues, which primarily include the question of access. While the RBI has taken concerted measures such as setting up an e-wallet linked to the unique identification number system (AADHAAR) set up (akin to the social security number structure in the USA) and encouraging retailers as well as other local businesses to provide discounts and cash-back schemes for use of electronic means of payment. There is a severe lack of infrastructure in most parts of the country for such payment systems to be used regularly, ranging from a functional internet connection to the sophistication of its users. Recently, privacy concerns, and legal challenges on this basis, have been raised. While these issues are currently being grappled with, there is a long way to go for a genuine move to a cashless economy.
Enforcement of the new insolvency regime
The IBC which was brought into effect in December 2016 has been in operation for a year and a notable shift has been seen in the approach of the RBI as well as creditors in bringing action against defaulters. The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have provided judgments which have helped clarify some points which were unclear in the IBC itself. While the jurisprudence is gradually developing, the Ministry of Finance has been quick to identify the challenges and update the IBC with regulations that aim to make the process more efficient. It remains to be seen, if the IBC process actually keeps pace with the increasing NPAs and therefore improve the status of banks as creditors within the Indian financial system.
The FSA has long expressed its concerns with the sustainability of the current business model of regional banks given the aging and decreasing Japanese population, low and flat yield curves, and technological innovations. The FSA has suggested that the sustainability of business models may be enhanced by creating a “shared value” with customers by providing high-quality services for the best interest of customers, and that a stronger customer base will secure stable revenue flows. The FSA is conducting in-depth dialogue with regional banks regarding the sustainability of their business models before serious issues arise in their balance sheets.
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.
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.
We believe the key threat to the success of the financial sector in Nigeria, is corruption. Corruption in the banking sector has, in the past, led to high rate of non-performing loans, financial instability and failure of banks in Nigeria.
The biggest threats to the success of the financial sector in Norway are probably the country's overall economic development and whether or not Norway will manage to restructure the oil-dependent economy. In short term the private debt accumulation and the risk of a housing bubble are major concerns. In a longer perspective also the ability to meet international competition in the financial sector, including as a result of the shift in technology and digitalisation is probably an important criteria for the success of the financial sector in Norway.
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.
The biggest threat of the success of the financial sector in Qatar as in many other jurisdictions is the challenges which banks face to insure the stability and the consumer protection. These challenges include cyber security threats, which have increased significantly around the world, as well as the risks surrounding the central banks’ work and its direct impact on policy making and the development of future plans and programs, in addition to the geopolitical fluctuations, which have a negative impact on the economy in general. We are aware that the Central Bank is considering that such challenges and risks to be addressed and all measures to be taken to confront them and reduce the risks.
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 drive some players out of the market.
The recent amendment on the Decree No. 32 Regarding Protection of the Value of Turkish Currency issued by the Council of Ministers under the Law No. 1567 (“Decree No. 32”) and published in the Official Gazette dated January 25, 2018 is a threat to the Turkish financial sector although the rationale behind the amendment is to enhance the Turkish economy against exchange rate fluctuations and to facilitate the exchange rate risk management in a more efficient manner. With the changes to enter into force in May 2, 2018 real sector’s borrowings in foreign currency are now to be determined as per their revenues in foreign currency as well as utilization of foreign currency indexed loans are no longer possible and important impacts are expected on borrowings of Turkish residents.
Following the entry into force of the amendments, Turkish residents that do not have foreign currency revenues are prohibited from utilizing foreign currency loans from abroad or within Turkey. Furthermore, Turkish residents are prohibited from utilizing FX indexed loans from abroad or within Turkey as well as real person Turkish residents will not be entitled to utilize FX loans from abroad or within Turkey.
Although the amendments will impose restrictions/limitations (as the case may be) on utilisation of certain exceptions are provided for the utilisation of FX loans by Turkish residents, that do not have FX revenues, from abroad and within Turkey such as Turkish residents whose credit balance is over 15 Million USD and state institutions and organisations, banks and other financial institutions located in Turkey are permitted to obtain foreign currency loans from abroad event though such entities do not have revenues in foreign currency. Furthermore, Turkish residents who have foreign currency revenue but the credit balance of the same are below USD15 Million at the time of the utilization, are permitted to utilize foreign currency loans, provided that, the sum of the FX loan to be utilized and the current credit balance shall not exceed the total FX income of the respective Turkish resident in the last 3 fiscal years.
With the prohibition on extending foreign currency/foreign currency indexed loans by banks and financial institutions in Turkey, current articles relating to utilization of foreign currency loans by Turkish residents from banks and financial institutions in Turkey (i.e. loans amount of which are over 5 Million USD with the maturity over 1 year) are planned to be abolished and removed from the Decree No. 32 in its entirety.
Considering the increase in the real sector’s foreign currency indebtedness in the recent years, it is observed that the rationale behind the amendments to the Decree No. 32 is to enhance the Turkish economy against exchange rate fluctuations and to facilitate the exchange rate risk management in a more efficient manner.
In this context, it is expected that the prohibition and limitations introduced under the Decree No. 32 with regards to FX loans and FX indexed loans to have significant effects on the financial projections of Turkish companies, in particular small and medium sized enterprises, active in private sector.
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.
With the expected transposing of PSD2, the recent unquestionable domination of banks in services such as cash transfers and collection of deposits will soon appear to be undermined by new technological companies and mobile platforms. Banks will need to re-consider all their processes in their aspiration to maintain their current clients and attract new ones. Digitalization of banking services and responsiveness to client expectations are expected to be essential for remaining on the market.
In response to higher capital requirements and related strict banking regulation, and the need of introduction of expensive and complex IT solutions, the economy of scale would be more and more relevant. We are in the course of expected consolidation on the market, which could be beneficial for the economy as a whole.
The lack of incentives for foreign financial institutions for establishing local branches, minimize the expectation of growth in the financial sector and the access to cheap lines of credit.
One of the biggest issues that may threat the success of the financial sector is the amount of legal banking reserve that is mandatorily deposited in the Central Bank. In past years the Central Banks had used these funds to borrow short term loans to the central government, in order to help with the lack of liquidity of the economy.
Another issue are the interest rates which are higher than any other country that as the US Dollar as a legal tender. This has a direct relation with the status of the national economy, which is growing less that is expected, and the production has significantly reduced.
Brexit, as dealt with under question 24, is an obvious threat to the Irish financial sector. However, the CBI has ensured that it is sufficiently resourced to manage incoming applications for relocation of bank operations from London to Dublin. This will facilitate the financial sector in capturing any Brexit upside that may be available. Another concern is the Irish financial sector’s reliance on Irish real estate. While banks are certainly taking a more cautious approach to LTV levels in the context of secured lending in this post financial crisis era, it nonetheless remains the case that the domestic banks’ retail and SME secured loan portfolios are heavily reliant on real estate. Recent history has shown that Irish real es-tate, regardless of location, is not an absolute certainty. Values currently attached to commercial and residential real estate in major city and urban areas are considered inflated.
The Blockchain, the e-money as the Bitcoins issues seems to be the biggest threats to the success of the financial sector in France.
If success is to be defined as a dynamic and innovating market for customers of financial services, the biggest threat would in our view be the risk of stifling of innovation: the investment capacity of financial institutions will be impaired by the burden of regulatory changes (CRD V as explained above, but also PSDII, MifID II etc…) and their willingness to innovate may be blunted by the fact that Fintechs are not perceived anymore as a threat, but rather as potential partners.
One of the biggest challenges that may involve also threats to the success of the financial sector is keeping pace with rapidly evolving new financial services and technologies. Innovative services are being launched which bring about new challenges to the sector. Despite the new services and technologies financial sector cannot make any concessions in protecting the interests of the client or tackling money laundering and terrorist financing.
Ever since the outbreak of the recession in 2008, the financial sector in Greece has faced many challenges, from the implementation of the capital control regulations to the resolution of numerous banks. In recent years, serious steps have been taken to consolidate the Greek banking system and improve the liquidity of the Greek systemic banks; most notably, the adoption of an efficient framework to handle the threat of NPLs has been key in this respect. Nevertheless, there is still significant progress to be made in terms of restoring the credibility of the Greek financial sector and the confidence of investors and depositors therein.
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 incumbents are likely to test the established credit institutions in the way that they offer services differently, which may result in higher customer acceptance and/or efficiency.
Regulatory measures that inhibit the role of banks as providers of liquidity and emergency access to the central bank discount window seem likely to introduce 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.
As seen in recent years, Colombian financial system is still very vulnerable to certain entities collecting resources from the public fraudulently. This situation clearly implies a great threat to the success of the financial system, due to the illegal operations carried out by entities not having the legal and proper authorization to operate and therefor, the fact that they are not under the control and supervision of the competent financial authorities. What can generally be seen in such scenarios is promises of great revenues in an unreasonable amount of time and a sudden insolvency of the company. Usually, the managers of such illegal companies tend to disappear with client’s savings and deposits, generating great scandals that affect the image of the Colombian financial system.
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. Currently the overheating of the Swedish housing market and household indebtedness may affect the financial stability in the Nordic area and may spread to Finland as well.
Credit institutions are further facing the challenges of digitalisation, forcing banks to adapt their business models to the changing digital environment 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.
Currently the 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.