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3-6-3: Banks and change

Speech by Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, at the Bankwirtschaftliche Tagung of the BVR, Berlin, 31 May 2017

Ladies and gentlemen,

Once upon a time, there were bankers whose lives were marked by three numbers. Do you know those numbers? They were 3, 6 and 3. Bankers paid 3% interest on deposits, earned 6% on loans, and at 3 in the afternoon they drove to the golf course.

Some of you might have fond memories of that life, while to others it might seem like a fairy tale. It was indeed a peaceful life – maybe even a bit boring.

Today is different. Other numbers shape the life of bankers – zero might be one of them. It’s not an easy life. And there is some anger about this – particularly in Germany, much less so in other countries.

Here, many people point at the ECB and its monetary policy, at regulators and their reforms and at supervisors and their high standards. I understand why many bankers are grumbling; if I were you, I would probably be grumbling too.

But would it help, apart from making me feel a bit better? Would it help my business or my bank? I don’t think so. As they say: criticising others never saves you from having to work yourself.

In my view, good business men and women are level-headed folks. They are realists; they accept change; and they try to make the best out of it.

And there are good business people in the family of cooperative banks. I see that many of them are adapting to a changing world, and I hope that this isn’t meeting too much resistance within the organisation.

For in the end it’s the task of every bank to adapt its business model to the new macroeconomic environment and to the changing behaviour of customers – in short, banks have to face up to change.

But where does change actually come from?

Change and its causes

It is almost a cliché that change drives economic progress. New technologies are invented, people’s needs change, and the market reacts: new products are created, new competitors appear, and others disappear. This kind of change takes place all the time. And it is happening right now.

Digitalisation is a good example. Here we have a new technology that has permeated our lives – from cradle to grave, almost everything happens online.

So why not banking as well? That, at least, is the question customers ask, and the banks should quickly answer them. If they don’t, they run the risk that others might be faster.

These “others” are, of course, the fintechs. More and more of these young companies are entering the market and increasing the pressure on banks. And the pressure was already high. Even before the fintechs arrived, there were many banks on the market, ultimately too many. Only those banks will survive that offer what customers want – and, among other things, that is digital banking.

Here, a profound change is under way – there is no doubt about that. Still, it is a kind of change that I regard as a normal part of business.

But then there is another kind of change. This kind comes suddenly and unexpectedly, often triggered by a crisis. And it can have dramatic effects.

Just think of the financial crisis and all of its consequences. Let us take a closer look at two of them.

For a start, there was the decision to overhaul the rulebook for banks – a process which began almost ten years ago. I admit that such a thorough reform may create uncertainty – particularly if it goes on for so long. It’s high time that the reform was finalised and implemented; then we should close the “revising the rulebook” chapter.

But the result is already clear: stricter rules for banks. The banks are not necessarily enthusiastic about that – they see, above all, that stricter rules mean higher costs. I cannot deny that that is the case.

But I also see that stricter rules make banks more resilient. There will be fewer crises and that will save a lot of money – including for the banks. So yes, by and large the reforms are the right thing to do.

But the euro area is diverse, and so are the banks. No two banks are alike. There are large banks and small ones; there are international banks and regional ones; there are banks that bear high risks and banks that don’t.

Do we need the same rules for each bank? I don’t think so. The rules should be determined by how risky a bank is and by its relevance for the entire system. And that brings us to proportionality.

Smaller banks per se are a smaller risk for the system: if a small bank fails, it does not trigger a global financial crisis. It would be a different story, of course, if many small banks were to get into difficulty at the same time.

Still, the rules for small banks don’t have to be as strict as those for large banks. The same is true for supervision: small banks don’t have to be supervised as intensively as large ones. We need to take a proportionate approach, and that’s what we do.

Take reporting. Small banks that report according to national standards have it easier than large banks that report according to international standards. They not only had more time to implement the ECB’s new requirements – two and a half years more, to be precise. Also, and above all, they have to report far fewer data points to the supervisors. The smallest banks have to report just 600 data points to the supervisors; the largest banks have to report up to 40,000 data points.

In future, smaller banks might have an even lighter load to bear. The European Commission is currently revising the European rulebook and is proposing even more proportionality. That would not only affect reporting but other things as well, such as disclosure requirements or the rules on remuneration.

Also under discussion is a reduction in capital requirements that would mainly benefit smaller and medium-sized banks. Relevant proposals aim at maintaining the “SME supporting factor” and extending its scope.

So, things are indeed easier for small banks when it comes to rules and supervision. Still, they don’t seem to see it like that. Why? There are two explanations I can think of.

First of all, it might be that smaller banks apply a different benchmark. Do they really compare their situation with that of larger banks? Or do they perhaps compare their present situation with the past? If that’s the benchmark, proportionality would mean unwinding the reforms.

But that’s not the point. The rules have become stricter for everyone – for large and small banks. And that was done on purpose. Proportionality means that the strictness has increased less for small banks than for the large ones.

And there could be a second reason for the feeling of a lack of proportionality. The instances of relief for smaller banks are scattered across the rulebook and thus are not particularly visible. And in supervision too, they often go unnoticed. There are up to four on-site inspections per year for large banks; for smaller banks there is one on-site inspection every ten years – provided they are well managed.

So, there are instances of relief for smaller banks both in the rules and in supervision. But they are not very visible; the scale of proportionality appears smaller than it is.

It might therefore make sense to bundle all these “lighter burdens” and put them in a separate box. That box could then be labelled “small banking box” – a dedicated rulebook for small banks.

I am open-minded about the idea of a small banking box, but I think that it will be difficult to clearly define it. Which bank belongs in the box and which doesn’t? This question has to be answered carefully.

Regulatory reform was one consequence of the crisis. A second consequence concerns monetary policy. As inflation in the euro area is very low, monetary policy is very loose: for more than one year now, the key interest rate in the euro area has been at zero.

This is a massive change for banks as very many of them depend on interest income. And many are complaining about this, especially in Germany.

These days, monetary policy is often discussed very emotionally, and that makes it difficult to objectively weigh up the arguments. You all know that it is not the intention of the ECB to harm banks – or savers.

By law, the ECB has a single objective. That objective is price stability. And it is a clear one: over the medium term, inflation should be close to, but below, 2%. For a long time, we have been a long way from this mark. That’s exactly why a loose monetary policy is appropriate, even though I am critical of one measure or another.

Now many will of course say: but we are almost at 2%! Indeed, inflation was still at 1.9% in April – very near to the objective. But we should not just look at a single month. We have to ensure price stability over the medium term. Otherwise, in a worst-case scenario, we might have to adjust monetary policy every six weeks. That would only increase the costs of monetary policy without bringing any benefit.

The crucial question is: are we seeing a stable trend towards the 2% mark or just a temporary high? Will the trend continue in the coming months? We are not immediately expecting it.

The fact that inflation rose in April was mainly due to oil prices and special effects such as the Easter holidays. And, as expected, inflation in May has fallen again, to 1.4%

At the same time, domestic price pressures are still subdued; the same is true for wages. And there is something else: current inflation still contains an element of monetary policy.

Does that mean that we will have to maintain the loose monetary policy for a long time? No, there is certainly reason to be positive.

The euro area economy is definitely improving. The recovery continues to firm and broaden, while the risks to growth, in my view, are now balanced. Business and consumer sentiment is positive. And worries about deflation have disappeared.

All ingredients for an appropriate increase in prices are present. Against that backdrop, we should prepare to slowly reduce the dose of monetary medicine.

First, because the better the patient’s condition, the more he will feel the side effects of the medicine. And here let’s face it: the current monetary policy is a strong medicine with strong side effects. That forces us to weigh things up continually. At some point, the costs of monetary policy will become greater than its benefits. When that happens, we have to stop administering the medicine – and we should not be too hesitant.

Second, the return to “normal” monetary policy will not be straightforward. After all, we are administering a complex cocktail of various medicines. Adjusting the monetary policy measures has to be well planned and well communicated. The markets have to understand what monetary policy is doing. For precisely that reason we introduced forward guidance in 2013.

Forward guidance should clearly signal to the market the future path of monetary policy. The current situation always forms the basis for forward guidance. So when the situation changes in a clear and not just temporary way, then forward guidance should also change.

To sum up: we will closely monitor how the patient’s condition is evolving. In doing so, we will consider both the effects and side effects of the medicine. And when the time comes, we have to find the courage to withdraw the medicine. Hesitating for too long only creates new problems.

For the moment however there is one thing we can clearly state: banks have to deal with both kinds of change: the ordinary and the extraordinary. They have to find their way in a digital world; they have to adhere to stricter rules and make the best out of very low interest rates.

I understand why some banks feel overwhelmed by this – particularly the small ones. And indeed, change leaves its marks.

Change and its consequences

More than anywhere else, we find these marks on the bottom line, in the profits, that is. No one will be surprised when I say that banks in the euro area have a profits problem. Profits are too low; costs are too high. And that is true for both large banks and smaller ones.

And it’s no surprise either that smaller banks are having to struggle as well. They often depend on interest income even more than large banks.

That also applies to Germany’s cooperative banks. Although their net income rose last year, it often comes from sources other than the traditional banking business. When compared with 2015, the interest income fell by 3.5% in 2016. The income came mainly from extraordinary revenues and they cannot be constantly repeated, as we all know.

One and a half years ago, an analysis done by the Bundesbank showed that the profits of the smaller German banks could fall by 25% by 2019 – in a worst-case scenario they could even fall by up to 75%.

This analysis is currently being updated. And the ECB too will be taking a very close look at the smaller German banks this year.

And yet, the smaller German banks are faring quite well in comparison, not least because of their hidden reserves and excess capital. Both can help them to absorb losses. But it’s obvious that someday the reserves will be depleted.

Dealing with change

How can banks keep pace with all the change? Because in my view, they have to keep pace. Those who lean back and wait for a miracle will fall backwards.

And it is possible to be profitable – even in these difficult times. We see about two dozen larger banks in the euro area that are faring very well. Their return on equity consistently lies above the average.

And that is not because these banks have less equity. It is because they generate more revenue – their interest income is above average, but other revenue sources play a role as well.

So there is hope – but it does not come for free. Each bank has to act and adjust its business model if it doesn’t want to be left behind. That means starting with the new digital demands of customers which I mentioned before.

The cooperative banks incidentally are doing very well in this regard: “omnichannel banking” and “scan to bank” are two keywords that come to mind. DZ Bank and the entire association have jointly taken up the challenge of digitalisation.

They are creating structures that help them to move into digital banking. And here a tight network offers advantages. Every single cooperative bank is close to its customers and knows their wishes. In this way, it can develop new ideas and share them with all the other banks in the group. Handled like this, digitalisation can help to open up new distribution channels, create new products and win over new customers.

In view of the low interest rates, it makes sense for banks to tap other sources of revenue, such as commission income.

But revenues are just one side of the equation, of course. The other side shows the costs. I already mentioned that German banks have very high costs. So on this side of the equation, too, there is room to adapt – “saving sensibly” should be the slogan.

And again, I can praise you, ladies and gentlemen. The association of cooperative banks is doing just that. The first example that occurs to me is the merger of the IT providers. It will help to reduce costs for every single cooperative bank. That requires, however, all banks to migrate to the new system; and that takes time.

And here we see that a true association offers all sorts of advantages. On the one hand, it is decentralised: every member is very small and thus poses only a small risk. On the other hand, the association offers many ways to achieve economies of scale and thus reduce costs.

The association and the protection scheme are also accompanied by privileges which lower the regulatory costs and which have to be earned – consider the capital and liquidity requirements or the large exposure regime within the association.

But consolidation is much more than joint IT solutions. The banking market has become a bit crowded – I already mentioned that. It therefore has to consolidate.

In the case of the cooperative banks, we see consolidation happening. When I became a banking supervisor in 1995, there were about 2,600 cooperative banks in Germany. Just before the crisis in 2008, there were 1,200; at the end of 2016 there were just 972. And it is not just the small ones that are merging – the leading institutions too are coming together.

I expect that we will also see mergers outside the cooperative bank sector. What we are waiting for above all are cross-border mergers. For at the end of the day, the goal of banking union is to attain a European banking market.


Ladies and gentlemen, the days of the “3-6-3” banker have been over for quite some time now. In any case, we shouldn’t take that little story too seriously. As others have already noted, it “mixes a grain of truth with a highly simplified view of reality”.[1] Everything was always simpler and better in the old days.

But today is today, and today differs from yesterday. The only thing to do is to accept change and adapt to it. And here, the cooperative banks seem to have made more progress than others. This is reflected in the title you have chosen for this event: “Accepting challenges and shaping the future”. It’s a title I find reassuring as a supervisor – provided that everyone takes it to heart.

Many thanks for your attention.

  1. DeYoung, R.; Rice, T. (2004), How Do Banks Make Money? The Fallacies of Fee Income. Federal Reserve Bank of Chicago, Economic Perspective 4Q/2004.

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